* $5 billion in annual transferable state tax credits
* New online market seeks to add transparency, value
* Past attempts have failed, some credits under scrutiny
By Nanette Byrnes
Nov 16 A new online exchange in New Orleans
allows participants to trade transferable state tax credits, an
estimated $5-billion annual market that has been generating more
complaints about the costs of taxpayer-backed incentives that
aim to attract targeted industries to states.
Up and running for just four weeks, the Online Incentives
Exchange (OIX) has traded more than $1 million in Louisiana tax
credits. It hopes to offer credits from 45 states by the end of
2013, according to management.
OIX Chief Executive Danny Bigel, a former Wall Street
financier and film producer, said his market will popularize and
enhance the value of transferable credits -- an informal market
historically dominated by small local brokers.
He said OIX will review credits for legitimacy before
putting them up for sale.
"In this large universe of state tax credits there was no
such thing as transparency. It was completely inefficient, a
complete mystery," Bigel told Reuters in an interview.
OIX - trading film credits, digital media credits, general
and historic real estate credits - has more than 60 member
firms, including major film studios, wealth management firms,
public and private companies, and accounting firms, he said.
More critics are complaining about rising costs of the tax
credits state governments offer to attract and encourage certain
industries such as clean energy or film production.
Companies get credits based on spending in a state on
eligible activities. They can apply the credits to reduce
corporate income taxes or other taxes. Recipients of
transferable credits can sell unused portions.
Past attempts to make a national market in resalable tax
credits have struggled to generate volume, with standardization
a problem, said Michael Bernier, a partner with Ernst & Young's
national tax practice. He analyzes credits for tax clients.
Robin Delmer, a traditional tax credit broker in Atlanta,
said an online brokerage has potential, but local networks like
his, built over many years, have an edge. When it comes to
taxes, being locally known and trusted is an advantage, he said.
MOVIE CREDITS EYED
The Louisiana Budget Project, a private financial watchdog
group, raised questions in an August 2012 report about whether
the state is getting adequate return on transferable film
credits. In fiscal 2012, film credits cost Louisiana $231
million, a 29 percent increase over the prior year.
The Louisiana legislature has created a Revenue Study
Commission to review the film credit, along with hundreds of
other state tax code exceptions. A report is due in February.
Colorado overhauled the review process for tax credits
granted to donors of land for conservation after an
investigation over whether appraisers were nflating land values.
Issuance of transferable tax credits is growing again after
slowing during the recession. States use them in hopes of
boosting economic development.
Oklahoma's transferable tax breaks for zero emission energy
producers like wind farms came back in June after being phased
out. This year, Georgia made its land conservation credit
transferable for the first time.
Buyers of transferable credits traditionally have been large
multi-state companies, often financial firms or insurers. In
some markets, individual taxpayers have become involved.
Atlanta CPA Alex Knight, a tax partner with Atlanta CPA firm
Habif, Arogeti & Wynne, has advised wealthy clients on using
credits, including film credits, to reduce Georgia tax bills.
Minimizing state taxes with credits has become a "powerful tax
planning technique," for wealthy individual taxpayers, he said.
SOLD AT DISCOUNT
Credits are typically purchased for less than face value.
Large companies such as Walt Disney Co and Sony
often will guarantee their credits are good, helping them to get
85 cents on the dollar or more for their credits.
Less well-known companies get around 70 cents on the dollar,
with more complex credits more heavily discounted, experts said.
Start-up companies can resell unused credits, said Alan
Wilson, CEO of Atlanta-based gaming company Tripwire
Interactive, which has video game hits like "Killing Floor."
Tripwire has received enough credits from the state of
Georgia to write off its entire state tax bill every year since
its launch in 2006, and still have extra credits left over for
resale. Sold at 82 cents on the dollar, Tripwire tax credits
will account for about 10 percent of the private company's
revenues this year, Wilson said.