A tax incentive
is an aspect of the tax code
In the UK, every person paid under the PAYE scheme is allocated a tax code by HM Revenue and Customs. This is usually in the form of a number followed by a letter suffix, though other 'non-standard' codes are also used. This code describes to employers how much tax to deduct from an employee. The...
designed to incentivize
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
, or encourage, a certain type of behavior. This may be accomplished through means including tax holiday
A tax holiday is a temporary reduction or elimination of a tax. Programs may be referred to as tax abatements, tax subsidies, tax holidays, or tax reduction programs. Governments usually create tax holidays as incentives for business investment...
s, tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
s, or tax abatements. Tax incentives are targeted at both individuals and corporations.
Individual Tax Incentives
Individual tax incentives are most prominent in the federal income tax code in the United States, and include deductions, exemptions, and credits. Specific examples include the mortgage interest deduction, individual retirement account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
, and hybrid tax credit
The U.S. Energy Policy Act of 2005 established a federal income tax credit of up to $3,400 for the purchase of new hybrid vehicles, purchased or placed into service after December 31, 2005. Vehicles purchased after December 31, 2010 are not eligible for this credit...
Corporate Tax Incentives
Corporate tax incentives more typically include federal, state, and local governments. The federal tax code provides a wide range of incentives for corporations, totaling $109 billion in 2011 according to a Tax Foundation Study.
The Tax Foundation categorizes federal tax incentives into four main categories, listed below:
- Tax exclusions for local bonds valued at $12.4 billion.
- Preferences aimed at advancing social policy, valued at $9 billion.
- Preferences that directly benefit specific industries, valued at $17.4 billion.
- Preferences broadly available to most corporate taxpayers, valued at $68.7 billion.
Corporate tax incentives provided by state and local governments are also included in the tax code, but many times are directed at individual companies involved in a corporate site selection
Site Selection indicates the practice of new facility location, both for business and government. Site selection involves measuring the needs of a new project against the merits of potential locations...
project. Site selection consultants negotiate these incentives, which are typically specific to the corporate project the state is recruiting, rather than applicable to a broader industry. Examples include:
- Corporate income tax credit
- Property tax abatement
- Sales tax exemption
- Payroll tax refund