INTRODUCTION:
Every analysis in IMPLAN will give you tax results. However, often times analysts wish to to examine the effect of a tax break or tax incentive on their regional economy. Modeling tax changes falls under the category of socio-political impacts; therefore, the spending associated with it needs to be determined by the analyst before it can be modeled in IMPLAN.
DEFINITIONS:
Different tax breaks are offered across varying levels of government. Generally speaking, a tax break or tax incentive is a reduction in how much tax is owed. There are a few different names for these benefits. Investopedia does a great job of outlining these for us.
Tax Credit
Tax Credits are a dollar-for-dollar reduction in tax liability. Therefore, they are more favorable than a tax deduction. Examples: Child Tax Credit, Child and Dependent Care Credit, Earned Income Tax Credit, Low-Income Housing Tax Credit
Tax Deduction
Tax Deductions subtract allowed expenses from gross income to reduce taxable income. Examples: Charitable Donation Deduction, Property Tax Deduction, Union Fees
Tax Exemption
Tax Exemptions represent the elimination of a certain type of tax. Examples: Homestead Exemption, Nonprofit Tax-Exempt Status, Personal Exemption
KEY CONSIDERATIONS:
There are a few things to remember before diving into analyzing a change in taxes. First, IMPLAN data estimates for all components of Value Added (including Taxes on Production and Imports, Net of Subsidies (TOPI) and Other Property Income (OPI)) come from state and county level data sources which are at least at the 3-digit NAICS level of detail. However, the distributions of these Value Added impacts (by component) amongst the types of tax are not Industry-specific. This means that portion of Output IMPLAN estimates an Industry spends on TOPI and OPI will be specific to that Industry, but the distribution of TOPI and OPI would be the same whether it was computers, tourism, tobacco, or forest products, regardless of differing tax rates between those industries. Logically, forest products or mining would have a higher proportion of severance taxes compared to computers or tobacco, but that level of detail does not show up in IMPLAN. It is up to the analyst to make adjustments as necessary.
Second, the tax impact report values are based on the existing relationships of the data found in the IMPLAN database. Taxes in IMPLAN are based on the collected and reported taxes by various units of government in the Data Year you are using. For example, if the Data Year you are using didn’t have a subsidy in the Industry you are analyzing and you know that there is now a subsidy, you will need to account for this.
Lastly, TOPI includes all direct government subsidies. If the subsidy in a particular industry is greater than the total taxes paid, the direct TOPI will be negative. For further information on this, please read The Curious Case of the Negative Tax.
If you want to learn more about tax breaks for individuals and households, visit the article Taxes: Individual Breaks. To learn more about tax breaks for Industries visit the article Taxes: Industrial Breaks.
RELATED ARTICLES:
Generation and Interpretation of IMPLAN's Tax Impact Report
BLOGS & WHITE PAPER:
Simplifying Tax Credit Applications Using Impact Analysis White Paper
A Look at Procuring New Markets Tax Credit (NMTC) Funding Blog Post
A Look at Procuring New Markets Tax Credit Funding, Pt. 2 Blog Post
OTHER RESOURCES:
Written December 30, 2019
Updated September 21, 2020