Explaining Southern California's economy

Econ 474: What's a tax credit?

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Chris Arnold/NPR

A sign in Maui, Hawaii, urges people to buy before the $8,000 tax credit expires. Both individuals and businesses can get credits.

Yesterday, I wrote a post about how Louisiana is offering aggressive tax credits to the gaming and software industries in an effort to lure them to what I dubbed "Silicon Bayou." Louisiana, along with many other states, offers tax credits to encourage business activity and relocation.

But how do tax credits work?

There are basically two types of tax credit: refundable and non-refundable. The latter can lower a business' tax bill to zero, but not turn into a cash refund if the amount takes a tax liability lower  than zero. The former can result in a check being cut by the state or IRS, as a refund. 

This can work about particularly well if a company is eligible for a tax credit and is losing money — as several producers of pulp, the raw material that goes into paper, learned in 2009, when big companies such International Paper received billions from the Treasury for exploiting a credit that was originally aimed at encouraging alternative-fuel use. A byproduct of pulpmaking is something called "black liquor," which paper mills have for a very long time cycled back into their systems and burned to provide power.