United States

A sign of things to come: Ohio clawbacks incentives

TAX ALERT  | 

The Ohio Development Services Agency announced that General Motors will refund $28 million in tax incentives as a result of closing an assembly plant in Ohio. While unrelated to the current COVID-19 pandemic, the state’s decision to seek refunds could foreshadow more clawback activities.

In 2008, Ohio granted General Motors $60.3 million in tax credits in return for the automaker’s promise to its Lordstown assembly factory operating through 2028. The automaker was also required to maintain 3,700 jobs at the plant. However, the factory was closed in 2019. The Ohio Tax Credit Authority approved a recommendation by the state development agency to terminate the Job Creation and Retention Tax Credit agreements with General Motors. At the time the plant was closed, GM had used $28 million of the agreed upon tax credits. Upon termination of the tax incentive agreements, General Motors will refund the state $28 million for the tax credits used. In addition, the company agreed to invest an additional $12 million in the state by the end of 2022. General Motors also receives tax incentives pursuant to agreements to invest in other areas of Ohio. The state indicated that General Motors was in compliance with all other agreements. 

Takeaways

Businesses receiving tax incentives for investment and job creation sometimes fail to meet their contractual obligations with state and local governments. Most often these failures are the result of the underlying investment becoming less economically practical. With the COVID-19 pandemic, the number of firms failing to meet their obligations under tax incentive agreements is likely to proliferate. The nationwide, indeed often worldwide, economic shutdowns have created immeasurably financial distress. Businesses are closing - temporarily or permanently - and firms across the country have been laying off or furloughing workers. 

Firms shuttering a facility and reducing their workforce should be aware of the clawback consequences. State and local governments are under their own fiscal pressures and could seek repayment of granted tax incentives. For example, Nebraska recently discussed COVID-19 in the context of incentive recapture.

There are ways to mitigate the burdens of repaying large tax incentive and other economic development grants, however, such as renegotiating an existing agreement with the state or economic authority. Firms should consider proactively seeking resolution of potential clawback conflicts. Using credits and incentives during an economic slowdown can provide substantial benefit, but there are still risks to navigate. Taxpayers currently receiving incentives or considering incentives should consult with your state and local tax credits and incentive advisor for more information. 

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