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Research Publication No. 21
Foreword Greater use of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy to help in achieving nonrevenue goals or in solving social and economic problems has often been proposed in recent years. These suggestions for supplying “tax incentives” in the form of tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s have prompted considerable discussion. Proponents believe that tax credits can be effective in more actively involving the private sector in desirable economic and social activities. Other observers doubt the desirability of using tax credits to help solve specific problems, such as the underemployment and lack of job skills in urban and rural poverty areas.
Tax credits have been used to a limited extent by different levels of government (in this country, to accomplish several specific objectives. This study reviews this experience and provides background for an evaluation of the efficacy of tax credits. Emphasis is primarily on Federal tax credits designed to influence action in the private sector. To some extent, however, the discussion is also relevant to the use of such credits by state and local governments, as, for example, the granting of a credit against state taxes for taxes paid to local governments.
Guenter Schindler, Senior Research Analyst, had primary responsibility for drafting this study.
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