An online exchange has been launched to facilitate the trading of state tax credits, a development that the exchange's co-founder says will increase the transparency and efficiency of the market in such credits. The Online Incentives Exchange (OIX) is starting with tax credits issued by Louisiana and plans to add credits from two more states, California and Georgia, next month. Eventually it hopes to host trading in the tax credits of all 45 states that allow such transactions.
"Our goal is to bring efficiency to a market that is currently a bit opaque and fragmented," says Danny Bigel, CEO and co-founder of the exchange. "There is currently no visibility in terms of pricing. By definition, transparency will bring efficiency to the marketplace."
States have rolled out a variety of credits to lure business activity, including incentives to relocate, create new jobs or invest. A 2011 study by Good Jobs First estimated state tax credits total $11 billion a year. Bigel says OIX's proprietary database on tax credits shows states issue $10 billion in credits each year, with about $5 billion of those tax credits either tradable or transferrable.
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Organizations that have no use for a tax credit they've been awarded, perhaps because they have no tax liability in the state, currently can use the services of a number of brokers to sell the credit to another company.
For example, Tax Credits LLC in Piscataway, N.J., was founded in 2005 and brokers film production tax credits in about 15 states. Christine Peluso, an attorney and principal at Tax Credits, says her firm has applied for membership in the OIX. But Peluso says that although she can envision some transactions occurring on the exchange, she thinks most buyers and sellers are reassured by the involvement of an experienced human intermediary.
"Our buyers are not in the business of buying credits; they've got their own businesses to run," she says. "We make sure they purchase tax credits that are applicable to the unique types of taxes they pay, and that the credits may be used against the proper tax period. We manage the whole transfer procedure, including preparing the legal documents between the parties, filing transfer documents with the state, compliance and funding. We get rulings from appropriate departments of revenue, if necessary."
Peluso estimates buyers pay an average of 91 to 94 cents on the dollar for tax credits, with pricing varying by states.
"These are multimillion-dollar transactions," she adds. "Our job is to eliminate mistakes and reduce risk to our clients—we do our program due diligence on behalf of both buyers and sellers, allowing them to confidently and effectively trade credits."
Bigel, a film producer and former member of the New York Stock Exchange, who's pictured at left, points out that OIX also performs due diligence, both on new members and on all the tax credits listed for sale on the exchange.
"While all of the bidding and offering is done electronically on the exchange, there is a great deal of human interaction, both on the front end, as we're diligencing the members and each credit, and at the back end, as we handle the clearing and perfect the process with the states," he says. Bigel adds that members of the exchange can ask to see the due diligence pack the OIX has assembled for any tax credit listed on the exchange.
Membership in OIX is free, although new members must be vetted. Listing a credit on the exchange is also free, as is buying a credit. Organizations that sell a credit via the exchange are charged a fee according to a sliding scale that starts at 5% of the value on transactions up to $100,000 and goes down to 2% on transactions over $5 million.
For previous coverage, see Getting an ROI on State Incentives.
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
