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What’s a Tax BreakA tax break is a reduction in tax liability. It comes in two forms, refundable and non-refundable.
A refundable tax credit allows you to get money back. A non-refundable tax credit allows you to reduce future tax liability. It provides a credit towards future tax liability that comes due.
For example, let’s say you make $100 per year and the tax rate is 20%. A $10 refundable tax credit means you get $2 back, regardless of whether you owe any tax or not.
A $10 non-refundable tax credit means you reduce your taxable income by $10. This means your taxable income is now $90, so you pay $18 in tax. If you don’t pay tax, you get nothing back.
The “tax break” is the $2 in tax savings.
Types of Taxes
Employee Income TaxEmployees hired by the company would be subject to paying income tax. An employee making $150k would pay 3.5% city tax and 6.5% state tax, totaling in 10% off the top or $15k per year flowing into state and city coffers.
Employee Payroll TaxAmazon would also be paying payroll taxes on that $150k, resulting in more money flowing to state coffers. Many employees are not aware of payroll taxes since it’s paid by the employer based on how much the employee is getting paid.
Property TaxBoth the employees and the firm itself would be contributing in property taxes. The company offices and accommodations of the employees would be subject to property tax based on the value. This is regardless if the office and homes are rented or bought. Rented homes and offices still contribute to property taxes since the rental/lease amount goes to the landlord who uses it to pay property tax.
Business Income TaxLocating in a jurisdiction subjects a company to the business tax. It increases the tax base located in that jurisdiction. New York City has a complex formula for calculating this.
Sales TaxPurchases made by the company would be subject to sales tax. In New York City, this is a 8.875% tax on everything from food purchased by employees to stationary purchased by the company.
Amazon’s HQ2Amazon’s HQ2, if situated in NYC, is expected to generate $27 billion in incremental taxes paid over 25 years. These taxes comprise of income tax, sales tax, payroll tax, and property tax.
Scenario 1 – Amazon Builds in NYC with $3 billion tax break
The $3 billion tax break is mostly a tax credit, which reduces the future tax liability of Amazon.
Scenario 2 – Amazon Builds Somewhere Else
Now suppose Amazon decides to build HQ2 in Toronto instead of New York. Now New York gets 0 jobs along with $0 in income, property, payroll, and sales tax.