COVID 19 May Impact Existing Ohio Tax Incentives

Not all companies will leave 2020 with job gains they anticipated when the year started. Companies with existing economic development incentive agreements in place need to make sure they are going to be able to comply with their existing tax incentive agreements.  The award of tax incentives always requires the company receiving this public benefit to enter into an agreement with the local or state government or private sector economic development corporation making the award.  Most economic development agreements will require the company to make specific job and capital investment commitments.  From a public policy standpoint, the award of government subsidies through an economic development tax incentive is generally regarded as a trade for jobs and capital investment.  That trade is committed to legally by the company and the local and state government through economic development agreements. 

Black Swan events like COVID 19 are a major disruption to job creation and capital investment plans even for successful companies.  COVID 19 will disrupt the job creation and capital investment plans that companies have committed to in a binding local and/or state economic development incentive agreement.  However, well-crafted economic development incentive agreements may have a way to address a COVID 19 based disruption to a company’s job creation and capital investment without harming the company even further. 

Many economic development agreements contain a “Market Conditions and Other

Factors” provision that gives the government or economic development organization partner the ability to keep the incentive agreement in place if the company does not meet its economic development commitments due to factors outside of their control.  “Market Condition” clauses have their roots in the common law legal concept known as Force Majeure.  Force Majeure gives the ability of parties to a contract to be excused from their obligations when certain circumstances arise beyond the party’s control making performance inadvisable, commercially impracticable, illegal, or impossible. Force Majeure is triggered through a contract provision that list the extreme events such as epidemics or pandemics, along with war, terrorist attacks, “acts of God,” famine, strikes, and fire in the list of events excusing overall performance or delay in performance.

Economic development incentive agreements may give the local and state economic development officials the ability to relieve the company impacted by dramatic events outside of their control from the job creation and capital investment commitments.  This flexibility is critical as many economic development incentive agreements permit local and state governments to “claw back” tax incentives previously awarded or terminate the tax incentive agreement even though the company may well pick up economic production following the dramatic event.  Local and state government officials deciding whether to avoid tax incentive penalties for a company under a Market Condition or Force Majeure clause may ask a couple key questions:   

  • Does the company believe it will survive the event and recover following the event?
  • Is there another company to implement the economic commitments of the company; and
  • What is the impact of any federal, state, or local regulatory requirements imposed on company or their project?

COVID 19 will drive many successful companies to appear unsuccessful in 2020 and those companies need to renegotiate existing economic development incentives to survive the year.