Commonly Used Terms

Measures of Economic Activity

• Economic output – The total value of production. Output includes the value of all final goods and services, as well as the value of intermediate goods and services used to produce them (such as energy and materials). Because an industry’s output requires output from other industries, economic activity is counted twice if output is used as a measure of aggregate production.
• Value added – The contribution to state gross domestic product (GDP). Value added is equal to output minus the intermediate inputs like energy and materials. The sum of value added across all industries is equal to GDP for the economy. Because it measures the incremental change in economic activity, value added is a more precise measure of an incentive’s impact than economic output.
• Labor income – Total compensation—wages, benefits, and payroll taxes—for both employees and self-employed individuals.
• Jobs – All employment, including full-time, part-time, and temporary jobs, which include the self-employed. Job numbers do not represent full-time equivalents, and one individual may hold multiple jobs.

Components of Tax Incentive Evaluations

• But-for analysis – An analysis to identify the portion of economic activity attributable to an incentive. For example, according to the evaluation of the low-income housing tax credit, approximately 21% of low-income housing units were attributed to the state’s low-income housing tax credit (i.e., would not have occurred but for the credit), indicating 79% would have occurred without it. The but-for analysis affects all economic activity measures and the resulting fiscal impacts.
• Alternate use – An alternative use of tax incentive dollars. While decisionmakers would have many options for how to utilize the revenue (e.g., tax reductions, adding to reserves, targeted spending), researchers did not choose their own policy options. Instead, researchers used existing state government spending patterns as the alternate use. The model does not advocate a different fiscal approach by the state but serves as a single economic and fiscal comparison for all incentives.
• Net – An impact calculation that includes both positive and negative effects. For example, net fiscal impact includes both forgone (negative) revenue in the form of the tax incentive and new (positive) revenue attributable to the incentivized economic activity. The net calculation should incorporate results from the but-for analysis; however, due to differences in methodology, the contractors may or may not incorporate alternate use into their net results.

Components of Economic Impact

• Direct effects – The effects on the companies receiving the tax incentive. This may be increased firm output (revenue) directly attributable to the incentive, as well as the associated firm employment and labor income supported by this increased output. For example, increased video game production and the accompanying jobs and labor income would comprise the direct effects of the interactive entertainment income tax credit.
• Indirect effects – Effects on the suppliers to companies that receive the tax incentive (business to business). For example, a construction company may purchase lumber, equipment, and vehicles. Each supplying business subsequently spends a portion of the money it receives on its own inputs, which in turn prompts spending by the suppliers of these inputs. These rounds of spending continue through the supply chain, getting progressively smaller due to firms spending money on imports (including imports from other states), taxes, and profits.
• Induced effects – Effects resulting from employees of the incentivized companies and their suppliers spending their income in the state. This spending may include items such as food, healthcare, and entertainment. The labor income spent to generate these effects does not include taxes, savings, or compensation of nonresidents because these leave the state economy.

Types of tax provisions and incentives

• Tax expenditure – A statutory tax provision that allows preferential treatment of certain types of taxpayers or activities. Although not direct government expenditures, tax expenditures represent an allocation of government resources in the form of taxes that could have been collected (and appropriated) if not for their preferential tax treatment.
• Tax incentive – A provision intended to encourage certain behaviors or economic activity by reducing or eliminating taxes owed. For example, Georgia’s manufacturing sales tax exemption reduces production costs by eliminating sales taxes on manufacturing-related inputs, which can help attract and retain manufacturing facilities in the state.
• Tax base – The total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation.
• Abatement – Typically a reduction of a tax bill or liability in exchange for certain economic activities. For example, Georgia offers a lower insurance premium tax rate if a company invests at least 25% of its assets in Georgia.
• Credit – A provision that reduces a taxpayer’s final tax liability (the tax amount owed), on a dollar-for-dollar basis. If the credit is refundable, the taxpayer may receive a refund if their tax liability falls below zero.
• Deduction – A subtraction of eligible expenses to reduce the tax base. For Georgia income taxes, standard deductions are fixed dollar amounts that vary by filing status, while itemized deductions are eligible expenses (e.g., home mortgage interest) that filers may report on their tax returns. These deductions reduce taxable income (i.e., the income subject to state income tax).
• Deferral – The act of postponing taxes. For example, retirement accounts (e.g., traditional IRAs or 401(k)s) are often tax-deferred, allowing individuals to contribute pre-tax dollars into a long-term investment account. When funds are withdrawn, the taxpayer will owe income taxes on the amount withdrawn.
• Exclusion – An adjustment that reduces the tax base. For example, Georgia’s retirement income exclusion allows taxpayers 65 and over to exclude up to $65,000 in retirement income (e.g., capital gains, interest, pensions) from their income tax base.
• Exemption – The exclusion of certain types of income, transactions, entities, or assets from tax altogether. For example, Georgia exempts the purchase of certain equipment and machinery used in distribution centers that have met investment requirements from state and local sales tax. For Georgia income taxes, personal and dependent exemptions allow the taxpayer to reduce taxable income (i.e., the income subject to the tax) by a specific amount for each tax filer and dependent.
• Preferential tax rate – Providing a lower tax rate to certain types of companies or assets subject to taxation. For example, in Georgia, insurance companies pay local premium taxes of 1% for life insurance companies and 2.5% for other companies.
• Rebate – A refund of taxes owed and paid. For example, Georgia taxpayers received a one-time income tax rebate of up to $500 in 2022. A rebate is not a refund of taxes that may occur after filing an annual tax return.