Incentives: What Auto Suppliers Should Look for when Expanding or Choosing a New Site
David B. Munson, Program Development Associate, Center for Automotive Research (Fall 2012)
A year ago, one of the leading automotive states was reluctant to consider economic development incentives for parts and components suppliers' expansion projects. Automotive parts manufacturing was not even on its list of "target industries." Only those projects considered as "advanced manufacturing" or diversification to reduce dependence on automotive were being targeted. Now, however, the rapid resurgence in vehicle sales has erased any ambivalence concerning the automotive parts and components sector!
Now the question is, "Can the supply-chain expand fast enough?" Automotive states and communities are competing aggressively to win supplier projects of all sizes and descriptions. If R&D, advanced manufacturing, lightweighting, more fuel-efficient powertrains, or diversification is part of the project, this increases interest and can raise the potential value of state and local incentives.
Incentives are primarily based on two criteria: jobs and investment. How many permanent, full-time jobs will you create (at what wage and benefit levels)? What is the planned capital investment? Job creation and investment may be phased in over three to five years. Incentives are scaled based on the total economic impact the project will have on the area. Job retention is seldom rewarded directly, but can be a subjective factor (and potentially a "multiplier") in how aggressively a region competes for a job creation/investment project that incorporates retention.
Incentives can benefit an automotive supplier's expansion or new location project and operations in several ways, including:
- Cost avoidance, cost reduction, or refunds covering periods up to 20 years;
- Work force recruitment, development, and training (no cost);
- R&D/product improvement assistance; and
- Improved public infrastructure, which can include on-site improvements in some instances (e.g., getting a site ready for construction, building the base for interior roads and driveways, storm water systems, and even building or rebuilding a parking lot).
Grants and loans reduce upfront costs, enabling a supplier to stretch and retain precious capital during the early stages when cash flow is negative. Saved capital can be used for additional investment in machinery and equipment or added to working capital as additional growth requires. Refundable and nonrefundable tax credits, on-the-job training grants, reductions in property and sales taxes, and special utility rates directly impact the bottom line as the supplier meets phased job creation and investment commitments.
Statutory or Discretionary
Incentives can be categorized as statutory or discretionary. Statutory incentives identify eligible industry sectors and subsectors by NAICS/SIC codes or in narrative form, such as "headquarters," "research and development facilities," etc. There are job creation and capital expenditure thresholds. Awards are objective: if a project meets the eligibility requirements and a timely application is submitted, the supplier should get the incentive. Typical examples of statutory incentives include:
- Property tax abatements;
- Sales tax abatements on utilities (especially gas and electric), new M&E (or equipment relocated from out-of-state), and project construction materials;
- Job training; and
- Nonrefundable credits against state income, excise, or franchise taxes; these credits are generally "use them or lose them" on an annual basis; a few states allow carryforward.
The justification for discretionary incentives is often, "But for this [incentive] the project would not have located here." Proof of one or more of the following is required:
- Out-of-state competition for the project;
- A competitive disadvantage at the preferred location vs. a viable alternative; and/or
- Incentive offers from other states.
Discretionary awards are subjective (within limits) and vary in type, structure and amount based on: (1) the company's specific need and justification for incentives to overcome a disadvantage in the location or a gap/obstacle to the project; and (2) the state's and community's judgment as to what it will take (and what it is worth) to win the deal. There are firm eligibility requirements, including higher job creation and capital expenditure thresholds than most statutory incentives, periodic monitoring of job creation, quality of jobs (average wages and benefits package), capital investment, and other objective data. A baseline for the supplier's statewide employment is usually established. Permanent job losses at other facilities in the state are deducted from net job creation at the expanded/new facility, resulting in reduced incentives. Examples of discretionary incentives include:
- Forgivable loans/ grants;
- Refundable state tax credits (if the supplier does not have a state tax liability in any year, the state issues a refund check); and
- Investment tax credits against state taxes.
Discretionary awards are performance-based: the supplier receives benefits after job creation and investment commitments are met. In a recent example, an automotive supplier willing to create 350 jobs was offered a forgivable loan with no payments or interest for up to three years. As soon as the supplier reaches 350 new jobs, a repayment obligation with five annual installments kicks in. For each year the supplier maintains 350 jobs, 20 percent of the loan will be written off, and 100 percent of the loan will be forgiven if 350 jobs are maintained for five years. The upfront loan supplied cash to enable the project to commence. The real enticement for the business to choose that location over a competitor was the opportunity to turn the loan into a grant through performance. If the company fails to create 350 jobs by mid-2015, the obligation converts to a regular loan and must be repaid in 60 monthly installments. In this case it was all or nothing. In other locations pro-ration is permitted, although there is an absolute minimum (say, 60 percent of the job commitment) required to trigger it.
Some states tie grants and refundable credits to jobs paying 130 percent or more of the average hourly manufacturing wage in the labor shed. The wage requirement in the first year might be 90-100 percent of the average, but must rise to the target level over the next year or two. This might be attractive to high-paying sectors like tool and die or precision-machining operations.
Knowing What to Look Out For