How Does Economic Development Legislation Affect Your Bottom Line?
A company’s final location or expansion decision hinges on a financial analysis that may be closely tied to the winning state’s economic development legislation.
Von Hatley, Managing Director, Jones Walker Consulting, LLC (Q4 / Fall 2013)

{{RELATEDLINKS}}In the never-ending quest to spur economic development, states have left almost no stone unturned. Most have amended tax policy to make themselves more competitive — some by eliminating onerous, low-impact tax programs, others by creating new incentive programs. Either way, the result has been a legislative flurry of activity.

But as states develop legislation to promote economic growth, they must make certain they are peering through the correct lens. That means, how will this legislation look to the companies they seek to attract? Legislators and economic development officials must remember that from any company’s viewpoint, the most fundamental question about any tax and incentive program is, “How is this legislation going to affect our financial statements?”

As companies review the various alternatives of expansion or consolidation, each of these decisions fundamentally comes down to a financial analysis. While there are always qualitative considerations, such as quality of life and other community factors, most of these variables come into play only after the quantitative analysis has narrowed the field of sites.

Even so, some states inevitably pass economic development legislation with questionable objectives. We call this “feel good” legislation, which on the surface sounds effective or “feels” good. A subset of this is “perception” legislation that is intended to change opinions about the state. In reality, “feel good” and “perception” legislation has little to no meaningful impact on profitability.

A second type of legislation, which we call “middle-of-the-road” legislation, much better serves states —and the companies they are trying to attract. Over time, and with continued positive changes, this type of legislation creates significant, positive impact for companies. And, finally, there are what we call “bold moves.” These legislative measures have a significant effect on a company’s bottom line and thus positively impact a state in terms of jobs and investment within the first several years of enactment.

Let’s examine each strata of legislation with an eye on how it will be viewed in the corporate boardroom — and what state economic development leaders must keep in mind as they push for legislative reform.

“Feel Good” Legislation

“Middle of the Road” Legislation Another method is to provide job retention tax credits, such as in California, where in 2013 the legislature provided the Governor’s Office of Business and Economic Development with the authority to enter into an agreement with a taxpayer to retain a certain number of jobs in exchange for a corporate income tax credit. These retention policies have the potential to substantially impact an existing business’ financial position and improve the business case for operating units of companies that have a multi-state portfolio to stay and expand as they internally compete for limited CAPEX dollars.

“Bold Moves” Companies need to look for programs that impact their bottom line. And, as the battle between the states for economic development dollars rolls on — and the competition and stakes grow — states must be more committed than ever to developing such programs, which will also affect their bottom line. Legislation is inevitable in this process. Whether states opt for “feel good,” “middle of the road,” or “bold” initiatives, they must never lose sight of how their efforts are viewed in the corporate boardroom, where the question is asked, “Does this state’s legislation financially benefit our firm?” If the answer is an unequivocal “yes,” that state will go a long way in differentiating itself from the competition.