Jenny R. Massey, Senior Project Manager, Bingham Economic Development Advisors (Nov 07)
Most corporate executives are aware of economic development incentives. There are almost daily announcements in the news. Earlier this year, for example, Honda Motor Company announced that it would be building a new assembly plant near Greensburg, Indiana. Honda will be investing $550 million and create approximately 2,000 jobs; Indiana was able to lure the company amidst fierce competition with $141.5 million in tax credits, tax abatements, and training money. These incentives meant a huge difference in project startup and employee training costs and will provide tax savings for many years beyond the initial project undertaking. Incentives offered to Honda equal roughly 26 percent of its capital investment or $70,750 per new job. Executives should know, however, that incentives are not just available for enormous developments like this; they can have similar impacts for much smaller projects.
After reading about large project announcements and their associated incentives, an executive of a smaller firm might wonder how to obtain incentives and whether or not his/her firm will qualify for them. Fortunately, incentives are available to most companies that are making a capital investment, creating new jobs, or relocating operations.
Leveling the Playing Field
Of course, there has been some controversy with regard to the offering of incentives by state and local governments. The question has been posed as to the purpose and effectiveness of offering incentives; the quick answer is that incentives make good business sense. Many states and local communities offer incentives in order to attract capital investment and create new jobs. They must be competitive in order to win projects, and incentives can help level an uneven playing field.
For example, Company X wants to relocate to a new site and it has two viable options in different communities. Community A has a rural undeveloped site and an unskilled work force. Community B has an established industrial park site but much higher taxes. Incentives can offset each disadvantage mentioned above: undeveloped land with infrastructure and development programs; an unskilled work force with training programs; higher taxes with tax credit and abatement programs. Aggressive states and communities will offer incentives to offset their disadvantages, enabling them to better compete for projects.
Many times incentives are tiebreakers that narrow several good sites to a final project site. Incentives, however, cannot turn an ill-fitted site for a project into a good one. They can only help narrow the decision between good site option possibilities.
There are three questions that an executive should ask when considering the incentives for a new project:
1. How can I be sure that the company is getting the best incentive deal?
There is no direct or easy answer to this question; however, an executive should be mindful of several factors.
First, is it a competitive situation? The most lucrative situation for incentives is if there are two or more site locations being considered. Communities are less motivated to offer incentives if there is no competition.
Second, have the company's goals, needs, and desires been clearly declared to state and local community representatives? Each project is unique; the more the state and local representatives know and understand, the better they will be able to tailor-assist with the project.
Third, consider that there are really three parts to managing a new project: real estate, operations, and incentives. Experts are handling the first two parts. If the executive has any questions about incentives, perhaps an expert should be consulted in this area as well.
Remember, the company gets one chance to get it right. States treat incentives as business negotiation tools. If a company does not ask for incentives or is not well-informed of the incentive possibilities, it will most likely not maximize its situation. Here is a real-life example:
Company X stated that its project would include a $100 million capital investment and create over 400 new jobs. It was a competitive situation, and yet the company did not really understand how to compare and evaluate the incentive packages. The state where it wanted to relocate had offered the company nonrefundable tax credits, training, and other refundable tax credits. The corporate executive decided to seek the advice of an incentives expert.
After some discussion, it became apparent that the nonrefundable tax credits (though they are a good incentive) would have little meaning for the company, as it had predicted no state corporate income tax liability for the first four years of operation. It also became clear that the training and other refundable tax credits that had been committed to the project were significantly less than those received by other similarly sized projects. The incentives expert was able to help the company work with the state to restructure the incentives package so that it added more value to the project, and Company X was able to locate to the preferred state.
2. How can I be sure that the company realizes the benefits of the incentives negotiated?
An executive should be considerate of the time it takes to manage incentives. Many companies negotiate for incentives and use them to help guide where their project locates but, unfortunately, many companies do not actually receive the benefit of those incentives. The reasons are many and varied. Understand that negotiation is not a guarantee of incentives - applications still have to be submitted according to the rules and must meet all of the requirements set forth by the state or local authority.
Incentive applications can be lengthy and daunting, and the continual monitoring can be cumbersome. Management of the incentives sometimes requires monthly and/or yearly reporting for the length of their term, which can be up to 20 years. Records are almost always required to be kept for years beyond the term of incentives. Incentive programs are not created equal or by one economic development body; therefore, they have different requirements, deadlines, and monitoring responsibilities.
Another reason that incentives are left unclaimed is that there is a natural flux of people in and out of a company, which results in some instability for incentive maintenance. Also of note, the middle manager who will administer the incentives will have his/her core job to do plus this incentive management. Even though the executive may see the benefits of the incentives for the company, the middle manager will most likely not see any benefit from his/her efforts - only an increased workload. Also, keep in mind that it is not in the state or local authority's best interest to make sure that all of the necessary paperwork is filed by the associated deadlines. In fact, from their point of view, it is better companies do not pursue the collection of incentives.
In order to be sure to take full advantage of incentives awarded, a company needs a dedicated and confident person on staff to take personal responsibility for incentives management. Factor in that there will be three to four people at the state level that will be working with that person to manage the incentives, as well as three to four people at the local level. As a final deliberation, recognize the actual time and cost of understanding and administering the incentive programs versus the cost of consulting and/or hiring an expert. Experts work with hundreds of projects a year and may be able to manage the incentive process for a fraction of the time and cost a company may incur while attempting to manage incentives on its own.
3. What happens if projections are too high and the company misses the goals set? Too low and surpasses the goals set?
executive should realize how important it is to forecast the most
accurate project numbers possible. It is understandably a difficult
task to undertake; however, most states like to see five-year
projections of capital investment and new jobs.
When mapping out
forecasts, keep the incentive programs in mind. Know what the penalties
are and what the company will ultimately be judged against. For
example, consider tax credit "Program D." Program D requires accurate
prediction of job creation for the next five years. While capital
investment predictions must be made, the Program D monitoring
requirements rely exclusively on new job creation; therefore, capital
investment should not be of too much concern for this program. With
Program D, if the new job projections are too high and the company
falls short of the goals originally set, the program regulations
dictate that the company will receive a prorated incentive amount based
on actual job creation numbers.
On the contrary, consider tax
abatement "Program Q." The Program Q application requires five-year
capital investment and job-creation predictions. Program Q rules state
that the company must achieve two-year employment and investment goals
within a two-year time period. If the company is delinquent in goals by
the end of the first year, missing the mark is not taken too seriously
as long as by the end of the second year the company has caught up to
original two-year predictions. If the company has not achieved its
two-year goals, Program Q's regulations defer to a previously signed
clawback agreement. This means that a portion of the incentives granted
will have to be paid back to the governing body. Alternatively, when
considering projections that were too low - i.e., the company exceeds
original numbers - there is usually no recourse. The company will only
receive incentives on the original numbers predicted for the project.
is important to understand that incentives are funded with government
dollars; as such, there are countless rules governing the incentives,
legal documents and agreements that must be signed, as well as
extensive documentation and reporting requirements. All of this leads
to the issue of accountability. States and local communities want
companies to be serious about their projects and will support those
projects only if it makes good business sense for them to do so. The
trend is such that if a company falls short of goals, states and
communities are asking for money to be returned.
To conclude, an
executive should be confident with the project numbers, both capital
investment and new jobs estimated for the next five years. If a capital
investment is being made or new jobs are being created, an executive
should not be afraid to ask for incentives based on those projections.
Offered incentives should be clearly stated in writing, with actual
assigned amounts from the governing body.
An executive should
know about the incentives to the point where he/she can understand how
they will impact the company business plan. He/she should feel
comfortable about assigning incentive management to one person who will
be responsible and accountable. Finally, consider that incentives
experts may be able to negotiate more appropriate and meaningful
incentive packages, as well as ease the burden of incentives
fulfillment if the company does not have the time or personnel to be
responsible for incentives management.
Massey is the senior project manager for Bingham Economic Development
Advisors (BEDA) headquartered in Indianapolis, Indiana. BEDA provides
comprehensive economic development services for businesses and