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Taxes and Incentives - Factor Into the Site Selection Equation

Corporate tax rate, state and local incentives, and tax exemptions were among the top-10 ranked site selection factors by the respondents to Area Development's 2007 Corporate Survey. Let's find out why.

Feb/Mar 08
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The Impact of Tax Incentives
The rising impact of taxes upon companies has increased the importance of tax incentives in the site selection process. Tax incentives are used both by public authorities and companies, albeit to accomplish different objectives. The former use them to attract operations, while the latter use them in choosing sites for relocation and expansion.

Tax incentives serve as a way to equalize the tax burden among states and municipalities. However, property tax abatement in one community may be no more valuable than no abatement in a second community due to higher property tax rates in the first locality. Nevertheless, the tax abatement may be necessary to make the first location competitive in attracting investment. For example, communities in states such as Michigan that levy personal property tax on manufacturing assets need to offer personal property tax abatement to remain competitive with communities in states with no personal property tax.

Corporate Survey 2007
Combined Ratings* of 2007 Factors
Site Selection Factors                   2007
1. Highway accessibility 96.9
2. Labor costs 92.3
3. Energy availability and costs 89.0
4. Availability of skilled labor 88.7
5. Occupancy or construction costs 88.2
6. Available land 85.4
7. Corporate tax rate 83.8
8. State and local incentives 83.4
9. Environmental regulations 83.2
10. Tax Exemptions 82.8
*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Tax incentives are also looked at as a means to reduce the long-term impact of taxes upon operating costs. Effective location analysis models estimate and evaluate key operating costs such as labor, transportation, energy, and taxes over the long term (typically between 10 and 20 years). Many tax incentives provide benefits for 10 years or longer, including income tax credits based upon job creation, property tax exemptions and refunds, and employee withholdings refunds. Even in cases of nonrefundable tax credits, where a company may not have immediate tax liability to apply the credits against, such benefits may be carried forward for future use over 10 or more years.

In addition, taxes generated by new or expanded operations may be used as a method to finance the start-up costs of the operations. As an example, many states use a tool known as tax increment financing to support certain costs incurred by companies in establishing or expanding operations within their jurisdictions. The incremental taxes generated by the operations over an extended period (typically 20 or more years) are used to service bonds - the proceeds of which are used for the benefit of the project. These taxes vary from state to state, but often include property taxes, sales taxes, and special assessments. In some cases, future incremental taxes generated by unrelated operations are used to support the costs of a single operation.

A Determining Factor
Each of these objectives is key to companies when determining the optimal location for new investment. Whether the impact of incentives is short term in offsetting the up-front costs of an investment or longer term in reducing operating costs, the effects of inducements can have a significant impact upon the competitiveness of operations at alternative sites. We have seen numerous occasions where a company's initial preferable location for investment was upended by the impact of incentives upon start-up and operational costs. In some cases, the impact has been significant enough to reverse decisions that were far along in the corporate approval process.

Incentives not only influence decisions regarding alternative locations for investment, but may also be the determining factor as to whether an investment with a single location option goes forward. We have seen instances in which the return on investment required by an approving corporate board has been substantially influenced by incentives. In other words, the shorter-term return on the investment does not allow management to justify the investment without the financial benefit of incentives.

State and local taxes and incentives will continue to be a key factor in location decision-making. Taxes will likely grow as a component of operating costs, while businesses will view incentives as a viable means to reduce these costs and increase return on investment. For states and communities, tax structures and tax incentives will both be scrutinized to determine the fiscal and economic impacts upon their economies and upon the competitiveness of these jurisdictions in attracting new investment.

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