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.
Rita Williams, Incentis Group and Larry Kramer, Incentis Group (Feb/Mar 08)
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The Impact of Tax Incentives
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.
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.
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.
|Corporate Survey 2007
Combined Ratings* of 2007 Factors
|Site Selection Factors 2007
|| Energy availability and costs
|| Availability of skilled labor
|| Occupancy or construction costs
|| Available land
|| Corporate tax rate
|| State and local incentives
|| Environmental regulations
|| Tax Exemptions
|*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.
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
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.
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.