Mali R. Schantz-Feld (November 2011)
The Top Site Selection Factor series outlines the factors that ranked high in importance by the executives responding to Area Development's 25th Annual Corporate Survey. Find out why and how these factors should be evaluated in your next move...
In the economic recovery, states are seeking ways to address their economic disadvantages, attract new companies, retain existing ones, and revitalize distressed communities. According to Area Development's recent survey of location consultants, several of the states considered as leading in the economic recovery also excel in their incentive offerings, including Alabama, Louisiana, and Texas.
Dean Uminski, principal at Crowe Horwath LLP in Indiana, notes that as a leader in the economic recovery, Texas has a number of property tax and income tax exemptions, and as a result, attracts a lot of attention from prospective projects. One consistently attractive incentive is the state's Texas Enterprise Fund (TEF), which was established in 2003 and was subsequently renewed in 2005, 2007, 2009 and 2011. As the largest "deal-closing" fund of its kind in the nation, the fund is used only as a final incentive tool where a single Texas site is competing with another viable out-of-state option. Additionally, the TEF will only be considered to help close a deal that already has significant local support behind it from a prospective Texas community.
TEF most recently played a major role in GTE Transportation's new 900,000-square-foot locomotive plant in Fort Worth that is expected to create 500 new high-tech jobs in manufacturing, assembling, and remanufacturing GE's leading rail and transportation-related products. The state of Texas will commit up to $4.2 million in incentives toward the project through the Texas Enterprise Fund (TEF). Production is slated to start next year.
Louisiana's version of a deal closing fund is the Economic Development Loan Opportunity Program (EDLOP), an incentive offered at the discretion of the governor and secretary of Economic Development that provides cash grants to high-impact economic development projects. Cash grants are structured as forgivable loans to ensure the state's return on investment. The principal and interest payments on a forgivable loan are paid in full each year a company creates and maintains a predetermined level of jobs, payroll, and capital investment.
Alabama's newest innovative incentive applies to international companies and is a part of the Made In Alabama Job Incentives Act. The incentive applies to foreign firms that invest at least $100 million and create at least 100 jobs in the state. As a result, the firm receives a state income tax credit of up to $20 million over three years to offset federal tariffs the company would pay on imported products while it builds and opens its plant.
John Lenio, economist and managing director of CBRE's Economic Incentives Group, notes that more aggressive states are spending more time on customer service to help foreign companies understand how U.S. incentives work. "To get noticed, they are doing more coaching than with U.S.-based companies. It is good customer service to explain, for instance, how property taxes and corporate income taxes work."
To be effective, incentives should be targeted to a firm's specific needs. An October 2010 report by CBRE's Economic Incentives Group, entitled "Economic Incentives, The Intersection of Site Selection and Economic Development," notes that capital-intensive firms - such as manufacturing, distribution, life science/bioscience facilities, research and development, and data centers - tend to heavily invest in infrastructure, machinery, and equipment for operations. This makes developing a new project an expensive undertaking. Start-up investment in machinery and equipment (part of business personal property) tends to be in excess of $50 million for most significant U.S. capital-intensive operations. CBRE notes that the capital investment profile of a high-end, mission-critical data center can reach $800 million, with machinery and equipment accounting for 75 percent of the total (or $600 million) and the remaining 25 percent consisting of real property investment (such as land acquisition and construction costs).
Incentives are devised with these criteria in mind. Lenio says that industries such as data centers "don't have a lot of people but have equipment or machinery. For those types of operations, offering tax credits or payroll rebates may not mean much. For capital-intensive companies, the focus may be on sales tax abatements on construction materials or equipment purchases, or on electricity consumption."
The two basic types of state economic incentives are statutory and discretionary. Statutory incentives are enabled by statute and have explicit performance metrics, such as job creation, average wages, and healthcare benefits. The incentive benefit is fixed, so if a company meets the statutory criteria and fills in the appropriate applications, the incentive benefits are guaranteed. Examples of statutory incentives are corporate income tax credits for job creation, R&D tax credits, job training grants, foreign-trade zone benefits, and military trade zone/re-use incentives. The discretionary incentive is comprised of benefits such as property tax abatements, cash grants, sales tax exemptions/refunds, donated land, and forgivable loans. These incentives are customized to a company's specific priorities, so the benefits and payment terms are negotiable, and the final approval is at the discretion of a government official.
According to CBRE, "Discretionary incentives are only offered on a case-by-case basis for strong economic development prospects that are projected to generate a significant economic and fiscal impact on the state and community." Uminski notes that more significant incentives are geared toward larger companies, "with several types of incentives for these projects often offered in tandem."
Especially during the economic recovery, companies are keeping a close eye on states' future incentive plans. In the recent recessionary times, Uminski notes, tax rates carry a greater weight in location decisions than in the past. He explains, "Illinois just upped its tax rate a significant amount, and received quite a bit of bad publicity." Taking advantage of that negative reaction, "Indiana, a neighboring state, did some advertising to lure companies to a more competitive tax rate structure."
Consultants advise companies to gain perspective on the future by exploring states' tax histories as well. Uminski says, "When making a significant investment, you want significant incentives, and tax incentives are long term - typically running 10 to 20 years." He adds, "Michigan is a good example. They are going through their third tax restructuring in the last four years; they went from the MSBT (Michigan Single Business Tax) to the MBT (Michigan Business Tax); now they are looking at a new corporate income tax that would have a big impact on a company. " Uminski advises companies to explore states' motives, i.e., whether the tax structure is designed to extract more revenue from companies by adding to the tax base, and whether they are choosing to keep, eliminate, or minimize exemptions. He says, "When a large company is preparing for a significant investment and creating new jobs, it typically will create a cross-state comparative analysis that examines labor costs, tax costs, utility costs, incentives, and building costs. Together, those are the major categories that level the playing field."