Nowadays, however, tax rates and incentives have a “Wild West” feel. Emerging from a recession and eager for new jobs, communities and states are in hot competition with each other to land the best projects. As a result they are upping their “incentive game” to be as competitive as possible and land the next great project.
Incentive packages include discounted or even free land and site preparation, state and local tax credits, payroll tax deductions, property tax abatements, research and development credits, deductions for machinery and equipment, wind and solar credits, and generous work force development programs (often for free). And, if a company wants an incentive that isn’t part of the initial proposal, and is bringing enough capital investment and jobs into an area, chances are that incentive will be negotiated and included in the final deal.
Putting Incentives into Perspective
Buzz Canup, founder and president of Canup & Associates in Greenville, South Carolina, advises to pay close attention to corporate tax rates. “Say you have one location with an 8 percent rate and another with a 5 percent rate,” he states. “The 5 percent rate sounds like the obvious winner, but you really need to know how they are structured and compare the net effective tax rate — you’d be surprised by how close these two areas could actually be over the long term.”
As great as they may sound, incentive packages don’t really have a big impact early on in the selection process, because every state realizes it needs a competitive package and that the contents are negotiable — so they are all fairly similar.
“Corporate tax rates and incentives usually rank in the top-five factors for most projects,” says Larry Gigerich, managing director for Ginovus in Indianapolis, Indiana. “We tell all of our clients that they should never pick a location solely based upon incentives. No amount of incentives can overcome a poor tax structure or inadequate work force.”
“Our experience has shown that tax incentives don’t get that much attention until the final two or three contending sites have been selected,” adds Robert Price, director of Herron Consulting in Atlanta, Georgia. “That’s when they can be the deciding factor — a difference of several million dollars over a 10-year period, for example, might decide which site wins out.”
Most states have a list of preferred industries they want to attract that they feel are best suited for their regions and work force talent. The incentive packages they offer can be customized to attract these industries. Every state wants to attract high-tech, forward-thinking enterprises that represent emerging, high-growth industries that will pay good wages. These include high-tech manufacturing, biotechnology, automotive, information and computer technology, data centers, and back-office or call centers.
For example, one of El Paso’s targeted industries is contact centers. Nearly 15,000 workers in El Paso work in technical-support operations, back-office operations, and call centers. Many of these employees are bilingual and also have post-secondary degrees from local colleges.
“We assisted our client, Redcats, in the location of a consolidated sales operation call center in El Paso, Texas,” says Gigerich. “Our three key project drivers were work force quality and costs, tax rates and structure, and economic development incentives. We were able to secure enterprise zone tax credits, a sales tax refund, and training grant assistance to support the consolidation project. The state of Texas and City of El Paso offered very competitive tax rates and economic development incentive programs. The ability to reduce ongoing operating costs was critical to the decision to locate in El Paso.”
Closing With Cash
More states are developing “deal-closing funds” that will sweeten their offer to a company with cash when they are in close competition with other states. For example, Texas has its Texas Enterprise Fund (TEF). Established in 2003, TEF is the largest deal-closing fund of its kind in the country and has been used effectively over the years as a final incentive tool. This program has invested almost $500 million in new projects since its inception, resulting in about 63,000 jobs and more than $20 million in capital investment. Most recently the TEF awarded $930,000 to Pactiv, the world's largest producer of food service disposables and food packaging, for a 150,000-square-foot expansion to its manufacturing facility in Corsicana, creating 200 new jobs.
There’s also the Texas Emerging Technology Fund (TETF), which has invested about $200 million to fund nearly 150 early-stage companies that represent emerging, high-tech industries such as electronics, nanotechnology, biomedicine, and alternative energy. Over the years this investment has leveraged almost $800 million in additional funding and investment.
Other states have similar closing funds that target specific sectors. Arizona is aggressively pursuing alternative energy projects, especially solar. Arizona programs include the Innovation Accelerator Fund, which supports promising technology firms on the path to commercialization. Other incentives include a 10 percent refundable income tax credit and up to a 75 percent reduction on real and personal property taxes for solar, wind, geothermal, and other renewable energy. These incentives continue to attract innovative energy companies to Arizona. For example, Clear Energy Systems, a provider of mobile and distributed power generation systems, is constructing a new 158,000-square-foot facility in Tempe, which will hire 225 new workers to make the Genesis 1000, the world’s lightest, smallest, one-megawatt generator set.