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In Focus: Incentives No More - Why States are Changing Course on Incentives

As some states table or modify their incentives programs for financial and/or political reasons, growing companies need to take these actions into account when making location decisions.

  • Tim Cook, CEO, KSM Location Advisors
  • Katie Culp, President, KSM Location Advisors
Q1 2016
The playing field for economic development incentives has been muddied recently due to evolving philosophies on incentives and cash-strapped states not only modifying their approach toward incentives, but using the fine print to reconsider promises made to companies looking to move or grow.

As the U.S. economy has recovered, some politicians think incentives aren’t as necessary to attract business and grow jobs. And as state administrations change, new philosophies on how incentives should be used are inevitably adopted.

    Consider the following:
  • In Arizona, a new administration overhauled the state’s training grant program; what was once a primarily formulaic approach has been redesigned for grants to be more competitively awarded, resulting in less certainty whether a project would receive incentives.
  • A distribution client was close to finalizing a deal to relocate their existing business within Illinois when state incentive programs were tabled by a new governor in June of last year; the project remains in limbo.
  • In Michigan, Governor Snyder has spent his two terms focusing more on tax reforms than particular incentive and job growth programs. State incentives still exist, but are less pervasive and more customized to the deal.
While these are not necessarily negative developments, growing companies need to take this changing landscape into account when making site decisions.

Other states, including North Carolina, are overhauling their tax systems to make the business environment more attractive. Such efforts are designed to lessen the need for incentives and tax credits. While such approaches can have merit, sweeping tax changes have their own winners and losers, benefiting some businesses while hurting others.

Former Indiana Governor Mitch Daniels used to say, “All kinds of Hoosiers need all kinds of jobs.” This adage is now being tested in Indiana where the overall economy has improved and the state shifts its focus to incentivizing higher wage jobs. In contrast, incentives are not as aggressively used to court manufacturing and distribution deals, a strategy that deemphasizes this centrally located state’s natural asset — being the self-proclaimed Crossroads of America.

In other states, officials are pulling out of existing contracts or reading the fine print more closely to undo deals completely. For example, due to budget concerns, Virginia defunded their enterprise zone program. A client in Virginia who had counted on these benefits to make a site decision lost hundreds of thousands of dollars as a result.

Critics of incentives argue that government shouldn’t pick winners and losers. But the most effective incentive programs level the playing field or bridge a gap to greenlight a project that would otherwise die. Without these tools, state and local government’s ability to influence economic development and site selection decisions will be severely compromised.
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