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The Great Incentives Debate

A well-planned and skillfully negotiated incentives package can allow a company to remain competitive while providing a net benefit to the state and community in which it has chosen to locate.

Feb/Mar 06
Justifying state and local incentives has become a hot topic in economic development and executive circles lately. As a result of the increased competition among communities, most medium-sized to large businesses locating new facilities or considering relocation now need to factor incentives into their location analysis. As the use of incentives grows, the questions continue to mount. Should states and communities be offering incentives? What kinds of incentives make good sense for a business? What are some of the pitfalls involved with incentives?

Why Are Communities Offering Incentives?
There is a growing debate in states and communities around the country as to whether companies should be rewarded for remaining in or relocating to their communities? The idea of paying corporations that generate their own profits to stay or relocate seems absurd to many. However, the global landscape for businesses and communities is quickly changing; companies are looking for locations that meet modern financial demands, while communities seek to keep and grow their job bases. With increased foreign competition and the lure of cheaper labor beyond U.S. borders, American states and communities need to make themselves competitive in order to keep companies here. Additionally, as U.S.-based operations struggle to remain profitable and viable, operations are consolidated. Incentives can help influence the economic analysis involved in deciding which facilities to close.

The debate over providing incentives has grown louder in recent years as more communities feel the competitive pressure to offer incentives in order to attract investment. Competition today now involves neighboring communities, other states, and, in most cases, other countries. The southeastern states, in particular, have become more aggressive in their efforts to lure big and small businesses alike, prompting other states to react. To many the rationale behind such spending seems skewed. However, a knowledgeable economic development team and local legislature can realize significant growth in their community and tax base. Communities that have successful economic development teams have been able to put together attractive incentive packages that help the community in both the short and long term. As a result, many states and regions have reaped the benefits expected from retaining and/or luring corporate residents.

The growth of many aggressive southeastern states and communities has demonstrated the potential for success. Of course, a community or state that is offering incentives must carefully calculate the value of jobs or capital expenditures versus the amount of incentives it expects to pay out. However, there are intangibles, such as the corollary jobs that are created to support a major regional operation, or the affirmation that a community is a good place to be, resulting in the attraction of even more businesses.

Charlotte, N.C., for example, has recently been in the news for its aggressive spending; however, the city is in an enviable position. It is one of the fastest-growing cities in the country and is attracting desirable high-paying technology and service jobs. Omaha, Neb., is another good example. Omaha, on its own initiative, has revitalized its once decaying riverside industrial area. The city began redeveloping the area and then provided incentives for businesses to locate there; it has since attracted a variety of high-profile business residents. The net effect has been a tremendous amount of development throughout the Omaha regional area.

Some states and local agencies have learned how to use incentives to help both businesses and their communities. A well-negotiated and structured incentives program can be beneficial to all involved. When looking at incentives, it is important to realize that there is room for creativity. Just as no two communities and businesses are alike, the same applies to incentives programs. Individual business needs and community resources can be used to create an economic environment that is advantageous to everyone. A successful economic development team will help a business structure an incentives package that meets the needs of the company without draining the resources of the community.

What Makes for "Good" Incentives?

In order to understand how a "good" incentives package can be put together, it is important to understand the different kinds of incentives. There are two main types of incentives: statutory and negotiated.

Statutory incentives are those economic development programs created by a state's or local community's legislature. Examples include enterprise zones and job tax credits. Statutory incentives often have stringent and convoluted requirements that seem attainable but are often laden with fine print or strict filing and reporting requirements. Many business professionals struggle to evaluate the advantages and management of such incentives. It is important to be very thorough and work with an experienced professional who understands the benefits and pitfalls of such incentives.

Negotiated incentives are often the bigger drivers when it comes to making a final site decision. A case study will help better illustrate how negotiated incentives can be utilized:

Company ABC is a relatively small business with roughly 500 employees and four facilities located in three states. ABC's midwestern facility has encountered significant increases in operating costs because of the tremendous rise in natural gas prices. This midwestern facility employs 80 people in an economically depressed county. In order to remain competitive, ABC needs to either consolidate these operations into one of its other three facilities, located in southeastern states, or reconfigure its midwestern operations to burn coal instead of natural gas. However, conversion of the facility is potentially cost-prohibitive. Nonetheless, after negotiations with the state and local community, a strategic economic plan is created that allows ABC to remain in its midwestern location and to convert this facility as required. The community provides tax and training incentives, while the state agrees to finance the conversion of the operations from natural gas to coal. The state and community realize dual benefits and their actions not only allowed ABC to keep its midwestern facility open, but also provide increased demand for the state and community's coal producers.

This is an example of how small companies can utilize negotiated incentives to benefit their organizations and their communities without resorting to drastic steps such as consolidation or closure of facilities. However, it should be noted that such negotiated incentives are often not readily available. Most businesses will not be offered such incentives unless they know how and what to ask for. How one asks for these incentives is not necessarily a straightforward proposition. It often takes weeks of negotiations, familiarity with state and local laws, and knowledge of the business' economic impact on a community. However, if the right community and right company come together, a mutually beneficial package can be designed. Moreover, these types of incentives packages aren't just for the mega-corporations of the world; nearly any organization may be eligible. Such determinations depend on the type of business, health of the community, growth projections, capital investment, and other issues.

The most important aspects of putting together a beneficial incentives package are structuring the terms and making sure the incentives are attainable. When structuring a package, oftentimes a community's economic development team may not realize the resources it has available. A professional experienced in site and incentives analysis can often help an economic development team recognize a business' needs and help strengthen the community's case to attract or retain the organization.

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