How to Play the Incentives Game
Through successful incentives negotiation and fulfillment of job-creation and investment commitments, a company and the community where it locates can both come out winners.
Dean J. Uminski, CEcD, Principal, Crowe Horwath (Feb/Mar 08)
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Steps to Successful Negotiations
Companies should take several steps to maximize the odds of obtaining the best available incentive package:
Quantify eligible credits and incentives. Identify the estimated amount
and duration of the potential local and state credits, incentives, and
grants that may be available for a proposed project.
a proposed work plan for securing the appropriate incentives. The plan
should include an analysis of the company's current framework for
capturing required data related to the project.
compelling application packages. The applications should document the
benefits - including ancillary benefits like construction jobs and
sales tax revenues - that the state or local government will enjoy by
attracting the company to its jurisdiction.
4. Research and
analyze cross-state tax and incentive comparisons. While preliminary
negotiations are under way, the company should determine the most
cost-effective location for its circumstances. The analysis should
encompass all of the tax and business incentives for each site as well
as a net-present-value analysis of future cash flows.
Maintain confidentiality. To maintain negotiating leverage, companies
should refrain from making any public announcement of plans for
expansion or relocation until the incentives package has been finalized
and comprehensive due diligence has been performed.
cases, companies find it advisable to retain an independent consultant
to help gather the necessary information, conduct the required
analyses, and participate in the negotiations. Consultants can also
assist in documenting, compiling, and submitting the information
necessary to comply with the terms of the incentives package.
Keeping Up Your End of the Bargain
and local governments are increasingly incorporating performance
requirement provisions in their offers of tax incentives. The
provisions mandate the satisfaction of capital-investment and
job-creation targets as a condition for receiving certain incentives.
must file annual reports with the appropriate agencies, and local
governments may reconcile headcount and wage information with state
unemployment records. To document capital investments, companies are
often required to provide detailed invoices. In many cases, independent
consultants must certify the companies' reports.
do not live up to their commitments may be obliged to return their
incentives. However, if the failure is due to circumstances beyond the
company's control - a sudden downturn in the market or the banning of a
key product, for example - renegotiation of the package may be possible.
One Cog in the Wheel
tax incentives and other benefits are vital elements when selecting a
location for relocation or expansion, they should not determine the
ultimate decision. An incentive package can rarely transform a poor
site into a winning location. Factors like transportation costs and
proximity to customers or suppliers should carry far greater weight in
the evaluation process.
Nevertheless, companies owe it to
themselves and their shareholders to thoroughly investigate all
potential incentives. The competition among jurisdictions for corporate
expansion and relocation is intense. Savvy companies that know how to
play the incentives game can gain a valuable strategic advantage.
J. Uminski is an executive specializing in state and local tax issues
with Crowe Chizek and Company LLC in South Bend, Ind. He can be reached