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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:

1. 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.

2. Develop 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.

3. Develop 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.

5. 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.

In many 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
State 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.

Companies 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.

Companies that 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
While 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.


Dean 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 at 574-239-7865.
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