Thomas J. Stringer, Esq., Managing Director & Practice Leader, Site Selection and Business Incentives Group, BDO USA (November 2010)
Despite the ongoing recession - or perhaps because of it - the importance of and spotlight on state and local business incentives has never been greater. In an age of TARP, bailouts, and stimulus spending, economic partnerships between government and strategic businesses are commonplace. While public opinion has varied on their success at the federal level, states and municipalities are using their traditional and newly crafted programs to solidify their tax bases and fight back at the Great Recession.
Changing Global Dynamics
For more than 30 years, locations in the United States and around the world have tried to attract new jobs, new taxes, and encourage economic development through various tax and business incentive programs. Typically these benefits played a second-tier role in the vast majority of real estate transactions and site selection examinations. For decades, other factors such as proximity to customers or markets or work force availability were tops on the site selection short list. Building the product or undertaking a service at the location where the best work force existed was a premium.
To a large extent this is still true, but global competition has changed that dynamic dramatically. In a seamless world where barriers to transportation, markets, capital, and talent have disappeared, controlling cost has become a dominant means of sustaining growth, and providing returns to shareholders. Add in a worldwide downturn and stalled global economy, and obtaining a competitive advantage through cost control has become a preeminent guiding principal of site decisions. Simply put, tighter budgets, fewer customers, more choices, and equal services/talent lead to a situation where cost is the only metric that decision-makers can exercise control over.
While incentives were always present in the decision-making process, they often were a second-tier item only serving as the deal-maker when locations would effectively be tied as finalists on the short list. They always made a good deal better, but were never the justification for making a bad deal good. But today, in a world with this equal economic landscape, incentives - as a major component of cost control - have arrived at the top of the list.
Cost Control and Value Added
The 2009 site selection factors are on-target and reflect the decisions we see daily in the site location process. It is very interesting that of the top-10 ranked site selection factors, three really address the precise same topic: cost control. Tax exemptions (ranked third), corporate tax rate (ranked fifth), and state and local incentives (ranked eighth) are all, in reality, a single factor. Each factor represents a way of saying, "How can we partner with our governmental officials to reduce the cost of operations?"