Elvis Presley once said "Don't criticize what you don't understand, son! You never walked in that man's shoes." Undoubtedly, Elvis did not intend to influence the world of economic development, but site selection experts, economic development professionals, and all others take note. There is an important message in the King's words. It is incredibly important to understand the competitive global environment in which American businesses operate today, in order to appreciate how businesses make decisions and what it is like to stand in the shoes of today's corporate executive. Let the King's words live on.
Today if your community loses a job, chances are better that it went offshore than to a competing community or state. The Chinese peg their currency at an estimated 40 percent below the U.S. dollar. Other countries charge no corporate income taxes or guarantee endless supplies of trained, low-cost workers. According to the Tax Foundation, the United States has the highest corporate income taxes of any country in the world. These are only some of the numerous economic incentives that have tempted American companies to move offshore. Pollina Corporate estimates that offshoring costs the United States 54 million square feet of office space (equivalent to one-third of downtown Chicago's office market) and 8,500 manufacturing plant closing per year.
The fact of the matter is that incentives are now a critical part of global business. However, if you open any newspaper in the country today, you can see the war being waged on incentives. Misunderstanding the benefits of incentives leads many to criticize local and state governments as being too business-friendly. Often, catchy phrases such as "endless corporate welfare" are used to describe these programs. As with many things in life, ignorance breeds prejudice. What these naysayers do not realize is that incentives, in whatever form, are critical factors in the decision-making process of American business today.
With the exponential increase in global competition year after year, it is difficult for companies to maintain profit levels. In the past, states and communities feared losing employers to neighboring communities or states. In a 21st century marked by sophisticated communications systems, reliable and efficient transportation systems, and skilled global work forces, the pressure to move offshore is intense. It is clear that the economies of Asia, Latin America, and Eastern Europe are on a course of staggering growth. Since they have capable work forces asking for less compensation, reliable infrastructures, and economies growing at rates two to three times that of the United States, the question sometimes becomes, "Why haven't I moved my business yet?"
As Americans, we have grown accustomed to having the strongest and most diverse economy in the world. It is difficult to accept that other economies will be the growth engine and source of tremendous profits for companies in the future. Even though there are compelling reasons for a company to make the transoceanic move, there still remain many benefits to staying in the continental United States. The United States still retains one of the best work forces in the world, and its infrastructure, transportation systems, and legal mechanisms are among the best.
Reducing Financial Risk
One of the most perilous "journeys" a company can embark upon is opening new facilities or expanding existing ones. The reason is simple: To properly plan and implement a successful expansion requires a tremendous capital expenditure and an investment of time and energy from key people within the company. This exertion of resources often places the company on weaker financial footing. Although the process is a calculated move designed to increase and grow the business over the long term, it exposes the company to significant financial burdens.
It is critical to remember that the more money and time invested in an expansion, the greater the risk. The company's goal is to get out of the danger zone by recovering the cost of the expansion and have the new facility producing profit as quickly as possible. This is a very high priority for corporate executives making decisions regarding expansion or new locations. It is important to understand a company's goal because it presents economic developers the opportunity to attract a new employer.
Communities that enjoy high rates of retention and expansion of companies are those that understand this guiding principle. The risk of an expansion is directly tied to the amount of money necessary to fund the expansion. The less money invested in the expansion, the less risk there is for the company. If a community can provide incentives and financial aid, reducing the amount of money invested by the company, the risk is reduced. Clearly, those communities that provide incentives, thereby reducing the amount of money invested and risk involved, are communities that are the most attractive to corporations. The key is to identify which incentives reduce the initial outlay of capital.
How Do Tax Exemptions Rank?
Companies like incentives that are received immediately or within the
first critical 24 months of opening a new facility, rather than
received over time. Upfront incentives have the ability to cut upfront
costs, thereby allowing for quicker recovery of invested capital and
achievement of a profitable situation. For this reason, companies find
cash grants, free land, free buildings, worker training grants, and
other similar incentives to be more attractive than tax abatements and
However, one tax incentive that virtually every community in the
country has the ability to offer and companies find beneficial are
sales tax abatements. These incentives give companies a break on the
sales tax of items purchased in order to expand. Under such programs,
the sales tax on raw materials for construction, machinery for the
production floor, office furniture, computers, and other items are
forgiven. Companies prefer this tax incentive because it helps reduce
the upfront cost of the expansion. Remember, achieving profitability as
soon as possible is the primary goal of an executive when dealing with
a new facility, and incentives that help satisfy this goal are the ones
that companies value the highest.
Most tax incentives, like income tax breaks and abatement of inventory
and property taxes, do not help the company recover its investment and
turn profitable quickly. In fact, it may take two to three years for a
facility to become profitable and be able to use an income tax break.
This is not to say that tax breaks do not have a place in an incentives
package. However, a community must present upfront incentives first in
order to catch the eyes of a corporation. Most tax incentives are best
used to sweeten an incentives package anchored by programs that help to
recover any initial investment quickly.