Economic development compliance is historically a long process, one that is typically managed over a multi-year time frame. Companies have negotiated incentives to help offset costs associated with growth and expansion and count on the economic benefits as part of their strategic growth plan — specifically, their plan for building the future of their business and their teams.
What no one counted on was a global pandemic bringing life as we know it to a standstill. The dramatic slowdown of the economy has caused business leaders to take a close look at all aspects of their business, which should absolutely include compliance reporting associated with economic incentive agreements.
What does compliance look like in the middle of a pandemic?
Despite these unprecedented times, not everything has — or should — come to a screeching halt. Business must continue processing payroll, maintaining employee health benefits, and fulfilling production orders. For those businesses that have recently experienced growth and expansion and have been awarded economic development incentives, quarterly or annual compliance reporting must be maintained. Most state and local compliance reports are due within the first quarter of each year, and in 2020, this was also the time that COVID-19 reared its ugly head in the United States. Companies had to immediately shift focus to having their employees work remotely, ensuring that networking and computer systems were safe and secure, and maintaining business continuity to the greatest extent possible. With this shift in attention, maintaining compliance with incentives has likely not been the priority.
Keeping up with compliance will be crucial in a recession.
Economic development incentives continue to be an important component of the strategic plan for companies experiencing growth. Past data has shown that many companies awarded incentives fail to realize the benefits because of the compliance requirements. This could be for a variety of reasons, including burdensome paperwork and/or the fact that responsibility for compliance failed to reach the appropriate company contact.
In 2020, maintaining compliance may be even more complicated as workers adjust to remote work environments, and teams are operating in fluctuating circumstances. However, as companies experience an economic downturn as a result of the pandemic crisis, the value of receiving the financial benefit from economic incentives becomes even more crucial to a company’s bottom line. It could make the difference in sustaining operations. Many incentives realized will be in the form of much-needed cash, especially important during uncertain times.
Economic development incentives continue to be an important component of the strategic plan for companies experiencing growth.
What’s happening around the country with compliance?
Nationally, Congress moved to enact the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as additional legislation in progress, which intends to assist businesses with a variety of needs during this crisis. While these assistance packages do not necessarily lighten or change the burden of direct compliance, the program will assist with the day-to-day stress of guiding a company through the fallout from COVID-19.
In New York, one of the areas most impacted by COVID-19, the New York City Department of Finance has offered relief in the form of deferment or suspension of property tax payments and extending abatement deadlines.
In Indiana, the Indiana Economic Development Corporation (IEDC) has extended the filing deadline for compliance reports required to receive payroll tax credits. Eric Holcomb, Governor of Indiana, also issued several Executive Orders, a few of which allow for the extension of property tax reporting and tax payments.
In Nevada, the Governor’s Office of Economic Development (GOED) issued a memorandum to the business community to take whatever measures necessary to keep its business and employees safe during the COVID-19 outbreak, including working with the GOED office to discuss specific situations and to work on compliance extensions as needed.
And a response by JobsOhio has been to immediately put into place an automatic, limited waiver of compliance for companies with active economic development projects. This policy will continue through the calendar year 2020 and 2021 reporting periods.
As other states continue to adapt to the ever-changing business landscape, we will continue to see more states roll out their contingency compliance guidelines.
National emergencies have impacted incentive compliance in the past.
How do we compare how the compliance process has been affected by the COVID-19 crisis to other national crises such as 9/11 and Hurricane Katrina? The short answer is that this crisis is unique with its challenges, and the need for flexibility is constantly evolving.
During 9/11, the aforementioned New York City Department of Finance enacted several tax incentives in an effort to encourage rebuilding in the city’s most traumatized areas. During Hurricane Katrina, the Gulf Opportunity Zone (GO Zone) Tax Incentives and Relief Act made available almost $14 billion in federal tax incentives to encourage businesses to invest in the regions devastated by the hurricane. Also, because there was such a need for housing to be rebuilt, tax incentives were offered to the New Orleans construction industry, an industry that would not normally qualify for economic incentives.
Re-negotiation may be a necessary reality.
The current pandemic crisis is unlike 9/11 or Hurricane Katrina; it is not human-made or a force of nature. The staggering number of $2 trillion is, as of this writing, the estimated financial loss to the global economy due to the COVID-19 pandemic, according to the United Nations Conference on Trade and Development.
During these times, existing incentive contracts may need to be renegotiated based upon post-pandemic economic realities.
Following a long period of economic growth, companies that a year ago were growing and hiring are now worried about keeping their doors open. For those companies that were awarded economic incentives as a result of their growth plans, adding to their worry is the possibility of not being able to meet their job and investment commitments and thus losing the economic benefit from those incentives. In the worst case, repayment of funds already awarded may be a reality; however, given the unforeseen circumstances, this situation likely can be mitigated. During these times, existing incentive contracts may need to be renegotiated based upon post-pandemic economic realities. Having strong relationships with state and local economic development officials, or even better, having a professional economic development consultant who has developed strong relationships over many years, can be an important strategic advantage.
Prepare for what comes next.
Our country has never faced a national or global emergency of this magnitude. Federal stimulus dollars will be an effective bridge, but the reparations needed to get our nation back to a pre-pandemic level will likely not be swift or linear. Unemployment is expected to remain at around 6 percent for the foreseeable future, leaving roughly four million people looking for work in a difficult economy. We had already seen manufacturing on a downward trajectory and can expect this trend to continue.
At the same time, positive signs are starting to surface. Local and state governments are now considering how to emerge from this pandemic safely and move forward. As businesses look to regain their footing and open again, it will remain imperative for companies to stay connected with economic developers to consider the latest factors and how they apply to any existing or future incentive agreements and opportunities.
Our country has risen to whatever challenges have been placed before us time and time again. This pandemic has been a bold reminder of our resiliency, our creativity, and our ability to come together for the greater good. We will again see a time when companies commence making new investments, and broad-based hiring will resume. Businesses should continue to expect economic development incentives to be an important collaboration tool in our nation’s economic recovery and rebirth.