The True Value of Economic Development Incentives
Companies need to determine which incentives are of most value to them and also make sure they are utilizing all the incentives to which they are entitled.
Economic development incentives come in many different forms and each state, town, and municipality administers them in various ways. Incentives can be provided via cash grants, property tax abatements, sales tax exemptions, utility rate reductions, infrastructure grants, fee waivers, port tax credits, state tax credits, building reuse/redevelopment grants, and fee waivers.
The real question is — are companies utilizing the true value of the incentives that have been awarded to them? Obviously, the low-hanging fruits are being used sufficiently — upfront cash grants and building reuse/redevelopment grants. Not so obvious is the fact that companies are disregarding the incentives that require a little more paperwork and reporting once the incentives have been declared and years after the initial announcement. Too often, companies are putting ongoing reporting at the bottom of their lists of priorities.
Navigating the Complex World of Incentives
For a company representative selected to assist with the site selection process, there can be an immense learning curve in navigating the world of economic development incentives and the value of the incentive. States and communities are constantly altering their incentive policies in relation to investment thresholds, number of jobs created, site location, and type of business. For those involved in the process on an infrequent basis, the wheel is essentially reinvented each time the process begins.
In most cases, companies will use the cash incentives, property tax rebates, or property tax reductions granted to them depending on the complexity of reporting. Due to this complexity, many smaller companies are not staffed to take advantage of the incentives offered. Another problem is that the personnel assigned to select the site and work with the states and localities are, in many cases, not the same personnel who will manage the facility during its operational stage. In these cases, there is no continuity in understanding what reporting is expected. Many reporting deadlines are often overlooked, which results in missed or delayed grant payments. In the extreme cases, companies can be disqualified for grants obtained due to filing deadlines being missed or extensions filed for delays in meeting target employment and investment requirements.
With the myriad of grants, abatements, credits, or incentives available, are companies truly utilizing the value of what they have been awarded?
Most companies will take advantage of grants that assist in new infrastructure, property tax reductions, payroll tax rebates, or reimbursements for building renovations. State income tax credits for both job creation and investment are more difficult for a corporation to fully utilize, unless they have a large corporate state tax liability. It is for this reason that many companies vastly underutilize these incentives. Another example of an underutilized incentive is a tax credit for increased port volume/traffic. Depending on a company’s logistics pattern and preferred port location, it can be difficult to take advantage of the full value of this tax policy from states with port facilities.
One of the oldest and most valuable incentives now offered by most states is the recruitment tools through the state’s employment office and training through the local community or technical college. Many companies use these tools but do not take full advantage of the value and cost savings that can be achieved through these educational institutions. Through our site selection activities, we have found that most representatives of these organizations want to push companies into a model of “one size fits all.” This can result in the company not receiving the full training assistance it was promised or being offered programs that contribute minimal value to the organization.
Do companies understand what needs to be completed in terms of incentives administration long after the project has been announced?
The completion and timely filing of paperwork determines whether companies successfully receive all grant dollars promised during a location announcement. This task is not as difficult for a company undergoing a major expansion, as they already have the personnel in place to track and report the required information for a city, county, or state. However, for a plant that is new to a community, the proper and timely filing of the required forms can be a daunting task. In many cases, plant management has to design and implement an internal tracking system to insure that the information requested by local and state governmental bodies is reported correctly.
What incentives create the most value for the company?
The old saying is true when it comes to incentives, “Cash is king.” While many states offer tax credits, these ultimately produce little value to a company. The start-up period of a new operation is where a cash incentive payment has the most value. While most communities and states are moving to a “pay for performance” model, the biggest transition point for a company is when a facility is being constructed or renovated and employees are being trained. This is where the incentives get the company officials’ attention. Cash goes a long way in assisting with new equipment purchases and site costs (i.e., grading and infrastructure improvements, to name a few).
Another valuable incentive is the building reuse/redevelopment cash grant. Many states offer a cash grant that will fund specific improvements to a facility a company is considering. Examples of these improvements include a new or upgraded sprinkler system, electrical system, or roof on the building. We have found that sometimes this incentive can bridge the gap when a buyer and seller cannot find common ground with the final sales price.
Many companies have found ways to reduce their corporate tax liabilities without the use of state tax credits. Therefore, those programs are used to effectively reduce the corporate tax rate of the state.
What are the top incentives for any company?
The top incentives for any company are a building renovation cash grant, payroll tax reimbursement payment, property tax rebate or reduction, and utility rate reduction during the first several years of operation. State tax credit programs are often unused or underutilized by most companies because of a small corporate tax liability or the complexity of understanding how the programs operate.
Should a company be considering a future move or expansion and want incentives to be a part of the decision-making process, it is imperative that it understands what exactly it is getting when the proposal is made. Sometimes the proposal sounds better than what it looks like on paper.
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