More than $1.3 billion in incentives has been approved to attract Panasonic’s EV battery facility which is projected to create 4,000 jobs in De Soto, Kansas.
North Carolina was successful in bringing Apple’s 3,000 jobs in machine learning and artificial intelligence to Research Triangle Park with the help of an incentives package estimated at $846 million.
While these mega-project announcements and the level of associated incentives awards grab national headlines and are regularly debated on their needs and merits, each year hundreds of thousands of companies in the U.S. alone will secure some level of business incentive and tax benefit to conduct facility expansions, capital investment, and other employment-related activity.
Business incentives, tax credits, and exemptions are regularly provided and deemed absolutely necessary by the federal government, state and local agencies, and other authorities and entities, including ports, airports, utilities, railroads, and workforce training organizations to encourage and support business investment and economic activity in all corners of the country. Our federal system allows state and local governments, and the voters in their states, to set tax and regulatory policies, and the levels of expenditures they feel necessary in their public and social institutions, to develop a healthy and economically productive state and region. In the same vein, state and local agencies are able to determine the levels of government incentives and tax benefits they feel necessary and in the best interests of their citizens to attract and retain companies and generate investment, jobs, and economic and social health for their communities.
Business incentives, tax credits, and exemptions are regularly provided and deemed absolutely necessary by the federal government, state and local agencies, and other authorities and entities. Credits and incentives can be defined in three separate categories:
- Statutory tax credits and exemptions — These federal, state, and local tax benefits are “as of right” based on companies making qualifying investments or conducting required activities to claim the benefits. Regularly claimed statutory benefits include investment and jobs tax credits, research and development credits, targeted hiring and training credits, foreign-trade zone or ports activity credits, employment tax reductions, sales tax exemptions, qualified opportunity and enterprise zone benefits, and others. Other major tax benefits that companies regularly claim include capital gains and foreign income deductions, property depreciation and business expense benefits, and employer health and pension contribution reductions. While these tax-based benefits do not require pre-approval by economic development or taxing authorities, the level of expertise and rigor required to calculate and determine eligible benefits that can be claimed on tax returns is extensive.
- Tax credits and exemptions that require pre-approval — While many of these tax benefits fall in the same categories as those above, in many cases the ability to claim benefits on tax returns requires companies to apply for the incentives and secure approval from economic development agencies and tax authorities. Many of the largest announced incentives awards may fall into this category, including property tax abatements and exemptions, income tax credits for capital investments, tax credits and employment tax withholding rebates for job creation, and sales tax exemptions on facility construction and equipment expenditures.
Benefits are secured by entering into discussions, submitting required applications, and securing approvals from state and local agency boards or local councils. In most cases, these benefits must be applied for and approved before any commitments or announcements are made by the company on their plans or intention to conduct the project in the state or city. Activities conducted such as signing a lease, purchasing or placing orders for equipment, hiring or posting announcements for new employees, internal announcements to company employees or internal communications that decisions have been made before required approvals have been received can disqualify companies for the incentives. While the qualifying criteria to secure approval of these benefits is based on statutes and regulatory guidelines, in many cases, economic development agencies have discretion on the benefits awards based on the amount required to secure the project and the long-term economic benefits.
Incentives should be fully reviewed to determine their value in the overall project cost calculation and in reducing project investment and long-term tax and other liabilities.
- Other negotiated and discretionary incentives — These benefits often come in the form of direct grants, low-cost or forgivable loans, free or discounted land, utility discounts and rider rates, permit and impact fee waivers, and a range of workforce development programs. Discretionary incentives are most often programs that have specific legislated allocations and guidelines determining the range of eligible awards based on the project investment and new or retained jobs. In some instances, for the largest, most competitive projects, state legislatures may approve special allocations to provide an award to attract a specific company. A number of states have approved governors’ deal-closing funds, which provide wide latitude on the amount of benefits the state economic development agency can provide to secure a specific project.
The evaluation of states and regions for projects by companies, i.e., the site selection process, requires a detailed review of a multitude of critical project requirements of which the amount of incentives that can be secured is only one — and often not the most important — factor. However, just as the long-term cost of labor in competing locations is critical to deciding the project location, incentives should be fully reviewed to determine their value in the overall project cost calculation and in reducing project investment and long-term tax and other liabilities.
A disciplined approach in analyzing the potential incentives in alternative locations that may be suitable for the project should be conducted before entering into discussions with state and local agencies. Knowing the value of the potential incentives, including the benefits to be realized based on the company’s tax structure or projected tax liabilities in the locations under consideration, is a critical first step. Companies should be clear in presenting their project plans, as well other potential alternative locations for the project, during initial discussions with economic development agencies so that any incentives offers are based on realistic and achievable employment and investment factors and commitments.
The process and timeframe to receive an offer of a package of state and local incentives can differ significantly between states and regions. In some instances, companies can receive an offer letter within a couple of weeks by providing basic project specifications in writing or in meetings with the economic development agencies. In other states and cities, a formal offer of incentives will not be provided for several months until project applications are submitted and approved by economic development boards or local agencies. In either situation there can be opportunities to negotiate the award levels, terms, and conditions of incentives packages before a company commits to or announces their project location decision.
Companies regularly achieve less than their approved incentives awards or default on their agreements and are removed from programs due to inadequate reporting and compliance procedures.. Adhering to Project Commitments and Terms
Companies should review and become comfortable with the project agreements, including all project commitments, reporting and compliance terms, incentives payment schedules and fees, default and clawback provisions, and other terms before accepting the incentives and making project commitments, as the likelihood of negotiating these terms is seriously diminished after doing so.
Finally, it can’t be overstated that establishing an internal process to track project employment and investments and accurately meet incentives reporting requirements is the most important part of the incentives process. Companies regularly achieve less than their approved incentives awards or default on their agreements and are removed from programs due to inadequate reporting and compliance procedures.
In recent years, many states and communities have increased the amount of application documentation and detail on such issues as project economic impact, community benefits, projected local labor and workforce participation, ESG and green building commitments, and competing locations prior to approving incentives awards. Similarly, there has been increased rigor and review of qualifying employment and wages, eligible capital investments, and other requirements spelled out in project agreements before compliance reports are approved and benefits paid to companies. States have seen the need to adjust such issues as percentage of time employees are required to work at project sites, or their calculations on employee spending impacts to the local community, as the level of remote workers and underutilized facilities remain stubbornly high. Understanding the level of complexity in securing approvals of both the initial incentives applications as well as the follow-on compliance reporting requirements is important in comparing competing incentives offers.
Unprecedented Financial Support
By all measures, since the start of COVID, the amount of business incentives and funding for companies that has been authorized and awarded exceeds any amount in our country’s history. Of the $3 trillion CARES Act I and II (the Consolidated Adjustment Act) funding, approximately $1.5 trillion was allocated almost equally to large and small businesses through the Payroll Protection Program, Employee Retention Credit, direct grants, loans and loan guarantees, and tax benefits.
Significant funding for investments in transportation, education, healthcare, energy, and economic development projects has been authorized through the $1.9 trillion American Rescue Plan in 2021. While over $600 billion of the $1.2 trillion Infrastructure Investment and Jobs Act will fund highway, transit, and rail projects, the remainder of the investments will be made to support energy, environmental, water, broadband, port, aviation, and other public/private projects.
Since the start of COVID, the amount of business incentives and funding for companies that has been authorized and awarded exceeds any amount in our country’s history. The Inflation Reduction Act allocates $369 billion to energy security and climate change projects, including significant funding for solar panel, wind turbine, and renewable battery projects, and individual tax credits for the purchase of solar panels and electric vehicles. Finally, while $200 billion of the $280 billion CHIPS Act is allocated to scientific R&D and product commercialization, approximately $53 billion in federal grants for manufacturing, R&D, and training, and another $24 billion in tax credits is available for direct company funding for semiconductor plants. States and communities are utilizing funds from all of these programs and supplementing them with their own incentives to support private-sector investments in their communities.
While the public benefit and need to award large incentives to a Fortune 500 company is regularly debated, all states and other levels of government routinely provide funding to companies to achieve specific outcomes. Some states and communities focus funding on the needs of small businesses, entrepreneurs and new tech, and emerging industry sectors, including renewable energy, electric vehicles and charging infrastructure, craft brewing, and cannabis. Others award significant incentives to projects by large companies in manufacturing, foreign direct investment, life sciences, and film production projects. As the distribution and logistics sector struggles to find properties and welcoming communities for their facilities, incentives can be challenging for projects in this sector in the near term. Cities and states may see the need to refocus efforts to secure large corporate services and financial institutions to underutilized suburban office properties and struggling downtowns through renewed incentives to attract this sector.
While the need to provide incentives to a specific company or industry sector in a state or city may change based on the economic or political climate, the availability and use of incentives by governments at all levels appears certain to remain to generate jobs and achieve economic prosperity for their communities.