In the current challenging economic environment, incentives are being provided to assist in the expansion or location of businesses in communities across the continent. Over the years, there has been a focus on the use of economic development incentives and — with the recent New York Times article — the issue is drawing more attention. The age-old question has been whether incentives are needed to entice companies to decide to invest capital and hire team members in a specific location. Companies should never make a location decision solely based upon incentives, though the financial assistance that offsets project and/or operating costs is important when the final decision is being made by any firm.
In certain situations, the chatter surrounding the use of economic development incentives can become divisive. The bottom line is that both governmental entities and companies have responsibilities to one another when they enter into a financial relationship. This is the same as when government and private businesses enter into agreements with vendors to provide products or services. Parties have contractual responsibilities to one another, and if one party fails to do what they are supposed to for the other party, there are penalties put in place. In today’s world of economic development incentives, it works the same way.
Communities fit into regional and state economies. Each community plays an important role in contributing to that regional and state economy’s long-term success. When communities understand their role, they will be prepared for and successful at attracting the types of industries and economic growth that best supports the objectives of their area. By aligning companies and industry sectors with the right location, communities and states can create an enduring partnership that can lead to future growth and involvement in other community initiatives.
Communities and states must be prepared with the right tax structure, work force, real estate, public infrastructure, and economic development incentive programs to ensure successful economic outcomes. Communities that are keenly aware of their strategic economic development goals are well prepared to secure new capital investment and job creation opportunities. The ability to offer and deliver meaningful economic development incentives in support of an opportunity to lower project and/or operating costs can result in great outcomes. This form of partnering will result in a win-win outcome for communities/states and businesses.
Why Communities Offer Incentives
- Retaining and creating good paying jobs — this is important to any community and affects everything from the tax base to the quality of life, i.e., the happiness and health of its citizens.
- Expanding the tax base through corporate taxes ranging from property taxes to sales taxes
- Diversifying the economic base through the creation of jobs for a diversely educated population
- Beautifying the community through the improvement of decaying buildings and neighborhoods or the availability of new tax sources to improve existing quality-of-life amenities
When companies begin their search for a new location or expansion of an existing one, there are key driving factors involved in the consideration of each community being evaluated (as outlined in the accompanying chart). Communities will need to meet most, if not all, of the high-ranking factors involved in the decision. Companies that have made diligent efforts in identifying those factors will be seeking the partnership opportunities with communities that can best fulfill those needs. Typical key factors include offsetting capital investment costs and operating expenses.
Key Factors for Industry When Seeking a New Location
- Labor: The quality, availability, and cost are top factors in selecting a site for relocation or expansion.
- Infrastructure and Utilities: Capacity, cost, and redundancy are all factors involved in the decision of selecting a community.
- Real Estate: The cost, availability, and location impact site selection decisions.
- Taxes: Property, income, and sales taxes can significantly impact operating costs.
- Regulations: Permit and code regulations, processes, and timelines can impact operating costs as well as project timelines.
Understanding one another’s key driving factors can go a long way toward creating a partnership that benefits both the companies and the communities involved. A clear communicative relationship with complementary or mutual objectives can help develop long-term positive results for the prosperity of the company and the community. This communication needs to include evaluations by both the company and industry, oftentimes with the aid of outside experts who have a depth of understanding and experience with the issues involved on both sides of the aisle.
Mutual perspectives can easily be identified and applicable incentives developed to address the needs of both the company and the community. Businesses contribute to the overall prosperity of a community. With the realization that 80–85 percent of all new jobs in a community come from existing businesses, it becomes easy for communities to understand that the investment they make in the existing industries in their community is essential to promoting the growth of those industries. Growth equals new jobs and a higher tax base, which in turn result in better schools and community amenities and a more attractive quality of life. Quality of life and good schools, in turn, continue to attract prospective employers and employees.
Work Force Initiatives
Several incentives can come into play to aid in the retention and growth of the necessary work force. Existing and continuing education levels for the jobs will need to be addressed by both the company and the community. Clear communication can help both parties ensure that needs are met. Some evaluating questions might include:
- What is the education or training level of the existing work force base?
- Are there prospective employees available to be trained or educated in order to fill additional jobs for present and future needs?
- If re-education or continuing education is necessary, are there job-training programs already in place by the community or the industries that exist in the community?
- Are any community incentives available to offset the cost of training or retraining any existing or new employees?
The answers to the first two questions can be answer fairly quickly. If re-education is necessary and there are no programs in place, the follow-up question must be who will provide these necessary programs and how will they be funded? By answering the last question, communities have the opportunity to decide whether incentives for training will be available and offered to help companies offset their necessary training costs. Most communities have access to state-level training incentives or grants for projects that result in a specified number of net new jobs and have guidelines in place to ensure that company projects are economically sound and will benefit their communities. Receipt of the incentives is, typically, based upon performance and compliance with any regulations put into place. The benefit to the company is a trained work force to meet their needs for growth and sustainability. The benefit to the community is a working and tax-paying population. The trickle down is obvious.
Community Revitalization Efforts
Another useful incentive for communities to beautify their environments is the use of industrial development or rehabilitation and revitalization type incentives. Outdated and decaying buildings, whether in use or not, can be an eyesore to any community. State-of-the-art facilities will help businesses keep up with the competition, grow, and flourish. And, as stated above, a growing business provides jobs and a tax base that trickles down to create all of the other positive improvements that make a community attractive. Incentives that provide financial support for infrastructure improvements in conjunction with capital investment can provide an offset and enticement for a company to choose to stay in a particular area; and those incentives that are aimed at providing companies with credits to invest in significant remodeling or rehabilitation of existing buildings can make the difference between new jobs and growth or not.
National statistics on economic development incentives indicate that for every dollar spent by a community on economic development incentives, $2 is re-invested by the company receiving the incentive. Now this is not to say that those responsible for awarding these incentives should not be prudent with the distribution of the benefits, but those communities that have a solid strategy with regard to economic development — and are able to partner with the companies that align best with that strategy — have an excellent opportunity to create a positive outcome for the community and the industries that it values.
Growing companies will evaluate decisions revolving around rehabilitating outdated facilities, building a new facility, or relocating to a new facility on many factors including capital investment and the existing and potential work force. If the current community they reside in cannot partner to come up with a mutually beneficial solution to stay, the company must evaluate the option of relocation. This is where communities can take action to offset the capital investment and job-training expenses for those businesses.
We would all love to believe that a company puts down roots, provides jobs and income for the citizens of the community, and stays forever. But the reality is that as much as industry competes for opportunities to maintain and grow its business, communities must also compete for their growth opportunities — and incentives can allow both parties to achieve a positive outcome by forging a partnership between companies and the communities where they choose to locate or remain.