The emphasis on company-specific incentive packages rose in part because states have begun evening out their differences in important structural differentiators such as corporate income taxes. Plus, many companies now are finally opening their capital-expenditure purse strings after the long recession and its aftermath, and they are eager to strike the best deal for building facilities that have been dormant on the drawing boards for some time.
“Incentives have taken on an increasing importance weighting in the decision-making process,” says Kathy Mussio, managing partner at Atlas Insight. “Since the 2008 recession, companies have been seeking ways to help increase project-cost feasibility on an initial go/no-go basis as well as to keep overall operating costs down on an ongoing basis.” With the amount of incentives skyrocketing, more corporate site selectors are running into a greater determination by states to ensure that the deals end up generating sufficient numbers of jobs, with their long-term spinoff economic benefits, and not just a massive initial dose of capital investment.
Another reason for the greater interest in incentives, explains Eric Stavriotis, senior vice president at CBRE, is that most companies now have more flexibility about where to locate than, say, in the era before the Great Recession. “Incentives weren’t as widely utilized,” he says. “But now many companies can deliver what they make from everywhere. Incentives are more important for companies in figuring out the best place for them to be. And so states and localities want to be at that table.”
Some High-Profile Cases
One of the highest-profile examples in 2014 of the importance of incentives was the $1.25 billion package of tax and other incentives that Nevada offered Tesla to get the electric-vehicle company to build its so-called “gigafactory” for making batteries in the Reno area. Although the incentives package was not the largest offered to Tesla (San Antonio’s was reportedly higher), when combined with other factors, it did help Nevada to win the plant which is expected to produce up to 22,000 direct and indirect jobs and inject up to $100 billion into Nevada’s economy over the next 20 years.
In this case, Nevada had to throw in a bunch of tax offsets even though the state has no corporate income tax. Instead, Nevada relies heavily on a sales tax, a tax on business machinery and equipment, and property taxes, as contrasted to some other states that competed for the Tesla complex that limit such taxes, including Texas. So more than half of the $1.25 billion total in Nevada incentives consisted of a sales-tax exemption alone. “That’s what they had to come up with just to be on a level playing field with some of the others,” notes Dennis Cuneo, a partner at Fisher & Phillips.
There have been other huge incentive-laden deals lately, including South Carolina’s promise to Boeing of $120 million in exchange for adding 2,000 jobs at a factory near Charleston that builds 787s, and Volkswagen’s deal for another $178 million in benefits for adding 2,000 jobs at its assembly complex in Chattanooga, Tennessee. And, with the amount of incentives skyrocketing, more corporate site selectors are running into a greater determination by states to ensure that the deals end up generating sufficient numbers of jobs, with their long-term spinoff economic benefits, and not just a massive initial dose of capital investment. On the other hand, says Dean Uminski of Crowe Horwath, companies still want to be rewarded for making those investments through creative use of incentives such as upfront grants for land acquisition.
Top 11 Tax Incentive Deals Nationwide
- Washington: Boeing - $8.7 billion
- New York: Alcoa - $5.6 billion
- Washington: Boeing - $3.2 billion
- Oregon: Nike - $2 billion
- New Mexico: Intel - $2 billion
- Louisiana: Cheniere Energy - $1.7 billion
- Pennsylvania: Royal Dutch Shell - $1.65 billion
- Missouri: Cerner Corp. - $1.64 billion
- Michigan: Chrysler - $1.3 billion
- Mississippi: Nissan - $1.25 billion
- Nevada: Tesla - $1.25 billion