I have worked in economic development at the state level for longer than I want to talk about. I have worked on projects that made international headlines and projects that may not have even made the local news. Through the years I saw and learned a lot. One of those things was that it was a rare exception for something good to come from a project that asked what their incentives would be when they first walked in the door. There are just so many more things that go into a location decision that have a greater long-term impact than incentives. Sure, you get a little financial “pop” for a good incentive package, but what about when the pop goes away? Do you have what you need to be successful?

Might as well get the most obvious issue out of the way upfront. The site consultant that is getting paid based on the amount of incentives the project receives. I have never understood why a company would compensate a site consultant based on this. The consultant is not incentivized to find you the best site, only the one with the biggest number. This frequently puts your best interests at odds.

I worked with a major international company once on a large project that went on a site woefully lacking the required public infrastructure. Was it possible to get it there? Sure, in economic development anything is possible. The question usually just comes down to time and money. Do the public entities have the money, and will the required time frame to complete the improvements meet the company’s needs? In this case, the project was such that the powers that be deemed the cost doable, and as for time, if everything fell into place, including a massive wetlands permit, the time frame could be met. Hundreds of millions of dollars were committed for infrastructure, site work and plain incentives. The first sign something odd was going on was when the consultant asked for what amounted to a rounding error on a project of this magnitude to “seal” the deal.

The night before the company team was to sit down and finalize the selection, the consulting team sent me an email and asked me to give them a call right away. They wanted to go down the list of all the incentives being offered to their client to “make sure everything was captured” when they talked with their client the next day. This included everything, including inducements from utility providers. We went down the list item by item. Grants from all manner of sources, their respective approval processes, property tax relief, even corporate income tax credits they had complained about because the tax structure made the credits worth pennies on the dollar but on paper added tens of millions.

When we got to the utility providers is when things took what I considered an odd turn. The site was “customer choice” for multiple utilities. For one utility, there were two entities, both having ample infrastructure already in place to readily serve the project. One of the providers was much smaller and really wanted the project; the other larger, and while they definitely wanted the business, was not nearly as aggressive. The rates were basically the same. The incentive list only contained the incentives from the smaller company and even though no choice had officially been announced, it was pretty well accepted they were going with the larger provider. I guess the argument could be made that the incentive had been secured for the project, but the company had chosen not to accept it. Odd or not, it is indicative of how goals of the client and consulting service are not always aligned when the consultant is paid based on the total incentives.

I must not be the only person who sees question marks in this type of contract. In the past four years I know of one company that refused to pay the bill they were handed and another project that went to court. Neither of those projects opened a facility on the recommended site despite committing and publicly announcing.

As a representative of the public sector, someone asking up front for the location where they could get the most incentives was a sign they might not have their financing in place or they had not read the fine print associated with some of the incentives. Many states have incentives set up to provide the most rural and economically distressed areas greater financial benefit. Grant dollars may be awarded at a different rate. In many cases there are additional sources of grant funds and tax credits, useable or not, are higher. On paper the numbers can be astounding. After being burned several times, I have come to believe there are people that prey on such areas.

For example, in South Carolina if you have a project that will employ 200 people paying $25 a person, looking in the most rural areas of the state you could expect to be shown an incentive package at the state level alone of around $29 million. Those numbers come largely from income tax credits that are $25,000 a job accrued each year for five years. It also includes approval of a wage rebate program the company could take advantage of for 10 years. Now if this same project was looking in one of the state’s urban centers that number likely becomes $1.5 million. The primary reason being that credit for job creation drops from $25,000 per job for five years to $1,500 per job for five years. Furthermore, the company is likely not going to be able to take advantage of the wage rebate program because at $25.00 an hour they are not paying the required per capita income level in the urban area.

Not too long ago I met with a company that saw numbers very similar to these and thought they had found paradise. They thought the state was going to write a check for $25,000 a job every year for five years. You should have seen their faces when I explained these could only be used against the company’s corporate income tax liability. Under the single-factor formula based 100% on sales in the state, it takes an awful lot of income to use that many credits. If you are just basing your decision on incentives, as they were, it seems a no-brainer. Do not get me wrong, I love rural America, but there is a reason incentives are demonstrably higher in rural areas. Can you find the workforce you need, is the infrastructure in place, etc.? It is possible everything you need is there. MVA recently worked on a project that went into one of the state’s lowest-tiered counties because our client had found a building that fit their needs. It also happened to be adjacent to a metropolitan area and be on an interstate. But that building is what drove the location decision, not the incentives. The incentives just happened to be available.

Incentives are important but should be considered the icing on the cake, not the reason the cake was made.