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Business Incentives in 2010: Alive and Well

Despite nearly two years of recession, a global credit crisis for the record books, and massive federal, state, and local budget deficits, business incentives are as viable and important as ever.

Feb/Mar 10
Despite nearly two years of recession, a global credit crisis for the record books and massive federal, state and local budget deficits, business incentives are as viable and important as ever.  In past cycles of economic distress the first casualty of budget cuts and falling tax revenues always seemed to be federal state and local incentive programs.  Legislative and executive officials always looked first to trim or eliminate entirely both statutory and discretionary economic development programs in an attempt to close budget gaps and stop the revenue bleeding until better times emerged and the programs could come back on line.  Historically, elected officials often treated investments in economic development programs as a luxury item reserved for times of plenty rather than a household necessity on which a jurisdiction's tax base could be secured and cultivated.

Click on any state in the above map for links to updated business incentives and tax resources

However, something very different has occurred during this downturn.  Perhaps it was the gravity of the global credit pandemic, the clamoring in the financial sector for direct cash injections by the U.S. and other national governments or the eventual stabilizing psychological effect accomplished by TARP, the Federal Stimulus package and their global siblings.  Whether the incentive investments are stop-gap measures like bailing out AIG and GM or nurturing measures to develop new green industries through the Department of Energy (DOE) alternative energy grants and Section 48C tax credits, what has emerged is a clear pattern that government participation in the economy is on the rise and for now will be an accepted part of the new business investment equation. 

In the U.S. state and local governments on both sides of the aisle have taken their cue from Washington and have been pursuing targeted investment oriented incentives for strategic projects even in spite of the risk of severe budget deficits.  Federal stimulus support has no doubt helped cover some of the operating gaps, but many states are refusing to take incentives out of the equation in budget negotiations. Rather, they prefer instead to work to make the business environment more user-friendly in the hopes of securing existing and further developing new tax revenue on the eventual upswing of the business cycle.  This will enable the States to repay their investment as well as add revenue.

The retention of existing jobs, control over tax increases and the partnering with key industries and sectors to maximize returns on investment from private sector activities are all becoming key strategies employed by jurisdictions to solidify the tax base despite the short-term budgetary short falls experienced across the country.

Throughout the U.S., this "Incentives as Investment" strategy has pushed financial resources out of the door directly into the hands of corporations fighting on the Frontlines of the recession.  This expansionary and proactive stance has been evidenced in the ongoing push by state and local development agencies to aggressively support worthy targeted projects.  Projects whose benchmarks are measured in sustained employment and tax revenue.  Those economic development officials unwilling to utilize incentives due to the down economy do so at their own risk.  Companies are ever more aware of what is available and see a "down economy argument" as a mere excuse not to provide funding to worthy projects.  Simply put too many states with budget deficits are playing the incentives game to win because they realize the positive economic reasons for doing so.

For example, New York State faces an approximately $3.2 billion budget deficit in 2010 or 5.7% of the General Budget Fund, one of the largest deficits in the country according to the Center on Budget and Policy Priorities and the New York State Division of the Budget, and has forecast a deficit in excess of $7 billion for 2011.  New York's plight is directly linked to the near total dependence on Wall Street and its bonus season for tax revenue.  However, New York has in many ways turned to economic development incentives to help refill and maintain the state reserves by supporting strategic projects in the right industries that they believe will return more diversified dividends in the future.  These initiatives are by no means a giveaway.  Powerful incentives awards for OSI Pharmaceuticals in the biopharma space, IDC to attract more growing financial firms to return to lower Manhattan and to Arizona Ice Tea to buttress the retention of dynamic Corporate Headquarters projects on Long Island evidence a desire to actively invest in strategic projects around the state. 

 In each instance particular attention was made by state and local officials of the need to support projects that generate positive economic returns, such as retained personal and corporate income taxes to property taxes on the corporate facilities to the periphery impacts on the other local businesses that do not lose these potential customers and their precious state sales tax revenue.  

In the Midwest, Illinois faces one of the largest total budget deficits in the country at approximately $5 billion, according to the Center on Budget and Policy Priorities.  Just like New York, Illinois has provided businesses with the financial resources necessary to remain in their respective states while providing a positive return on investment to the state.  Just recently, UPS, the shipping and packaging giant, and the state of Illinois announced a 3,000 job retention project in Hodgkins and Rockford, Illinois.  The state of Illinois provided $24 million in incentives to UPS to leverage the company's $91 million of capital investment over the next two years, specifically including EDGE tax credits and a training grant to the company.  According to Illinois Governor Quinn, "UPS is a major employer in our state, providing good jobs and benefits to its hard-working employees. It's important the State works with such a fine company to protect jobs, while helping to build a foundation for future growth and greater employment."  As Governor Quinn demonstrates, even those at the highest levels of state government have begun to recognize the importance of maintaining the tax base during the difficult times of the recession.

While the case both for and against business incentives has been made for decades, they have proven their worth and durability in this recession.  Simply put, projects generating a positive return on investment will find willing partners in economic development officials hungry for jobs, investment and future tax revenue.  In any case the message in this downturn has been loud and clear, for the right project incentives are not only here to stay but will be a bigger part of our future.

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