Maximizing the Benefits of Incentives
A process-driven approach to site selection and incentives — including a formal RFP, informed narrative, and economic impact analysis — produces optimal results.
There are many factors to consider as you make your site selection decision. Some are common to most projects, such as labor availability and wage levels, the local cost of real estate, utility costs, and access to markets. The relative level of importance of other factors — for example, proximity to existing customers and suppliers — can vary significantly by project. As site alternatives are identified, each will present advantages and disadvantages with respect to your decision criteria. And where there are disadvantages, there is incremental cost that can erode your project’s return on investment (ROI).
Fortunately, federal agencies, states, and localities offer financial incentives to support your project objectives as well as help address and offset the cost of disadvantages inherent to a given location option. Throughout the decision process, it is a leading practice to not only identify these advantages and disadvantages along the way, but also to quantify them. Qualitative and quantitative information will inform the narrative, or story, you ultimately convey about your project.
Leave no stone unturned.
As you identify financial incentives opportunities, leave no stone unturned. Look for tax and non-tax benefits at the federal, state, and local levels as well as within private-sector utilities and public/private partnerships. And as you familiarize yourself with both the discretionary and statutory programs available, be aware that there are several considerations to keep in mind.
Discretionary incentives, for example, are generally applicable to expansion projects, such as those that will create new jobs and/or incur capital investment. For projects that qualify, discretionary incentives commonly come in the form of cash grants, or above-the-line savings, such as the abatement or rebate of personal income, sales, or property taxes.
You will want to plan for the type of approvals that are required. The size of these projects and their importance to the community may necessitate executive office or board approvals through a public process. And, as ever, timing is everything. If you have proceeded with your project before seeking discretionary incentives, you may lose the ability to qualify for them. Discretionary incentives are generally not available once the project has been publicly announced or the investment and/or hiring are under way.
Considerations related to discretionary incentives vary — they may specify particular types of investments or a certain level of job creation. Sometimes the criteria go beyond the project activity itself. California’s criteria, for instance, include the prevalence of unemployment or poverty in the area.
Statutory tax credits are available to any taxpayer who meets the legal criteria. Statutory tax credits serve to reduce the overall state tax burden and are, in some cases, refundable. They can be claimed upon filing of the relevant federal, state, or local tax return, after the investment or qualifying business activity has occurred.
Issue a formal RFP.
Once you have a good grasp of your site location evaluation criteria and the landscape of financial incentives, it is a good idea to use a formal request for proposal (RFP) to make your project parameters, needs, and expectations clear — in writing — to each of the contending jurisdictions. Your RFP should establish the project facts, as well as highlight the key decision-making criteria. This process enables state and local policymakers to provide a response that best fits the needs of the project.
Remember, the value you negotiate is only as good as the value that you are ultimately able to realize and retain. The RFP also serves to initiate a dialogue that can lead to benefits that might not have otherwise been achievable. It opens the discussion to possibilities such as special legislation and creative alternatives for “off-menu” benefits (for example, discounted rent or free land).
Another important process step is translating your business plan into a long-term cost model that evaluates both up-front capital cost and ongoing operational costs. The various responses to the RFP, including the proposed incentives, will help complete your integrated cost model and enhance your understanding of the project’s true economic picture. Additionally, this exercise will often reveal key financial gaps between location options and allow for a more meaningful dialogue with the respondents about the value of the proposed incentives packages.
Determine which benefits have the greatest impact.
It is important to be able to discern which, among the many possible benefits, will have the greatest impact on your operations. Begin by knowing the tax code. Understand whether you can actually use the benefits that are offered. Is it possible that certain nonrefundable tax credits will be “trapped” for an extended period of time due to your forecast tax position in the given state?
Among the key provisions requiring consideration are the credit-delivery period, the carryforward period, and the ability to monetize or refund the credits that are available to you. Additionally, determine if the incentive is transferable between entities and how it will be treated on your corporate tax return. Also, certain incentives may be taxable for federal purposes, which could greatly reduce the effective value of a benefit that initially might have looked more significant. Remember, the value you negotiate is only as good as the value that you are ultimately able to realize and retain.
It is also important to remember that your proposed business activity is of great benefit to the state, the region, and the community. Therefore, don’t limit yourself solely to that which is “on-menu.” If your project is significant enough, economic development officials will usually be open to creative ideas that may be of value to the project, such as favorable procedural or administrative fixes and even special legislation. Compile your wish list and evaluate the pros and cons of asking for it within the negotiation process.
Understanding the project cost through modeling, as well as the company’s current and future tax positions, makes it possible to identify a list of creative alternatives. Perhaps existing legislation could be changed to broaden qualification criteria, or to extend qualification periods or allow for monetization of benefit streams.
Incentives are not the only way your project can benefit. For example, tax provisions such as classification of the business as a manufacturer or R&D corporation, or income apportionment rules, have at times been amended to help attract and support strategic economic development projects. These changes can be taxpayer-specific, applying to your project alone, or they can be so broad as to apply to all taxpayers.
Demonstrate the state and local ROI.
Once you have selected a location or subset of locations that present the greatest opportunity, begin looking at your project from the state and local government perspective. What benefits would it bring to the state, the locality, and its citizens? You must communicate your position clearly and succinctly, using quantitative information that supports your assertions about the impacts your project will have on the region and the industry. Know the economic impact of your proposed operations, and present it to effectively describe your project.
If your project is significant enough, economic development officials will usually be open to creative ideas that may be of value to the project, such as favorable procedural or administrative fixes and even special legislation. Build on this quantitative narrative with data from an economic impact study. Such data can help advance your project in several ways. Powerful insights can be found, for example, in data that projects the economic “ripple effect” of the proposed operations themselves, new construction, and the presence of nearby suppliers and customers — the direct, indirect, and induced impacts. Illustrating the new taxes to be realized from these impacts will help you demonstrate the state and local communities’ ROI for the proposed project.
Quantifiable metrics can also be effective not just as a financial tool, but as a public relations tool, as well. For example, the public officials involved can use this data in internal and external discussions to build support for your project.
Take precautions and make smart use of technology.
Even the best public relations function, however, will not protect against every pitfall that may present itself. Be aware of the common areas where problems can arise. If you are not proactive in your planning and communications, misunderstandings about reporting requirements or the entities involved can occur. Additionally, follow leading practices and take every precaution to provide as accurate a picture of the proposed project as possible. Incorrect headcount and investment projections can diminish your ability to optimize financial incentives. It is also not uncommon for employers to misstate wage levels by not including all appropriate types of compensation.
Smart use of technology and integrated support can keep many such problems at bay. For example, utilize technology to track and monitor reporting requirements related to maintaining incentives benefit streams. Web-based tracking is now prominent in the industry and allows for all agreements to be stored in a centralized, accessible format. Internal to your organization, technology-enabled incentives compliance reduces risk while also helping promote the importance of the incentives function, the value received, and project successes.
A process-driven approach to site selection and location investment incentives that involves data analytics, cost modeling, tax technical insights, a formal RFP, economic impact analysis, an informed narrative, and technology enablement is a leading practice in today’s business environment and one that is likely to produce optimal results.
Brandon Pyers is the Credits & Incentives Leader for Northeast Location Investment at Ernst & Young LLP. Prior to joining the firm, Brandon held senior positions within the public and private sectors, designing and negotiating state incentive offers and advising companies through all aspects of the site selection process. As Incentives Leader, Brandon has supported site selection efforts and secured multimillion dollar incentives packages for tristate area (PA/NJ/DE) corporate headquarters relocation projects within the past three years.
Brandon has both authored and contributed to a number of articles and case studies focused on the impact of state and local incentives on corporate site location decisions, economic development, and public policy. He holds a B.S. In Law and Politics from Suffolk University. In his role as Credits & Incentives Leader, Paul Naumoff assists clients with documenting federal tax credits and deductions; applying for discretionary federal tax incentives and credits, which require approval by the federal government; and providing tax advice related to investments in federal tax credits. This includes work with New Markets Tax Credits, Affordable Housing Tax Credits, Historic Rehabilitation Tax Credits, Renewable Energy Tax Credits, and other industry-specific federal tax credits and grants. Naumoff's team also advises on tax credit transactions that help clients monetize tax credits or reduce their effective tax rate via acquisition of transferable tax credits.
As EY's Sustainability Lleader for tax, Naumoff leads project teams throughout the world that work with clients interested in energy efficiency and carbon reduction initiatives, renewable energy production, and the development and manufacture of efficient and/or less carbon-intensive products. He helps clients execute upon their sustainability strategies in a cost- and tax-efficient manner. This includes identifying and securing country-level, U.S. federal, and state tax credits and incentives; utility incentives; and grants for energy efficiency initiatives, renewable energy production, innovative products manufacturing, and investments in carbon offsets. He also advises clients about the expanding number of jurisdictions where carbon taxes and other carbon regimes are being implemented across the globe.
Naumoff received a B.S. in Finance from Miami University in Ohio and graduated from Capital University Law School. He is a member of the Ohio State Bar Association's Taxation Committee and an affiliate member of the Ohio Society of Certified Public Accountants' Taxation Committee. With over 18 years of credits and incentives experience, Brian Smith is a principal and EY’s Global Inbound Investments Leader. During his career, Brian has assisted clients secure over $2.5 billion in global and domestic incentives and has conducted incentives studies in over 25 states and on five continents. Brian serves as a key advisor for EY clients looking to locate or expand in the United States as he is currently leading the practice’s foreign direct investment efforts for inbound companies from countries such as Germany, Switzerland, the United Kingdom, France, Taiwan, Japan, and China. Additionally, he serves as an advisor for multi-national companies who are investing outside the United States.
Brian holds a BA from Pennsylvania State University and a J.D. and LL.M. from Capital University Law School.
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