Economic Development Incentives: Not Just For Big Businesses Anymore
Thursday, April 16, 2009
Most corporate executives are aware of economic development incentives. There are almost daily announcements in the news. What executives should know is that incentives are not just available for enormous developments and they can have major impacts for much smaller projects.
After reading about these project announcements and their associated incentives, an executive might wonder how to obtain them; moreover, what are the requirements to qualify? Incentives are available to most companies that are making a capital investment, creating new jobs or relocating operations.
Of course there has been some controversy with regards to the offering of incentives by state and local governments. The question has been posed as to the purpose and effectiveness of offering incentives; the quick answer is that incentives make good sense. Many states and local communities offer incentives in order to attract capital investment and create new jobs. States and communities must be competitive in order to win projects. Incentives can help level an uneven playing field.
For example, Company X wants to relocate to a new site and they have two viable options in different communities. Community A has a rural undeveloped site and an unskilled workforce. Community B has an established industrial park site but much higher taxes. Incentives can offset each disadvantage mentioned above: undeveloped land with infrastructure and development programs; unskilled workforce with training programs; higher taxes with tax credit and abatement programs. Aggressive states and communities will offer incentives to offset their disadvantages, thereby enabling them to better compete for projects.
Many times, incentives are tiebreakers that narrow several good sites to a final project site. Incentives, however, cannot turn an ill-fitted site for a project into a good one.
Two Questions
There are two questions that an executive should be concerned with when considering the incentives for a new project.
1. How can I be sure that the company is getting the best incentive deal?
2. How can I be sure that the company realizes the benefits of the incentives negotiated?
Question 1 – How can I be sure that the company is getting the best incentive deal?
There is no direct or easy answer to this question; however, an executive should be mindful of several factors. Firstly, is it a competitive situation? The most lucrative situation for incentives is if there are two or more site locations being considered. Communities are less motivated to offer incentives if there is no competition. Secondly, have the company’s goals, needs and desires been clearly declared to state and local community representatives? Each project is unique; the more that the state and local representatives know and understand, the better they will be able to tailor-assist with the project. Thirdly, consider that there are really three parts to managing a new project: real estate, operations, and incentives. Experts are handling the first two parts – if the executive has any questions about incentives, perhaps an expert should be consulted in this area.
Remember, the company gets one chance to get it right. States treat incentives as business negotiation tools. If a company does not ask for incentives or are not well-informed of the incentive possibilities, they will most likely not maximize their situation. Here is a real-life example. Company X stated that their project would include $100 million capital investment and create over 400 new jobs. It was a competitive situation and still yet, the company did not really understand how to compare and evaluate the incentive packages. The state that they wanted to relocate to had offered them non-refundable tax credits, training and other refundable tax credits.
The corporate executive decided to seek the advice of an established consultant. After some discussion, it became apparent that the non-refundable tax credits, though they are a good incentive, would have little meaning for the company as they had predicted no state corporate income tax liability for the first four years of operation. It also became clear that the training and other refundable tax credits that had been committed to their project were significantly less than those received by other similar sized projects. The consultant was able to help the company work with the state to restructure the incentive package so that it added more value to the project and Company X was able to locate to the preferred state.
Question 2: How can I be sure that the company realizes the benefits of the incentives negotiated?
An executive should be considerate of the time it takes to manage incentives. Many companies negotiate for incentives and use them to help guide where their project locates, but, unfortunately many companies do not actually receive the benefit of those incentives. The reasons are many and varied. Understand that negotiation is not a guarantee of incentives – applications still have to be submitted according to the rules and must meet all of the requirements set forth by the state or local authority.
Incentive applications can be lengthy and daunting and the continual monitoring can be cumbersome. Management of the incentives sometimes requires monthly and/or yearly reporting for the length of their term, which can be up to twenty years. Records are almost always required to be kept for years beyond the term of incentives. Incentive programs are not created equal or by one economic development body, therefore, they have different requirements, deadlines and monitoring responsibilities.
Another reason that incentives are left unclaimed is that there is a natural flux of people in and out of a company, which results in some instability for incentive maintenance. Also of note, is that the middle manager who will administer the incentives will have their core job to do plus this incentive management. Even though the executive may see the benefits of the incentives for the company, the middle manager will most likely not see any benefit from his/her efforts; only an increased workload. Also, keep in mind that it is not in the state or local authority’s best interest to make sure that all of the necessary paperwork is filed by the associated deadlines. In fact, from their point of view, it is better companies do not pursue the collection of incentives.
In order to be sure to take full advantage of incentives awarded, a company needs a dedicated and confident person on staff to take personal responsibility for incentives management. The actual time and cost of administering the incentive programs is significant. It may make sense for your company to hire a consultant that specializes in economic development. An experienced consultant should be able to manage the incentive process for a fraction of the time and cost a company may incur while attempting to manage incentives themselves.
By Jenny Massey
Senior Project Manager
Bingham EDA
at 1:59 PM Link to this Article 0 Comments
Comments:
After reading about these project announcements and their associated incentives, an executive might wonder how to obtain them; moreover, what are the requirements to qualify? Incentives are available to most companies that are making a capital investment, creating new jobs or relocating operations.
Of course there has been some controversy with regards to the offering of incentives by state and local governments. The question has been posed as to the purpose and effectiveness of offering incentives; the quick answer is that incentives make good sense. Many states and local communities offer incentives in order to attract capital investment and create new jobs. States and communities must be competitive in order to win projects. Incentives can help level an uneven playing field.
For example, Company X wants to relocate to a new site and they have two viable options in different communities. Community A has a rural undeveloped site and an unskilled workforce. Community B has an established industrial park site but much higher taxes. Incentives can offset each disadvantage mentioned above: undeveloped land with infrastructure and development programs; unskilled workforce with training programs; higher taxes with tax credit and abatement programs. Aggressive states and communities will offer incentives to offset their disadvantages, thereby enabling them to better compete for projects.
Many times, incentives are tiebreakers that narrow several good sites to a final project site. Incentives, however, cannot turn an ill-fitted site for a project into a good one.
Two Questions
There are two questions that an executive should be concerned with when considering the incentives for a new project.
1. How can I be sure that the company is getting the best incentive deal?
2. How can I be sure that the company realizes the benefits of the incentives negotiated?
Question 1 – How can I be sure that the company is getting the best incentive deal?
There is no direct or easy answer to this question; however, an executive should be mindful of several factors. Firstly, is it a competitive situation? The most lucrative situation for incentives is if there are two or more site locations being considered. Communities are less motivated to offer incentives if there is no competition. Secondly, have the company’s goals, needs and desires been clearly declared to state and local community representatives? Each project is unique; the more that the state and local representatives know and understand, the better they will be able to tailor-assist with the project. Thirdly, consider that there are really three parts to managing a new project: real estate, operations, and incentives. Experts are handling the first two parts – if the executive has any questions about incentives, perhaps an expert should be consulted in this area.
Remember, the company gets one chance to get it right. States treat incentives as business negotiation tools. If a company does not ask for incentives or are not well-informed of the incentive possibilities, they will most likely not maximize their situation. Here is a real-life example. Company X stated that their project would include $100 million capital investment and create over 400 new jobs. It was a competitive situation and still yet, the company did not really understand how to compare and evaluate the incentive packages. The state that they wanted to relocate to had offered them non-refundable tax credits, training and other refundable tax credits.
The corporate executive decided to seek the advice of an established consultant. After some discussion, it became apparent that the non-refundable tax credits, though they are a good incentive, would have little meaning for the company as they had predicted no state corporate income tax liability for the first four years of operation. It also became clear that the training and other refundable tax credits that had been committed to their project were significantly less than those received by other similar sized projects. The consultant was able to help the company work with the state to restructure the incentive package so that it added more value to the project and Company X was able to locate to the preferred state.
Question 2: How can I be sure that the company realizes the benefits of the incentives negotiated?
An executive should be considerate of the time it takes to manage incentives. Many companies negotiate for incentives and use them to help guide where their project locates, but, unfortunately many companies do not actually receive the benefit of those incentives. The reasons are many and varied. Understand that negotiation is not a guarantee of incentives – applications still have to be submitted according to the rules and must meet all of the requirements set forth by the state or local authority.
Incentive applications can be lengthy and daunting and the continual monitoring can be cumbersome. Management of the incentives sometimes requires monthly and/or yearly reporting for the length of their term, which can be up to twenty years. Records are almost always required to be kept for years beyond the term of incentives. Incentive programs are not created equal or by one economic development body, therefore, they have different requirements, deadlines and monitoring responsibilities.
Another reason that incentives are left unclaimed is that there is a natural flux of people in and out of a company, which results in some instability for incentive maintenance. Also of note, is that the middle manager who will administer the incentives will have their core job to do plus this incentive management. Even though the executive may see the benefits of the incentives for the company, the middle manager will most likely not see any benefit from his/her efforts; only an increased workload. Also, keep in mind that it is not in the state or local authority’s best interest to make sure that all of the necessary paperwork is filed by the associated deadlines. In fact, from their point of view, it is better companies do not pursue the collection of incentives.
In order to be sure to take full advantage of incentives awarded, a company needs a dedicated and confident person on staff to take personal responsibility for incentives management. The actual time and cost of administering the incentive programs is significant. It may make sense for your company to hire a consultant that specializes in economic development. An experienced consultant should be able to manage the incentive process for a fraction of the time and cost a company may incur while attempting to manage incentives themselves.
By Jenny Massey
Senior Project Manager
Bingham EDA
at 1:59 PM Link to this Article
Comments:
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