There once was a time when a business’ headquarters location was based on proximity to natural resources and transportation networks. If you owned a mill, you worked near a river. If you exported goods, you were near a port. While some of those geographical limitations still exist, most businesses operating in the modern world of universal high-speed Internet, widely accessible transportation hubs, and a truly global economy can set up shop pretty much wherever they want.
State tax authorities are well aware of this phenomenon, and in many cases, they are willing to roll out the red carpet to woo the right types of businesses to their backyards. One of the higher-profile recent examples of this was Nevada’s aggressive courtship of Tesla, whereby the state offered an unprecedented $1.25 billion tax incentive to the company for it to build a $5 billion “gigafactory” in the Silver State. South Carolina also made headlines recently with its offer of $200 million in combined incentives to Volvo in exchange for building a new plant just outside of Charleston.
As big as these deals were, they represent a small fraction of the total amount of credits and incentives offered to corporations throughout the United States each year. All told, about $80.4 billion in government tax incentives are up for grabs each year, and 5,000 companies have received more than $1 million in incentives each in recent years.
MONEY LEFT ON THE TABLE
Despite the widespread use of the tax incentive as an inducement to expand or build in a particular region, a majority of these incentives go unclaimed each year. According to a recent survey of Thomson Reuters Checkpoint customers, seventy-seven percent of respondents said they do not spend any time researching available credits and incentives. Included among the reasons why that is the case were research is time-consuming and there are a lack of resources for seeking out available incentives.
With more and more incentives being introduced each year and money still being left on the table by corporations that just didn’t have time to research what’s available for the taking, we felt it was time for a primer on how to get the most out of credits and incentives.
DISCRENTIONARY AND STATUTORY INCENTIVES
The first step to using tax incentives as a business bargaining chip is to understand the two basic types of state tax incentives: statutory and discretionary. Statutory incentives are written into state law, and companies can claim them once they’ve met prescribed criteria. A notable example of a statutory incentive is the Texas Film Commission’s video game tax incentive program, which allocated $32 million this year to provide cash grants to video game production companies for all wages paid to Texas residents. This program is credited with helping Texas become the number two state in the country—just behind California—in overall video game employment, with roughly 5,000 residents now working in the industry.
The second type of incentive is the discretionary incentive, which is typically negotiated with state and local government agencies before a desired action takes place. Tesla’s gigafactory deal with Nevada and Volvo’s South Carolina project are examples of discretionary incentives. These are essentially negotiations that take place between state governments and a company and can often lead to bidding wars between neighboring states, as was the case with Tesla.
Amid seemingly constant business lobbying efforts to reduce taxes, it can be easy to overlook how much money is given away each year to businesses that are savvy enough to take full advantage of the credits and incentives that are available to them. With virtually every state in the country looking for ways to become the next Silicon Valley or the new Detroit, the tax deals just keep getting better. It’s up to you to take advantage of them as strategic assets in your company’s growth.
Getting the Most Out of Incentives
Whether looking to take advantage of statutory incentives that already exist or evaluating an optimal location based on discretionary incentive terms, follow a few best practices to ensure that no opportunities are missed.
Search by industry, jurisdiction, and credit type. Does your company develop high-speed data technologies? You might be entitled to an infrastructure development tax credit in Tennessee, Texas, or California. While that may not be a glaringly obvious option, states are betting big on infrastructure plays, and data transmission networks are increasingly becoming a critical part of infrastructure. To make sure your company gets everything it is entitled to, it is important to search everything that’s available in places where your company has a physical presence and those where you are thinking of expanding.
Start negotiations for discretionary incentives early. The best time to start discussing discretionary incentives with host governments is well before any investment or expansion is publicly announced. This will allow host governments to marshal all of the resources they need to put forth their best offer. It will also give other states time to compete.
Focus on job creation. Jobs are the cornerstone of any state and local economic development initiative. If your project can clearly show job growth in a region, you are on your way to negotiating a good incentive package.
Virginia Lorenzo, J.D., LL.M., is senior director of the editorial tax group with the tax and accounting business of Thomson Reuters. Lorenzo is a member of the Connecticut Bar and has significant experience in tax publishing, research, and product development. Most recently, she was part of the core team that developed Checkpoint Catalyst, a new generation of tax research featuring multijurisdictional content, embedded tools, and an enhanced search engine.