Every year, companies invest billions of dollars into property, plant, and equipment for new and existing facilities. Such capital investments are made to meet changing market demands, improve operational efficiencies, enable expansion, and maintain the integrity of existing assets. Federal, state, and local governments offer various economic development incentives to attract such investments to their communities. However, corporations miss sixty to seventy percent of these opportunities each year. The result is cash left on the table. This article will explore how tax executives and CFOs can identify the economic development incentive opportunities in their capital investment budgets that will directly boost the bottom line.
How can you maximize value from economic development incentives?
Local, state, and federal governments (both domestic and international) utilize economic development incentives to retain jobs and operations and to recruit new capital investment and employment to their jurisdictions. This allows them to expand their tax base and improve their communities. Other entities such as utility companies, port authorities, and rail service providers can also make economic incentives available to help support these same initiatives. Note that while job creation often motivates economic development incentives, many states and local communities offer programs to assist with job retention as well.
Awarding jurisdictions secure these jobs and capital investments through statutory and discretionary programs. Each of the tremendous number of awarding jurisdictions has its own method or theology of providing economic development benefits, and each jurisdiction must be researched as an individual opportunity. This task may seem daunting, but your research will typically reveal that economic development incentives take one of these forms:
- cash grants;
- income tax credits (refundable and nonrefundable);
- infrastructure improvements;
- wage rebates;
- property tax exemptions and abatements;
- sales and use tax reductions/exemptions;
- training assistance and workforce recruitment/screening;
- forgivable loans and low-cost financing programs;
- tax increment financing;
- reductions on tax and utility rates; and
- EPA-related programs.
Although economic development incentives should never be the lone deciding factor in an investment strategy, these benefits do directly impact the company’s pro forma and help enhance the overall return on investment. In many cases, they allow for projects that otherwise would not have been able to move forward. Thus they should always be considered as part of the overall business plan.
Don’t Leave Cash on the Table
In today’s fiercely competitive and ever-changing global economy, companies look for advantages to meet their financial goals. Business executives are charged with analyzing every methodology and process in all departments to increase efficiency and profits to improve shareholder value. However, research shows that most companies do not realize their full potential in economic development incentives.
A key to ensuring that your company takes advantage of every available economic development incentive is to be sure your company is working well in advance of any planned capital investment spending or new hire. As the tax executive, you should reach out and work closely with your operation and your company’s strategic planning functions to understand months (even years) before the company plans to make a potential spend. Study the capital investment budget. Then meet with operations to understand how that spending will be deployed over the company’s facility footprint. Having this knowledge allows you to get in front of the expenditure, research, and then negotiate the appropriate incentives available and put measures in place to obtain them.
Keep in mind that many jurisdictions require that the potential expenditure or hiring be competitive enough to merit serious consideration. In those situations, it is important to let the authorities know early in discussions that other jurisdictions are being considered for this project as well. They need to understand that the incentives they offer will be a serious component in the overall decision-making about whether your potential capital spending or hiring comes to their area.
Smart negotiation is critical in all phases of securing economic development incentives. This involves having the right relationships with governing authorities, understanding the incentives available, and being able to position your potential project strategically so state and local officials will put their best foot forward in their offers. Too many companies leave cash on the table simply by failing to understand proper ways to negotiate or by having inappropriate timing.
Another reason cash gets left on the table is poor compliance after the fact. Many companies have neither the time nor the resources to monitor annually each benefit and ensure the company is meeting all its obligations and completing and properly filing all required documentation. Establishing a process and dedicating team resources to this function is critical to realizing the full potential of each benefit.
Here are two examples of projects that were identified through a capital investment budget review. (Company names and exact project parameters have been made generic to protect confidentiality.) In each case, the project was negotiated before the final decision by the appropriate incentive firm partner to secure economic development incentives. These economic development incentives had a huge impact on the executive leadership’s review process and ultimately became the reason for which the project was sited in a particular jurisdiction.
ABC Manufacturing Co. needed a larger facility to meet high market demand and new customer contracts. Over the past fifty years, this company’s office and manufacturing operations had operated out of the original, single location, while its products were distributed to more than twenty states stretching coast to coast. ABC Manufacturing Company planned to spend up to $35 million and create 150 new jobs to accommodate its needed expansion. It considered two options for its new, larger facility:
- a different location in the same county and state; and
- a move to one of two bordering states that were more business- and tax-friendly. (According to the Tax Foundation, more than 100 different measures reflect the climate of a state’s tax structure to a business, including differences in types of taxes levied, differences in tax rates, and how complicated the tax codes are.)
After its incentive firm partner negotiated with officials, ABC Manufacturing Co. realized savings of over ten percent of its investment from economic development incentives provided by its current state and local community. A total of $3.8 million in tax incentives, including a property tax abatement, cash grant, and workforce development services, allowed the company to remain in its home state. Without the negotiated incentives, it would have made more sense for ABC Manufacturing to move to a more tax-advantageous state. It was a win for both the company and its home state.
XYZ Manufacturing Co. is the world’s leading manufacturer in its industry. With more than 75,000 global employees, XYZ Manufacturing needed to relocate a divisional headquarters. The project entailed a $50 million build-to-suit facility and the relocation of 300 highly compensated employees, as well as the hiring of over 300 new employees. XYZ Manufacturing’s incentive team evaluated three different states and ultimately based its decision on the economic development incentives offered by the chosen location. The total amount of more than $95 million in incentives almost doubled the amount of capital investment planned for the new facility. The incentives included not only income tax credits and sales and property tax reductions, but also cash grants, temporary office space and furniture during construction, free land, infrastructure assistance, and workforce training.
This significant incentive package resulted directly from planning, negotiating, presenting the project in a competitive manner, and, most important, identifying the opportunity early on and working in advance of any final decision.
The Bottom Line
Negotiating economic development incentives helps drive down operating costs, minimize tax liabilities, and increase and accelerate return on investment. All these things go directly to the bottom line, while simultaneously enhancing shareholder value.
These are results that every tax department strives to bring to its company either through direct negotiation or by identifying a skilled incentive firm partner.
Wes Bowen and Rudy Watkins are the founders of the Harvest Group in Germantown, Tennessee.
- Economic development incentives include cash grants, income tax credits, infrastructure improvements, wage rebates, property tax exemptions and abatements, sales and use tax reductions/exemptions, training assistance and workforce recruitment/screening, forgivable loans and low-cost financing programs, tax increment financing, reductions on tax and utility rates, and various other local, state, and federal programs.
- While many economic development incentives are non-tax-related, they represent an opportunity for the tax department to drive value in the organization. If tax doesn’t take charge of economic development incentives for your organization, who will?
- The best starting place for economic development incentives is the planned capital investment budget.
- Economic development incentives often allow projects to move forward that otherwise would not, dictate where a project takes place, and, in almost every case, make a project more profitable for your organization.
- Common pitfalls to avoid include lack of information, poor timing, and failed compliance.
- Most organizations that negotiate economic development incentives do so with a combination of both in-house and external consulting resources.
- The return on effort for economic development incentives is typically higher than in many of the other areas tax departments focus on to bring value to their organization.