From Site Selection magazine, July 2003
SPECIAL ADVERTISING SECTION
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Tie Breakers
he experts agree. "Incentives will never make the wrong location right," remarks Jay Biggins, managing director of Stadtmauer Bailkin Biggins LLC, an economic development consulting services firm based in Princeton, NJ. "Incentives do not drive a project, but they are definitely a factor in the final decision making," says Kathleen Norat, vice president of economic development for East Brunswick, NJ-based Mintax, an economic incentives specialist firm. "Incentives are a tie breaker, not a deal maker," notes Rick Weddle, president and CEO of the Greater Phoenix Economic Council and chairman of IEDC. "Incentives won't make a bad deal good, but they will make a good deal better," says Gene Strong, secretary for the Kentucky Cabinet for Economic Development. Incentives shorten the long list. Companies make location decisions based on a variety of factors such as market access, transportation resources, labor pools, business climate, proximity to suppliers and customers, cost of operations, and quality of life. Economic developers and incentive consultants concur: incentives are important, but only after a company has narrowed down its decision to a handful of locations that meet all of the other criteria. But incentives can also put a relatively unknown jurisdiction on the long list. Incentive packages can sometimes create enough of an economic case such that site selection decision-makers are compelled to give a less popular site a good look. Incentives demonstrate a good faith effort on the part of a community or state. "Incentives show that a jurisdiction wants a company and that the government is willing to negotiate hard to get the relocation or expansion," Weddle comments. Incentives are omnipresent because companies expect them. Organizations everywhere recognize that they have a legitimate claim to a share of the incentive pool. What's more, shareholders expect that their corporate leadership will pursue all benefits. And, with the worldwide economic downturn, incentive packages and programs have become increasingly important, according to Don Jakeway, president and CEO of Regional Growth Partnership of Northwest Ohio. "There are fewer projects being done because of the slowdown, so communities are becoming more aggressive with their incentive offers. As the economy recovers, that will smooth out as incentives become less essential," remarks Jakeway. Incentives Defined
Biggins defines incentives as investments in job growth and growth in tax revenue. Incentives, he says, represent the primary opportunities jurisdictions have of managing their way out of budgetary problems by growing revenue instead of just cutting costs.
"Incentives are not expenses, but are revenue programs that require an investment by the state," notes Biggins of Stadtmauer Bailkin Biggins LLC, which provides economic development consulting services to companies who are considering location decisions. The firm also works with public sector entities that are evaluating their economic development programs to make them as effective as possible. In other words, incentives are a reinvestment by the state of the dollars a company spends to support future growth for the state. In short, a return on investment if the jurisdiction promises a certain amount in incentives, there should be a corresponding set of income in wealth generated by the company to pay it off. Incentives can exist in very specific applications because states and regions and communities often lack the political will to undergo subsidy tax reform. "In Phoenix, we have high class-three property taxes so the state has approved a provision that if a company locates in one of our foreign trade zones, we can reduce their property taxes to the level of residential taxes, which are very competitive with other states," explains Weddle. "This has proved financially viable for Intel, Motorola, and other large semiconductor manufacturers." What's more, incentive programs from state to state cannot be compared line for line. For example, Norat detailed how Mintax recently worked on a $50-million incentive package for Pfizer, which is investing more than $500 million in midtown Manhattan and creating 2,000 jobs. The Pfizer package is comprised of sales tax exemption, property tax stabilization, electric utility rate reductions, and training grant funds. "Pfizer's incentives were not designed to get dollar-to-dollar parity among competing states because midtown Manhattan is a higher-cost location," explains Norat. "But incentives were needed to control the incremental costs of the expansion for Pfizer from both a tax and operating perspective. The $500 million they are spending and the 2,000 jobs they are adding will result in higher property and sales taxes, increased energy costs, and greater capital equipment costs, so Pfizer needed incentives to mitigate these increased costs." First Things First
Regardless of the details of any incentive package, states must first have the human and physical infrastructures in place for a company to justify a long-term commitment.
Strong from Kentucky explains: "States must start out with a solid work force and an exemplary educational system, energy availability and reliability, reasonable labor costs, and competitive occupancy and construction costs. Once these factors are all in place and a location is on a level playing field with its competition, a company will then look at the location where it can be the most profitable. That's where the incentives come into play. That's where incentives can make the difference." "It doesn't make sense for us to 'buy' a project," says Mark Kilduff, executive director of the Virginia Economic Development Partnership. "The company has to fit here and want to belong here, then we can move on. The use of incentives must make sense to both sides of the table or the deal won't work. Businesses want reassurances that when they come to a locality, they will be well received and not have any road blocks or hurdles that make it more difficult to complete a project on a timely basis." What Are the Trends?
Relocation decisions are always cost sensitive. At the margin, incentives as a pricing tool that can affect the cost of doing business and defray the cost of moving will become increasingly more influential in the final decision.
Norat of Mintax remarks that companies are often looking for non-income tax benefits because in many cases the companies have already reduced their corporate tax liability and many of the credits offset the corporate taxes. Firms are also looking to reduce other tax or operating costs such as property taxes, sales taxes, training costs, and infrastructure improvements. Increasingly, more states are considering statutes to allow the buying and selling of tax credits. For example, New Jersey has a tax benefit transfer program for high-tech and biotech firms, Missouri allows companies to sell their R&D tax credits, and New York has a bill introduced that would allow certain high-tech companies to sell their unused tax credits. These tax credit programs come into play when, for example, a start-up high-tech firm has earned tax credits based on eligible investments but, because they are not yet in a profitable situation and do not have tax liabilities, they are not in a position to use the credits. Accountability Provisions
There is an increasing trend toward more specific quantitative, carefully drafted accountability provisions in incentives. Biggins says it is inevitable and positive for all professionals because accountability for use of public resources is a fact of life.
"Our incentives are performance-based and generally include tax abatements and tax credits rather than upfront cash," explains Jim Donaldson, vice president of the Michigan Business Development Corporation. "The tax credits and abatements are triggered after the project has gone forward, and the training grants kick in only after companies have invested in labor, equipment, and construction." Norat says that governments are strengthening their program agreements so that if a company has not met the expansion or investment benchmark, or if a firm has not supplied the required documentation, the governments will not dispense the benefits. Because of tight fiscal constraints and deficit budgets, Norat is seeing states and communities reclaim dollars that they have offered if the company has not moved forward with the project in a timely manner. Norat says that economic development agencies are increasingly extending the project periods so that companies can optimize the job creation and capital investment numbers required to receive incentives. However, she also notes that up to 50 percent of tax credits and incentives are never collected. This is often due to the fact that companies just cannot keep up with the required paperwork. "An incentive offer letter is worthless if a company does not have a backup system to administer, document, and comply with the program," explains Norat. "No one will simply send you a check in the mail until you have gone through all the legitimate steps laid out in the original agreement. The challenge is to keep pace with the changing nature of these incentive programs and their rules." This is where a firm like Mintax steps in. Mintax delivers a full-service program to companies from incentive identification to implementation to compliance resulting in the receipt of the cash benefit or claiming the tax credit on a filed return. Successful Projects
More than 1,300 new jobs will be created in Michigan in the near future because four companies have expanded their business operations. Grupo Antolin Michigan, Gordon Food Service, Inc., Ironwood Plastics, Inc., and Inalfa Roof System all were sold on Michigan's competitive tax base and quality of life. The four projects will provide a total of more than $55 million in revenue to the state over the life of the Single Business Tax credits, resulting in a net positive gain for the state of more than $50 million after the credits. The projects are expected to generate more than $722 million in personal income over that time.
Alabama has some significant successes to boast about also. In one decade, the state went from manufacturing zero automobiles to now producing over 800,000. "A decade ago we had to go to the legislature to get special incentives to win the Mercedes and Honda projects," notes Neal Wade, director of the Alabama Development Office. "At the time, our package was castigated by many who said that we were offering too much. But about three years ago, Forbes wrote that we were right on the money and that our packages got us into the automotive game. Now we create our incentive packages from a position of strength because winning that Mercedes project was key and it represents the first domino that enabled the other dominos to fall." Kentucky has also experienced tremendous success with its incentive programs in attracting such big names as The Pella Corporation, J.M. Smucker, Toyoda Boshokyu and Kyosan DENSO Manufacturing Kentucky LLC. "Our programs are tax-credit and performance-based as opposed to cash-based," explains Kentucky's Strong. "Even in tough financial times, these programs still allow us to compete for the business without taking dollars out of the treasury. The higher a company's payroll, the more employees they hire, and the more profitable they are, the greater the benefits they will receive from Kentucky. It is a win-win for everyone and our businesses know they have a fair and equitable partnership with us." Likewise, Virginia has had great prosperity with its large stable of incentive programs, including its Workforce Training Program; Industrial Access Road Program to help localities develop physical infrastructures; 60 authorized Enterprise Zones; Governor's Opportuni-ty Fund; and the Virginia Investment Partnership (VIP), which offers financial assistance to companies proposing significant expansion projects. Philip Morris USA will move its corporate headquarters from New York City to Richmond, creating 450 jobs and investing more than $300 million. Governor Mark R. Warner approved a $3-million grant from the Governor's Opportunity Fund and Philip Morris USA qualifies for a $25 million performance-based grant from the VIP program. In Northwest Ohio, the Regional Growth Partnership (which covers an 11-county region) helped secure a major deal for Dana Corporation to construct a new technology center for its Automotive Systems Group. The financial incentive package put together through the cooperation of several entities was the deciding factor in the site selection process, according to Dana officials. The package included both local and state infrastructure grants for roads and sewers. The Toledo-Lucas County Port Authority stepped in to finance the land and construction of the facility. The State of Ohio and Port Authority provided financing to Dana below market rates, and the state also approved a jobs tax credit as well as a training grant and capital grant. Empire Deals
According to Ray Richardson, senior vice president of Strategic Business for Empire State Development, New York's 72 Empire Zones (EZ) are highly effective tools for rejuvenating regional economies. A few of the host of EZ incentives include a credit for property taxes paid, a sales-tax exemption on the purchase of property or services used by the business, and a tax credit for business taxes paid.
"Other than our Empire Zones, we do not have many pre-determined incentive programs for good reason," remarks Richardson. "We are staying away from programmatic incentives in favor of working closely with companies interested in New York State to ascertain their needs and develop unique programs to meet those needs. In other words, we work around a company's needs rather than trying to have them squeeze into pre-programmed incentive packages. "The bottom line? New York State can compete with any other state in the nation when it comes to incentives," says Richardson. IBM is certainly sold on New York. Its $2.5 billion, 300-mm semiconductor factory in East Fishkill, NY represents the largest private sector investment in New York State history. "New York's incentives made a big difference in getting the IBM project," recalls Richardson. At the End of the Day
A location must start with the basics buildings and sites that are ready to go, good business climate, solid work force, competitive costs, and top-notch infrastructures.
"If a location doesn't have the basics, all the incentives in the world won't be any good," concludes Kilduff from Virginia. "Can incentives help close a deal? Absolutely. Can they push a location to the top of the list? I think so. "But first you must meet the real needs of the prospect in the long term," he adds, "or the incentives will never even come into play."
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