ncentives exist at various levels of government, and may even be found from sources outside of the traditional economic development agencies. Even locations that claim to have nothing to offer are mistaken in that assertion. The incentives that can be offered by the federal government exist on a nationwide basis and are often overlooked. This makes an area that does not qualify for certain statewide or local benefits still eligible for incentives from the federal government.
One such incentive that exists from the Federal Government is the WOTC incentive that credits employers on their Federal income tax return for hiring individuals from certain targeted categories. The list of targeted categories was recently expanded.
One of the most critical points to remember when discussing incentives for your project is to be realistic with your projections, especially when it comes to headcount and investment growth in future years.
All too often companies will project aggressive growth strategies in future years to try and get economic developers and politicians as excited as possible about the project. What typically results is a fancy offer letter itemizing the incentives a company can expect to achieve if they meet their lofty hiring and investment projections.
Too many companies fail to qualify for any of the incentives listed on their offer letter because they could not accurately project the business cycle two to three years in advance, and therefore created quite a number of jobs and investment, but have nothing to show for it on the incentive side because of the miscalculation (or brashness) of those who were responsible for the incentive negotiation process. Either incentives are never collected for failure to meet the agreed job creation or investment, or in the worse case, incentives are given but then the issuing agency attempts to “clawback” or recall the money that was given. Most economic development professionals comprehend that business models are constantly changing. However, fewer politicians understand this, and an even smaller number of incentive policies empathize with these changing business conditions. Your best bet is to try and negotiate the incentives using attainable numbers and then work to see if you can add a second tier of incentives for achieving higher job creation numbers or investment dollars.
Another key element to the incentive process is to ensure you are analyzing the incentives offered very carefully and valuating them properly before using these numbers when certifying incentives will exist for a project during the return on investment analysis. This step appears to be easy, as the economic development groups will gladly value the package they are offering on behalf of the company, and once this valuation is given to the project manager, it can just be added to the project’s cost benefit analysis. This could potentially be a huge gaffe on the part of the project manager, as there are many factors that could prevent the company from ever collecting the incentives that are offered.
Take for example a tax credit program, which many states will offer as part of an incentive package. Many of these programs have limited use, such as allowing the company to only offset 50 percent of its state tax liability. Even with programs that allow the user to offset 100 percent of liability, it is common for a company to only utilize a small portion of the total incentive, making tax credit programs the most commonly overvalued incentive. Even a relatively straightforward training grant needs to be valued properly, taking into consideration the project’s training needs, and what costs are considered reimbursable under the program’s guidelines.
Cash flow of competing incentive offers is also critical to the return on investment analysis. Two competing incentive grants both valued at $1 million can actually play out very differently, with one being an up-front grant while the other may pay out $100,000 per year for 10 years. For most companies, the incentive with the largest up-front value will be best. Therefore this needs to be closely scrutinized before it can be added to the project’s cost metrics.
Not only are we dealing with the time value of money here, but incentives that play out over longer periods of time typically have a greater risk of being lost altogether, as project numbers fluctuate and other performance criteria are adjusted over time. A good example would be accepting an incentive with an average wage standard attached to it that may fluctuate over time.
Not only may the project metrics change over time, but in general most companies do not have a strategy for incentive compliance. Without a strategy for collecting these incentives, value could be lost. If the incentives were used in the up-front analysis during the site selection process, project numbers could be missed as a result of a lack of incentive compliance, either from project headcount, wage, or investment metrics falling short or from the company’s lack of an administration strategy.
With effective incentive strategies in place for negotiation, valuation, and administration, site selection project managers can feel confident and comfortable that they are depicting an accurate incentive analysis.