Mobile Edition
Print
Get the Mag
Weekly UpdatesCompetition among state and local governments has resulted in a daunting array of incentives, including cash grants, tax credits and abatements, infrastructure assistance, land grants, utility rate reductions, and streamlined permitting. Each program has its own rules and is tied to specific government priorities. The companies that are most successful in obtaining incentives combine thorough research with creative thinking about how their plans align with the relevant governmental priorities. This strategic approach allows these companies to negotiate enhanced incentives for their projects. These companies then follow through with the proper compliance procedures to ensure full realization of the benefits of these incentives.
Three questions can help focus your thinking about how a strategic approach to business incentives can support your company's investment in new or expanded facilities.
* How do you prepare to discuss incentives with state and local officials?
* How will you know if an incentives offer is "fair"?
* How will you make sure that your company realizes the benefits of multi-year incentives agreements?
Preparing for Incentives Negotiations
At the outset, it is critical to assess the project timeline and to control public dissemination of information about the project. If economic development officials know that a company's project will move forward with or without the incentives, they will be much less likely to grant discretionary incentives. Many jurisdictions require that the company seeking incentives certify that its project would not move forward "but for" the granting of incentives. Problematic information about the status of a project can leak out through discussions with customers or suppliers, stories in the employee newsletter, building permit applications, or "moving dirt" at the project site. It is critical to take affirmative steps to prevent the premature disclosure of project information prior to and during incentives negotiations.
Information about state and local incentives is available through a variety of sources, including legal databases, government websites, and informal discussions with officials. Another important aspect of preparation for incentives negotiations is to gain an understanding of the state and local political climate and legislative budget cycle. For example, the election of a new mayor can change the availability of the city's property tax abatement. Some states make it a priority to attract specific industries or specific types of projects (e.g., computer software, alternative energy, and manufacturing). Also, funding for certain grants may be limited of unavailable as the jurisdiction nears its fiscal yearend, in which case, the timing of the company's project and application is a crucial consideration.
It is also important to consider whether your company will be able to utilize a particular incentive. For example, consider the case of Company A, which is contemplating a project in Pennsylvania. Company A's project team researched the available programs and benchmarked the incentives previously granted to similar projects. Accordingly, the project team knew that Pennsylvania might offer Opportunity Grant Program (OGP) funding, a Customized Job Training (CJT) Program grant, and Job Creation Tax Credits (JCTC). The project team next consulted the Tax Director and learned that the company would be in a loss position in Pennsylvania for the next several years and would have a modest Pennsylvania franchise tax liability. With this in mind, the project team negotiated for enhanced OGP and CJT funding and sought to limit the JCTC to an amount sufficient to offset the projected franchise tax liability.
As the preceding example illustrates, it is important for a company to determine in advance whether a company will be able to utilize a particular incentive. For example, some state training grant programs require a degree of coordination with the local community college, which may not be feasible for some companies because the training must be conducted in conjunction with the community college.
Determining the Parameters of a "Fair" Offer
A company's research regarding the available incentive programs should be supplemented with benchmarking of previous offers for similar projects. A thorough benchmarking analysis will provide the company's project team with a good idea of the parameters of a "good" or "fair" offer before meeting with economic development officials. Government websites, press releases, and news articles can be excellent sources for information about previous offers.
Consider the example of Company B, which is contemplating a major project in Pennsylvania with a combined package offer of OPG funding and JCTC worth $2,000 per new job. Because Company B's project team had performed a benchmarking analysis, it knew that several comparable projects had received incentives valued at $4,000 to $6,000 per new job. With this information, the project team was able to negotiate a revised offer at the high end of the range identified in its benchmarking analysis.
Preparation for incentives discussions should take into account all of a company's potential plans in the relevant jurisdiction. Consider the example of Company C, which is considering several important company-wide initiatives involving its information Technology and Training departments. Viewed separately, each of Company C's initiatives might involve relatively modest job growth, investment, and be spread out over several states. Further, Company C is managing its cash very closely and is interested in obtaining incentives to help move these initiatives forward. The Company C project team determines that it is feasible to combine these separate initiatives into a single project that could be located in either of two states. The project team prepares a comprehensive presentation that combines the separate initiatives into one larger project and schedules meetings with officials from both states. The combined presentation allows the company to attract substantial incentives offers from both states to support its expansion plans.
A final consideration is that the investment and job creation commitments made to economic development officials must be reasonable and attainable. State and local governments have increased compliance audits and the enforcement of "clawback" provisions against companies that do not live up to their commitments.
These concepts are critical aspects of effective preparation for incentives negotiations. Further, they will allow the project team to know when it has received a fair offer, based on the scope and nature of the project.
Avoiding Compliance Failures
In some cases, companies mistakenly conclude that the job is complete when an incentives offer has been accepted. These companies may fail to claim negotiated incentives that have been included in the project's financial budget. These failures generally result from the following two causes:
* A company may fail to commit adequate resources required to effectively manage the often complex, intimidating, and burdensome administrative requirements associated with these programs.
* A company may fail to delegate overall responsibility for management of the compliance requirements. Multiple departments may be involved in securing the incentives, but the compliance responsibilities may "fall through the cracks." This is a growing problem, since many states are requiring more detailed reporting over a longer period of time.
The following example illustrates how inadequate preparation and poor follow-through can sabotage a company's efforts with respect to incentives, first, by undercutting the company's negotiating position, and then by jeopardizing the realization of the incentives that have been granted.
The High-Tech (HT) Company must decide whether to locate its new $40 million factory and 200 high-paid employees in State A or State B. State A offers to reimburse 50 percent of HT Company's qualified training expenses, up to $5,000 for each new employee, and to grant HT Company state income tax jobs credits of $1,000 per each new employee. HT Company accepts the offer, unaware that two similar projects recently received job credits of $3,000 per job along with infrastructure funding, streamlined permitting, and utility rate reductions for the first five years of operations. Further, HT Company did not investigate State B's incentives programs, which might have included a grant of $500,000, jobs tax credits, and training assistance.
HT Company locates the new plant in State A and includes the $1,000,000 training grant and the $200,000 in state income tax credits in the plant's financial projections. The company signs agreements with State A, and the Governor issues a glowing press release announcing the new jobs. HT Company starts construction of the new plant.
As the new employees are hired, no one informs Human Resources of the State A training grant program's very specific and particular requirements for the documentation of training activities. HT Company does not file the required quarterly training progress reports that would have included class schedules, instructor salaries, class sign-in sheets, and trainee evaluation forms. HT Company's tax manager leaves the company for another job, and the new tax manager is unaware of the jobs credit. HT Company files a federal tax return and 20 state tax returns, and during the frenzy of the next "busy season," the jobs credit is not claimed on the State A tax return.
Eventually, HT Company realizes that it has missed out on the training grant and jobs credit. HT Company's CEO contacts State A and is referred to a compliance officer at the Department of Labor, who administers the training grant, and a taxing officer from the Department of Revenue, who administers the jobs credit. HT Company learns that it is no longer entitled to either incentive because it has missed deadlines and filing requirements.
FEED