Five Current Economic Incentive Trends
by Kelley Rendziperis, on Oct 28, 2022 1:11:31 PM
Site Selection Group continues to see increased project activity since the pandemic. While there are fears of a looming recession, in visiting with economic developers throughout the U.S., we learned that they are also busier than ever. In fact, many have received more project inquiries to date in 2022 than in previous years. In a post-pandemic and pre-recession business environment, Site Selection Group has noticed several trends while negotiating, securing and complying with economic incentives.
Economic incentives continue to be in high demand. Whether a project is $10 million or $100 million, corporate stakeholders expect a significant return on their investment when choosing where to locate. Economic incentives should never be the determining factor in where a company locates, but they certainly play a crucial role in deciding between finalist locations. Unfortunately, incentive awards tend to be viewed in a vacuum at this stage of the project and are compared against each other based on nominal values. The challenge with this is that the incentives must be compared to the overall cost of the site. Often, a large incentive package is compensating for a poor tax structure. Companies need to be educated on this nuance so as not to make an impulsive decision; especially since most incentive benefits will eventually come to an end.
2. Award Size
Earlier this year we released our annual white paper which reflected that there were fewer incentive awards granted, but higher overall awards. In the past few months, this trend seems to be shifting. Garnering incentives is generally more difficult than in the past. Perhaps jurisdictions are trying to recoup lost revenue from the pandemic, or they are cautious about a looming recession. Either way, our recent deal flow reflects generally smaller awards for increased commitments. The exception is for the large number of mega projects that have been announced over the past year. It will be interesting to see the overall statistics when we release our 2023 Economic Incentives U.S. Market Report in the first quarter of 2023.
In exchange for economic incentives, companies are accustomed to committing to minimum thresholds of capital investment, job creation and average wages. These are the three primary triggers for economic incentives and the traditional benchmarks. However, a recent trend has state and local governments requiring additional commitments by the company. The following are broad categories of community benefits and some examples:
Diversity, equity and inclusion
- A required percentage of vendors or suppliers must be certified minority, women-owned business enterprises
- Mandatory recruiting efforts with local workforce boards to hire the underserved and unemployed population (e.g., formerly incarcerated)
- Proving a pathway for employee advancement is very important to communities, as well as creating internship and/or apprenticeship programs
- Mandatory safety training for employees, beyond those required by state or federal regulations
- Many programs require that an incentivized employee be a resident of the subject state, but now there may be increased residency requirements to only include residents of the county and/or city.
- Employment of a specified percentage of employees who live in certain qualifying census tracts
- Companies are generally expected to be good corporate citizens who participate and volunteer in the local economy. Recently, in exchange for incentives, communities may be required to memorialize these commitments (e.g., joining the chamber of commerce, hosting philanthropic events, etc.) via economic development agreements.
4. Program Types
The primary economic incentive benefit has historically been the tax credit. Recently we observed state and local communities increasingly shifting to utilizing other types of incentives, including financing, grants and workforce development incentives. The Council for Community and Economic Research recently reported similar results since the pandemic, stating that more grant programs have been created than tax credit programs over the past three years. Our clients are currently laser-focused on realizing as many upfront benefits as they can, even if it means a smaller overall economic incentive package. Thus, communities need to be flexible to be able to offset upfront costs to be competitive, but companies need to remain cautious and ensure they will uphold their commitments.
Recapture provisions, or clawbacks, are a common clause in economic development agreements. These provisions state that a company may be required to pay back any incentives awarded if it fails to meet its commitments. While these are customary provisions, clawbacks were less punitive when incentive awards shifted to being more performance-based, meaning incentives are only awarded upon a company’s performance in meeting its commitments. However, in addition to the community benefits described above, many companies are increasingly required to maintain project commitments for a certain amount of time after the incentives are awarded. The pandemic has shown how these long-term commitments are difficult to manage, especially when the company has little to no control over outside environmental factors. While some jurisdictions have the authority to negotiate clawbacks, we have seen an increase in others that are strictly enforcing these recapture provisions. This highlights the importance of ensuring that clawbacks are specifically stated and defined to avoid all ambiguity down the road.
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