Site selection consultants know that economic incentives should never be the primary factor in making a site decision, but rather to bridge the gap between two or more competing locations when all other factors are similar. While economic incentives are typically not the main driver of a site decision, they are heavily relied upon to achieve a targeted return on investment in the selected location. However, many consultants, businesses and economic developers underestimate the complexity of the compliance required to realize economic incentives.
A client recently told me that the complexities of economic incentives compliance should be weighed in determining the overall competitiveness of a particular jurisdiction.
Since economic incentives are not supposed to be the tail that wags the dog, the backend compliance of such programs is usually not a scored item in a comprehensive community comparison or in deciding if the value of the incentive is worth the effort to pursue or claim the benefit. However, our client’s point is certainly valid. To be sure, compliance requirements are something we describe in detail at the time a site decision is being made, but until a company is performing the necessary compliance, or fails to do so, it will always be underestimated. This is especially true as economic incentive compliance continues to increase.
In this article, we describe various compliance measures which we confront daily. Of course, not all jurisdictions and economic incentive programs are the same, but the purpose of this article is to educate a company regarding the magnitude of and variances in compliance.
Economic incentive cost-benefit analysis
A company may expect to pay a filing fee associated with an application, but what about other direct and indirect costs, such as:
Drafting of the economic incentive agreement
At the outset of a project, all the parties involved usually have a mutual understanding of the terms of an economic incentive agreement. However, it is imperative to carefully review and understand the literal meanings in an economic development agreement.
Gathering information to stay in compliance
There is a plethora of information gathering when it comes to economic incentive compliance. Unfortunately, this is usually not a streamlined process and multiple entities (Department of Revenue, Department of Commerce, state economic development agency, appraisal districts, city council, county commissioners or workforce development board) will require different data, in different formats and at different times.
These are only some of the very important items that must be considered and dealt with in complying with economic incentives. It is important to know that the various state and local entities involved when negotiating and complying with economic incentives are usually different governmental bodies. When negotiating incentives, the primary entities conducting the negotiations may be the state and local economic development organizations whose mission is to attract and retain businesses to the state; whereas, the primary governmental bodies overseeing compliance of such programs are taxing authorities, whose mission is to collect and grow tax revenue. Although most economic development organizations are aware of program compliance requirements, they may not be experienced with the finer points or issues that companies face in meeting the requirements or the details of a company’s particular tax complexities. Also, while the taxing authorities are supportive of the effort of economic development organizations, their requirements and procedures are generally driven by strict rules, regulations and tax policy.
One can easily understand why more than 50% of companies never realize the economic incentives they negotiate. Thus, it is equally as important to consider the costs and time necessary to perform economic incentive compliance, as it is maximizing and negotiating an incentive package to its full potential.
For additional information about your compliance burdens or for assistance, please contact me at firstname.lastname@example.org.