How to Value Your Project When Negotiating Economic Incentives
by Kelley Rendziperis, on Nov 23, 2015 11:13:22 AM
Several items generally need to be presented when seeking economic incentives during a site selection analysis. They are: anticipated capital investment, job creation/retention and average wages.
Aside from the general project parameters presented to communities, it is also important to show a company’s broader impact in order to garner the most comprehensive, beneficial economic incentive package possible.
While some jurisdictions and/or economic incentive programs require a cost comparison or economic impact analysis, not all do. However, being able to show the company’s financial impact on a region aids an economic development organization in justifying an award or an increased level of economic incentive assistance.
Below are some of the key components that drive such an analysis:
- Income tax. Not every economic developer is fully aware of how a company will be subject to income tax in its respective state. Some often overlooked items in evaluating a company’s income tax impact are the filing methodology (separate, unitary, nexus combined), apportionment formula, how sales are sourced, throwback/throwout rules, intercompany addbacks/exclusions, economic nexus, etc. For these reasons, it is helpful to have a representative from the state’s department of revenue help verify and quantify the company’s income tax liability. This analysis serves a couple of key purposes: It shows the increased income tax revenue to a city and/or state of a future project and, secondly, it may present significant cost gaps which exist between competing locations for which the city and state can assist. This assistance may include options such as deal closing funds, alternative apportionment or even legislative changes if the project is large enough. In addition to the company’s direct income tax liability, the impact of individual income tax revenue should not be overlooked. While this may be inapplicable in states that do not impose an individual income tax, most states still do and some localities do as well. The level of wages paid to employees will clearly impact the overall individual income tax collected, including workers compensation and unemployment. In some instances, executive level professionals can pay a hefty individual income tax adding to a state’s coffers.
- Property tax liability. Depending on the jurisdiction, a company’s property tax liability may include a tax on real property, personal property and inventory; however, a company should also estimate the amount of property taxes that will be paid by new employees. This will vary by project, but should not be discounted. For instance, a project may include relocating a portion, or all, of its employees to a new community and an average ratio could be used to determine the percentage of those who may purchase new homes in the region. On a smaller scale, existing residents may be able to purchase homes based on higher paying positions created by the new project.
- Sales tax liability. The most common sales tax that a community is interested in while evaluating a project is whether the product/service sold will result in local sales tax revenue. In conjunction with this consideration, there are several other sales tax transactions that may occur:
- Building materials and/or construction
- Purchase of tangible personal property, including machinery and equipment
- Increased local spending on consumables by net new employees
- Business travel resulting in increased hotel visits
- Energy. How much gas and electricity will the project require? While this item is not always relevant, it is often overlooked until it is too late for a utility to provide any benefits. In an area where utilities are able to compete for investment, a company’s power requirements may encourage a utility to offer a reduced rate or other infrastructure assistance.
- Suppliers/vendors. If the project is of a type that will inevitably attract suppliers and/or vendors, then this should be stressed during economic incentive negotiations. A prime example is the auto industry. Every state desires an automotive assembly plant, beyond obvious reasons, for all of the ancillary projects that follow. Furthermore, if a project requires new construction, then there will be contractors and construction workers involved. Construction-related employees generally spend money on items such as food, gas and other consumables near the construction site. This yields additional revenue and higher tax generation as well.
- Qualitative factors. Make sure to tell the company’s story. Why is your company appealing? Not all companies are perceived the same. When detailing the objectives of the company, it is important to stress what makes your company unique. A call center project might appear fairly benign at first, but the company may have extraordinary benefits, huge bonus potential, work-life balance and civic commitments. It is very important to show the community what value the company can add beyond merely revenue and job creation.
At the end of the day, a good economic incentive package is one that results in a win for the company, as well as the community which lands the project. In order for this to happen, all parties need to be fully educated about the direct and indirect impact a project will have. For additional information, please contact Site Selection Group.