Misperceptions of the Role Economic Incentives Play in the Site Selection Process
by Kelley Rendziperis, on May 22, 2019 9:22:04 AM
In response to the recent media attention on the site selection industry mischaracterizing site selectors and economic incentives, Site Selection Group’s blog this month illuminates the proper site selection process and use of economic incentives.
Understanding the site selection process
If you were to interview every one of our former and current clients, they would each tell you that Site Selection Group consistently advises them that economic incentives should never be the driving factor in a location decision. In fact, economic incentives are not part of our site selection process until we have narrowed down jurisdictions using an objective top-down approach of filtering based on more pertinent drivers such as labor availability, labor quality, logistics, business environment, regulatory climate, infrastructure, real estate and quality of life. Please refer to my prior blog When and How to Engage in the Economic Incentive Process which reiterates this point.
Our clients share Site Selection Group’s philosophy and realize that economic incentives are utilized to close any gaps that exist in a set of semifinalist locations that have already satisfied the operational demands of the project. It is not too surprising to see the media quote CEOs stating that they would have chosen a location regardless of the economic incentives provided because at the point in which we are negotiating economic incentives, a site has already been qualified based on the more pertinent drivers listed above. In addition, these quotes are likely meant to reassure a company’s stakeholders that a location was chosen based on the ability of a project to succeed and not solely on economic incentives; however, at the point in the process when a set of semifinalist locations are competing for a project, tax credits and incentives are critical to improve the overall return on investment.
Conversely, it is important to realize that while economic incentives should not be the primary location driver, they can influence a company’s final location decision if a community does not offer a competitive package or follow through with its economic incentive offer. The most recent and well-known example is Amazon’s decision to withdraw from New York when the state failed to approve its economic incentive package to locate its second headquarters. While Amazon is a highly recognized company, we represent many other companies which have made the same conclusion, but those are rarely publicized.
Understanding business development
State and local governments are like private industry when it comes to competing for “business.” Economic development agencies use marketing funds to actively advertise their communities and their strengths. This is not dissimilar from companies trying to attract customers or Site Selection Group’s business development efforts in attracting clients. When economic developers use their marketing funds appropriately, the business development events they host are very useful in learning more about a community and its assets first-hand. Site Selection Group is routinely asked to attend various events and familiarization tours throughout the year, and we are incredibly selective in which events we attend and how they will further our knowledge and ability to service our clients. Additionally, we gladly host economic developers in Dallas; Austin, Texas; Greenville, South Carolina; and New York to learn more about what they have to offer our clients. A professional site selector will never provide a biased site recommendation based on an economic development marketing event.
Understanding economic incentives
State and local communities compete in many different arenas and it is no different when it comes to utilizing economic incentives to attract headcount and capital investment. As mentioned in my article, Nontraditional Economic Incentives that Benefit Companies, Communities and the Workforce, there are several ways to structure economic incentives to result in a win-win for all parties. These benefits are often portrayed as one-sided, when the reality is the chosen state and local community are benefiting from an improved workforce and incremental tax revenue to fund governmental services and public-school systems.
An effective site consultant should be able to advise companies which economic incentives exist in a particular jurisdiction and have the expertise to accurately value them. Anything less is providing a disservice to a company and its shareholders who are reliant on the best possible return on investment. Equally, a site consultant should also be able to show the value of the company’s project to the state and local jurisdiction.
As an example, one highly scrutinized economic incentive program is the Texas Appraised Value Limitation under Chapter 313 of the tax code. This program allows for a company to receive a tax abatement on an investment over a certain threshold against the respective school tax millage. This is highly controversial because it impacts schools’ revenues and requires the state to “subsidize” the tax loss. However, what opponents lose sight of is that these types of economic incentives are often only available to projects that are in excess of several million dollars and if this benefit was not offered then the project might not occur. What is overlooked is that a community still benefits from the job creation and incremental tax revenue up to the value limitation, which is $10 million in most jurisdictions resulting in a minimum of an estimated annual property tax of $200,000. Not to mention that an Appraised Value Limitation is temporary and moreover, a tax abatement in other states often includes the total property tax millage (i.e., city, county and school district millage).
Understanding legislative policy
Personally, I do not understand the negative connotation of site consultants using legislative measures to effectuate change to benefit their clients. Often, we are working to understand how our clients’ projects fit within the criteria of existing policies. It is not uncommon to have a unique set of circumstances that do not fit squarely within existing legislation. In these cases, Site Selection Group works collaboratively with communities and states to find a mutually beneficial result. Otherwise, we may work with our clients’ governmental affairs and legal departments to make suggestions as to how a set of unique characteristics could be included within various tax credit and exemption provisions, but we are not directly lobbying for their interests.
Aside from creating legislative policy, Site Selection Group is often asked about state tax policies and how states compare to others or what best practices we see other states utilize. Relying on our experience and tax expertise, we can provide feedback to states regarding how their tax structure may or may not be competitive in attracting certain industries. As an example, we have provided insight to states that are trying to recruit manufacturing projects that a policy of imposing a property tax on business personal property or having a three-factor apportionment formula for state income tax purposes is not as aggressive as states that do not tax such property or only source income based on a single sales factor.
As I have mentioned in many of my prior blogs, there will always be people who are against economic incentives. These opponents should not be able to contort the truth and misrepresent our site selection process and interactions with economic development officials. We deeply value our relationship with economic development departments, and they know that when dealing with Site Selection Group they will be expected to provide accurate real-time data and put their best foot forward in offering incentives; while in turn we will act professionally and work to structure an economic incentive package that maximizes the overall value to the company and the community.