Before COVID-19, many service companies were investigating work-at-home models. Now, as more and more companies like Twitter and Facebook are announcing their intention of maintaining either a complete or partial work-from-home model, how will economic incentives be impacted? The answer will largely depend on how communities are affected financially from such a shift.
Corporations reducing their real estate footprint can severely hamper a community in ways beyond a loss in tax revenue, including a lack of private funding for economic development, lack of philanthropic donations, participation from corporations and their employees, and the demise of small businesses from lack of revenue. A massive shift to the work-at-home model could destroy the livelihood of some downtown communities, which could then affect arts and entertainment.
With a substantial loss of revenue, many companies are asking how state and local communities will be able to compete for economic development projects by bridging any cost differentials that exist between their jurisdiction and others.
Economic incentives are often the tool used by state and local communities to bridge any cost differentials that exist between their jurisdiction and others. The three fundamental factors that drive economic incentives are capital investment, headcount and wages. If a company no longer creates new jobs in a centralized location, then presumably its capital investment will decrease; as well as the local revenue generated by the new headcount. Decreased capital investment will affect local property and sales tax revenue — the primary source for many economic incentive programs. Decentralizing headcounts will result in employees no longer generating sales tax revenue from local discretionary spending such as meals at restaurants, coffee, gas or local income tax in jurisdictions which have such a tax.
But will a shift toward remote employees really happen?
I think it is too early to determine whether the remote employee paradigm will truly take over. Since it has only been approximately three to four months since COVID-19 forced employers to allow their employees to work from home, the productivity of such employees remains to be seen. Current productivity could be driven primarily by employees’ motivation to keep their jobs during this pandemic and economic uncertainty. However, it is not clear how productivity will be in the long term. There is no question that employers are doing everything thing they can to ensure the health and safety of their employees during this current health crisis, but it may not be a long-term solution.
Some of the challenges that work-at-home employees may face include ensuring proper cyber-security protocols or maintaining client confidentiality from others living at the same residence.
Once communities are reopened and we have a clear plan how to fight COVID-19 in the future, seeing a movie, going to the gym, running errands, or shopping could become very enticing to employees during the workday.
Moreover, companies who have fought hard to ensure outstanding employee morale and culture, will struggle to retain social, extroverted employees who prefer to be in an atmosphere with other people, rather than feel isolated working from home.
For these reasons, I think the overall productivity of the work-from-home model will not be successful for all employers. It certainly can be advantageous for certain industry functions, but I have a difficult time seeing it as the wave of the future unless overall corporate culture and expectations change.
However, for argument’s sake, assuming the work-from-home model does become more prevalent, how may this affect economic incentive programs?
Most existing economic incentive programs across the United States are not structured to incentivize work-at-home employees. However, Site Selection Group has negotiated economic incentive packages for remote employees which include job creation grants for hiring residents, rather than non-residents; as well as, training benefits. Of course, this assumes that a company will cluster its hiring efforts in a region, but one huge benefit to remote employees is the ability of employers to recruit a qualified workforce without regard to geographic boundaries. Thus, unless a company can clearly reflect its economic impact on the state and local community of its remote operations, it will be difficult to garner meaningful benefits.
It is possible that existing economic incentive programs will need to be restructured. If state and local communities continue to lose revenue, the primary objective could become tax reform and since most economic incentive programs are structured from the revenue generated from state and local tax policy, any tax reform will affect the efficacy of existing economic incentive programs. As an example, if a city implements a local income tax to raise revenue, then there may be either a new economic incentive program or modifying an existing program to allow for payroll rebates, withholding tax credits or grants from the incremental revenue.
While some argue that companies will reduce or eliminate their real estate footprint in favor of the work-from-home model, others suggest companies will increase their real estate footprint to allow for greater distance between employees. Which way the real estate market will go remains to be seen and Site Selection Group will continue to monitor this trend and how it impacts economic incentives in the site selection process. Even in a work-from-home world, there will still be state and local competition for jobs and the necessity of being able to compete for those jobs by bridging cost differentials.