Top 10 Economic Incentive Program Types to Target During the Site Selection Process
by Kelley Rendziperis, on Sep 25, 2017 11:34:03 AM
The pursuit of economic incentives has become standard operating procedure for companies during the site selection process. These economic incentives are offered public and private governmental and economic development organizations at the federal, state, county and municipal level. They are pursued for all types of projects including call centers, data centers, distribution centers, headquarters, manufacturing plants, research and design, retail, and software development operations. To help identify these economic incentives, Site Selection Group is providing a summary of some of the most commonly used economic incentive program types to target for your site selection project.
What types of projects are eligible for economic incentives?
This is a common question asked during the site selection process. The easy answer is that it depends. It depends on which state, county or city is involved and what type of operation is under consideration. It also depends on the amount of sales tax revenue, jobs and capital investment that is at stake. In short, there may be many other factors that make the economic incentive process more complicated than you can imagine. They key is to carefully define your project so that you can clearly provide your project details to economic development organizations.
The top 10 most commonly used economic incentive program types
Economic incentive programs vary state-to-state, county-to-county and city-to-city; however, there are common categories that most economic incentives programs fall into. To help you understand these different categories, I have summarized some of the most commonly utilized economic incentive programs.
- Tax credits - Tax credits often come in the form of income tax credits based on job creation and/or investment. The most important consideration is to ensure the credit is realizable, and if not, that it is refundable or transferable. Refundable tax credits are ideal because they result in a direct cash benefit to the extent you do not have liabilities to offset. Transferable credits may be transferable to another tax base within the state you are operating in or transferable to third parties and able to be sold on the open market. The goal is to procure a credit you can utilize.
- Tax rebates – Tax rebates evolved out of a need to solve the problem with unutilized tax credits. Rebates can be based off your increased payroll, property tax or sales tax. Another popular rebate is related to energy efficiency improvements. Rebates are a good tool to incentivize a project based on actual performance.
- Real and personal property tax abatements - Tax abatements are one of the most common forms of economic incentives. These can help reduce your real (building) and personal (machinery, equipment and furniture) taxes by 25% to 100% over five to 10 years, or more. Their value can add up over time and help drive down annual operating expenses.
- Sales tax abatements - Certain expenditures, such as manufacturing equipment, are statutorily exempt from sales tax in many states. However, some purchases that would otherwise be taxable may qualify for abatement or refund through negotiation or location in a designated economic zone.
- Training grants – These incentives vary wildly by jurisdiction. Some jurisdictions offer in-kind services which can be incredibly tricky and subjective to value. Other training subsidies may require participation with a local educational institution. Finally, some training grants may be awarded in the form of reimbursements, based on either job creation and/or actual training expenses. The compliance process can be a nightmare and when reimbursement is offered, companies need to read the fine print. Reimbursement can be limited to only the wages of the trainer and development of educational materials, and not to trainee wages. Furthermore, the trainer may need to be provided by a third party and not an internal training resource. Thus, the compliance cost may outweigh the potential benefits.
- Cash grants and forgivable loans - These can be very valuable economic incentives especially if you are facing upfront capital investment at your facility for infrastructure, training or other costs such as equipment. For example, in many cities in Texas, companies may be eligible for cash grants for each job created. These will range between $500 to $10,000 per job depending on the city and the wages being paid. The most popular of all incentives are the upfront direct cash payments made to offset initial project costs; however, many communities are now structuring such assistance to be paid out over a longer period based on performance. Loan forgiveness is another popular tool to convey cash, subject to your compliance with employment, investment or other commitments.
- Utility discounts and rebates - States and utility companies may provide discounted utility supply or delivery. This can be very valuable for heavy power users such as data centers and manufacturing plants. In some cases, utilities will provide economic development grants for job creation or fund required improvements to utility-related infrastructure.
- Real estate and infrastructure grants – There are many communities out there willing to provide land or a free building in exchange for your capital investment and jobs. The land or building is typically owned by the city or economic development organization. There are even speculative buildings that have been financed and built by economic developers to attract companies whereby they provide a turnkey facility for free rent over the lease term. In addition, infrastructure grants are often used by the community to fund fiber to your building, increased power supply to the site, addition of roads and/or ingress/egress to a building.
- Priority permitting and fee waivers - Projects are typically required to seek permits and often charged fees by cities and counties related to zoning, permitting and other regulatory requirements. You can bypass these delays and expenses through the reduction or waiver of fees, as well as expedite your project to the top of the permitting approval list.
- Tax free zones - Some states will eliminate all or a portion of your tax burden by locating and creating jobs in designated geographic areas. These zones may often be in an economically challenged area, so you want to make sure to carefully evaluate labor conditions. A good example of a tax free zone is Pennsylvania’s Keystone Opportunity Zones, which eliminates most state and local taxes within underdeveloped areas.
Economic incentives in the site selection process continue to play a critical role. However, companies need to make sure they evaluate locations based on all site selection factors such as labor availability, labor costs, tax conditions, business climate, real estate, logistics and many other variables that may be required to make the location a success. It is essential to properly weigh these location drivers based on your specific project which may include call centers, data centers, distribution centers, headquarters, manufacturing plants, research and design, retail, and software development operations. Bottom-line: making a decision solely on economic incentives can be a far more expensive mistake than the value of any economic incentives you receive.