Site Selection Group frequently fields questions on the applicability of economic incentives in a company’s site selection process or in their business operations. This article, the first of a two-part series, focuses on the most frequently occurring questions from Corporate America during the pre-site selection process.
1. When should we start thinking about economic incentives?
There are various scenarios in which economic incentives may come into play. For instance, is the company renewing a lease, evaluating a new site, consolidating facilities, relocating an office, or making annual routine capital investments? Depending on the trigger, the timeline as to when to start thinking about incentives may differ, but sooner is generally always better than later. A company has the most leverage to negotiate economic incentives early on in the process. Thus, Site Selection Group recommends a couple key strategies:
2. Which states are most competitive for incentives?
This answer is heavily influenced by the type of project involved. There are certain states which seem to favor capital intensive projects by granting property tax abatements and/or investment tax credits. Other states may be more focused on job creation and rely on payroll rebates and/or refundable tax credits to attract more jobs. In general, the most competitive states for economic incentives have a diverse set of programs which they can utilize at a state and local level. These programs would include inducements that offset direct and indirect tax components because these items are impactful to different business units within an organization.
3. What are the most common types of economic incentives?
The most common type of economic incentives offered to companies continues to be tax credits. These types of credits are considered “statutory” and are typically granted based on an entity’s job creation and/or capital investment within a state. However, state economic development programs continue to evolve by offering cash grants, payroll rebates and indirect tax abatements (sales tax, property tax). As an example, Texas utilizes very little, if any, true tax credits and rather relies on a multitude of various state and local discretionary economic incentive programs. It is also worth mentioning that most jurisdictions no longer offer upfront cash and rather use a performance-based model which helps to avoid any clawbacks and is more politically popular.
4. Do economic incentives really matter in the site selection process?
Yes. While economic incentives will never make a bad site option a good site, they will help offset any gaps that exist in two competing jurisdictions. States and local communities have varied tax rules, rates, exemptions, etc. and often times economic incentives can help bridge the gap between differences. Such incentives might enable a company to choose a location which has a better labor pool or more economical wages that it would not otherwise be able to select due to large direct and indirect state tax differentials. In addition, companies have a duty to their shareholders to try to procure all available economic incentives in order to generate the best possible return on investment.
5. What range of economic incentives can I expect to receive?
This question is obviously pressing to our clients. Unfortunately, there is no easy generic answer. However, through years of experience and prior project comparables, most economic incentive packages will range from 5 percent to 15 percent of capital investment and/or $1,000-$5,000 per net new job.