The Economic Incentives Questions that Companies Most Often Ask (Part 2)

Site Selection Group frequently fields questions related to the applicability of economic incentives in a company’s site selection process or in its business operations. This article, the second of a two-part series, focuses on the most frequently asked questions from Corporate America during the post-site selection process.

1. What will I have to do to actually receive the economic incentives procured?

A vast majority of companies fail in actually realizing the benefits they fought so hard to obtain. Either no one takes ownership over the compliance process from the outset or it falls between the cracks upon turnover of key personnel. Public scrutiny of incentives has led to more, stricter compliance requirements; thus, compliance burdens cannot be taken lightly and should be carefully considered upon acceptance of a package. It is possible the cost to comply might outweigh the projected benefits.  However, once a company decides to accept an economic incentive package, it needs to make sure all the proper stakeholders are aware of the benefits obtained and the compliance required. Such stakeholders may include plant managers, human resources and the tax department, among others.

2. What are clawbacks?

Clawbacks are provisions in economic development agreements that penalize a company for not meeting its commitments in exchange for economic incentives. Clawbacks can be drafted in various ways, including having to pay back all or a portion of the economic incentives obtained. Current practice includes more performance-based programs, which reduce or eliminate clawbacks because economic incentives are only granted once the company fulfils its commitment.  However, if a clawback is included, it is important to make it as business-friendly as possible. For instance, pro-rating incentives based on a company’s performance is more equitable and beneficial to the company than a total clawback.

3. What happens if my project changes?

Aside from any mandatory compliance measures, it is important for a company to continually monitor the progress of its project so it can proactively manage any contractual obligations. Governmental entities always prefer to address issues in advance of missing project milestones, rather than having to deal with clawbacks. A common misconception is that state and local economic development agencies try to avoid actually paying out the incentives they offer. Generally, they want to see a company succeed and thus it is important to keep them informed of project status so that any necessary amendments to an economic development agreement can be made in advance of being in default.

4. What are retention incentives?

Retention incentives are still not commonplace in the industry, but they do exist. These types of incentives should be considered when a facility is at risk of closing due to business operations, a merger or acquisition, or a consolidation. Many jurisdictions may have formalized programs to incentivize retaining operations such as the Texas Enterprise Zone, but perhaps more relevant to retention efforts are non-monetary benefits a community can provide.

A community with good economic development liaisons, is continually in contact with company personnel and is very familiar with its operations. This allows them to be readily available to offer any assistance, which may be necessary in retaining an operation. Offering training services, recruiting, apprenticeship programs, an equipment loan, or permitting help are all examples of assistance that a community can provide to ensure the long-term viability of a company.

5. Do you envision that states will stop offering incentives?

No. Every state and local jurisdiction will continue to compete for additional investment and job creation. Until tax regimes, labor quality and labor availability are identical among the states, then economic incentives will continue to be used to bridge cost differentials among state and local communities. Economic incentives will also continue to be used to encourage favored investments, such as employment of the disadvantaged, unemployed and veterans. Communities will also target industries to diversify a city’s economy and increase its tax base.

For additional information about incentives, please contact Site Selection Group.