Why the Biggest Economic Incentive Offer Is Not Always the Best Deal

When a jurisdiction offers a company an economic incentive, it's natural to focus on the bold number at the top of the page. But the biggest number on paper is not always the best outcome for the client. Site Selection Group routinely evaluates incentive offers, and time after time, once we analyze an offer against a project's commitments, the value looks very different than it did on the cover page.

Headline Value vs. Realistic Value

Jurisdictions typically present the maximum possible value of an incentive package: the number a company could receive if every assumption holds and every target is hit. That's the headline value. But headline value and realistic value are two different things. Realistic value is what a company will realize once the offer is measured against its actual hiring plans, capital spending, tax position, and ability to meet program requirements. The gap between those two numbers is often where economic incentive packages can be maximized, and the real decision-making needs to happen.

Why the Value Changes

A handful of factors consistently separate the headline number from what a company can actually expect to collect, and that depends on how quickly payroll ramps up, when capital spending actually occurs, how much state and local tax liability exists, the performance commitments attached to the award, and how realistic the underlying project assumptions are in the first place.

Each of these factors can drive a wedge between the number in the initial proposal and the projected realizable value. It is important to note that this gap is certainly not caused or being misrepresented by a jurisdiction. The discrepancy is typically derived from a few recurring reasons.

In-kind services are often assigned an arbitrary, subjective value in an offer for things like training, recruiting, or marketing support, but many companies never fully utilize them, either because they prefer to manage those functions in-house or because the services only apply to a portion of their workforce.

Statutory incentives, such as sales tax exemptions or income tax credits, can be equally tricky. Jurisdictions rarely have full visibility into a company's tax position at the site selection stage, and companies often don't either. As a result, income tax credits in particular tend to be overstated, with offers assuming the full credit value will be realized when only a portion actually will be.

Project changes are also common. Once a company receives an offer or begins the formal application process, commitments often shift—headcount, timing, capital mix—and those changes can reduce the realizable value of the original package without anyone flagging that the headline number no longer applies.

Timing Matters More Than It Looks

Even a strong offer can lose value if the underlying project doesn't move on the schedule the offer assumed. If hiring comes in slower than projected, or capital investment occurs later than planned, the benefit schedule can fall out of step with how the project is actually rolling out. An incentive tied to job creation in year one is worth less if those jobs don't materialize until year three. Timing misalignment is one of the most common—and most overlooked—ways a headline number shrinks in practice.

Another timing aspect to consider is when the economic incentives will be realized. Based on a company’s cash position, they may prefer a smaller package if benefits can be realized earlier in the project timeline. Some companies forego certain incentives which may be bigger and last longer for a more immediate benefit to reduce upfront capital expenditures. Similarly, companies may choose a favorable financing structure or rate in lieu of other benefits.

Tax Liability and the Ability to Use the Benefit

An incentive is only as valuable as a company's ability to actually use it. Some offers look strong on paper, but if the company doesn't have enough state or local tax liability to fully monetize a credit, a meaningful portion of that "value" simply goes unused. Before comparing offers side by side, it's worth asking not just what's being offered, but whether the company can capture it. Tax credit carryforward periods play a significant role in this determination and vary among states. Some states have extended carryforward periods, and others have reduced them. For example, a few years ago, Tennessee extended its carryforward period to 25 years, while last year, Georgia reduced its carryforward period to five years.

Achievability Changes the Math

This is often where a smaller offer quietly becomes the better deal. An award tied to realistic, achievable thresholds may end up delivering more actual dollars than a larger award tied to aggressive targets the company is unlikely to fully hit. A bigger number attached to a stretch goal isn't worth more than a smaller number a company can reliably earn in full; it's worth less, once the odds of achievement are factored in. Moreover, most companies can pursue additional economic incentives in the future for incremental growth rather than overcommitting at the outset.

Compliance and Administrative Burden

Larger offers frequently come with more moving parts: more reporting requirements, more approvals, more audits, and more ways to fall out of compliance. That administrative load is a real cost, even if it doesn't show up in the incentive calculation itself. A company should weigh not just the size of an award, but what it will take to maintain and defend it over the life of the agreement.

Case Studies

On a recent multistate manufacturing project—a large advanced-manufacturing facility representing roughly $375 million in capital investment and about 1,350 new jobs—two competing states offered very different economic incentive packages. State A's jurisdiction-valued offer totaled approximately $54 million, while State B's totaled roughly $91 million, nearly 70% larger. On paper, State B looked like the clear winner.

Once we analyzed both offers against the client's actual capital spending schedule, hiring ramp, and tax position, the picture changed. State A's realistic value held up well, coming in at approximately $51 million, only a 6% reduction from the initial number, largely because its primary tax credit was capped and phased in a way that closely matched the company's real timeline.

State B's offer told a different story: A manufacturing equipment tax exemption that made up nearly a fifth of its initial number turned out not to be realizable at all once we modeled the client's actual purchasing structure, and its property tax benefit shrank as well once phased against the true investment schedule. State B's realistic value came in at roughly $64 million—a reduction of almost 30%.

State B still delivered more in total dollars, but the gap between the two offers was nowhere near what the initial figures suggested. Comparing jurisdictions purely on the size of the initial offer would have overstated the real difference by a wide margin—exactly the kind of miscalculation that leads companies to make site decisions based on the wrong information.

Another example of a recent economic incentive offering was a state valuing a package at $4.4 million for a project commitment of approximately 120 jobs and $12 million of capital investment, when the only discretionary incentive offered was valued at $1.6 million.

Approximately 64% of the overall offer consisted of job tax credits, investment tax credits, a statutory sales tax exemption of manufacturing equipment, and in-kind training benefits. At first glance, a company assumes the initial offer will yield a return on investment of approximately 36%, when the real return on investment is approximately 13%. This is a significant difference, and it is especially important to understand when a company is charged with meeting a certain return on investment threshold for a project to receive board approval or move forward.

The Takeaway

Understandably, it is incredibly difficult for a jurisdiction to fully comprehend a company’s financial position or accurately value economic incentives; thus, the onus is on the company to dig into the details to determine which incentives offered are realizable.

At Site Selection Group, we don't evaluate incentive offers based solely on what's being offered. We evaluate them based on what a client is likely to realize, given their specific project and considering the respective operating cost environment. That means pressure-testing every offer against realistic headcount and payroll schedules, capital expenditure timing and classification among real and personal property, projected tax position, and conservative performance measures before we ever put a number in front of a client.