Scrutinizing Incentives: Perception vs. Reality

Over the past few years, there has been an increased level of scrutiny placed on incentive packages offered by many state and local governments to entice companies to create new jobs and invest capital in their area. A lackluster national economy, increases in government spending, the passage of a major healthcare reform bill, and growing deficits have likely contributed to taxpayer concerns and much of the negative press around some incentive deals. Many companies have been blasted in certain media outlets for negotiating or accepting incentive offers. Needless to say, this can become a public relations nightmare for the incentive recipient, as well as municipal governments and politicians.

While some of the criticism may be valid, there appears to be a widespread lack of understanding as to the nature of economic development and incentive programs. There is also often a discrepancy between the perceived value of incentives versus the actual value.

Incentives come in a variety of forms including loans, grants, tax credits, tax abatements, workforce assistance, and other programs aimed at attracting or retaining new jobs and investment in a location. Some of these incentives – such as grants, have a “cash equivalent” value, while others – such as tax abatements and non-refundable tax credits, are simply a way to reduce a company’s tax burden for a specified period of time. When it is announced that “Company XYZ will be investing $200 million in a new facility, creating over 500 jobs and receiving $45 million in state and local incentives”, the average person may not stop to think about the actual cost to the taxpayer or the economic impact that the project will have on the local economy.

This also raises the question as to what should be considered and quantified as an incentive. Should needed investments in public infrastructure, such as roadways or municipal utilities, be considered an incentive? How about property tax abatements? Public guaranteed low interest loans? Workforce training programs? Waiver of community impact or permitting fees?

It’s important to recognize that some locations have inherent challenges that can put them at a significant disadvantage when competing for new investment. These challenges include topography, infrastructure deficiencies, high land costs, insufficiently skilled labor, high taxes and many others. Incentives can be used as a way to offset certain cost barriers or challenges that do not exist in other locations. For many rural communities, incentives may be one of their best tools for attracting new investment. You don’t have to look hard to find great examples of projects that have transformed local economies through a combination of public and private investment.

Nevertheless, some have made the case that all incentives should be done away with, and that the competitive incentive battle fought by states and communities is nothing more than a “zero sum game.” This argument overlooks the fact that the playing field is not level to begin with. Locations that are at an inherent disadvantage need more help than others. Incentives can provide that help.

Companies that are contemplating expansions to new locations should be cognizant of the potential for backlash in the media for accepting incentives, particularly larger discretionary ones. Being able to demonstrate and quantify the need for incentives to assist with a location’s challenges is important. Detailing the economic impact that the project will have on the community can also go a long way. An experienced consultant can help you navigate the negotiating process and build a stronger case for justification of incentives.