Economic incentives, or entitlements, are a significant component of state and local economic development strategy. The use of incentives to stimulate economic activity has both proponents and detractors. Nevertheless, any company experiencing growth, undertaking an expansion or considering a relocation project should consider tapping economic incentives to reduce costs.
An economic incentive is a benefit provided by a state, county or municipality to a company in return for creating jobs and making a capital investment in their community. Economic incentives may include direct benefits such as cash grants, tax credits, tax abatement, low-interest financing and job training as well as indirect benefits such as infrastructure improvements.
When utilized effectively, economic incentives can stimulate economic activity and provide a positive return on investment. The use of incentives, however, is not without peril. The landscape is littered with failed projects, unrealistic expectations and broken promises. Here are ten “rules of the road” to consider when contemplating the use of economic incentives.
- Job Creation is the Coin of the Realm. Job creation and, to a lesser extent, capital investment are the critical factors communities use in deciding whether to offer an award of economic incentives. Benefits for job retention are less common but available for large-scale and headquarters projects in some jurisdictions. Small businesses, particularly in the area of healthcare, technology and other hot areas, may also qualify for benefits with a little as 10 employees.
- Incentives are the Icing on the Cake. Don’t lose sight of operational imperatives such as labor availability. No award of incentives can make up for a bad business decision.
- Time is Not on Your Side. The availability of incentives should be considered early in the project development process. Many incentive programs contain stringent “but for” requirements and deny benefits for jobs created prior to project approval.
- Build a Team. Assemble a multi-disciplinary project team to evaluate the use of incentives and program requirements. Core constituencies include key decision makers and representatives from facilities, operations, government affairs, human resources, tax and finance. By the same token, avoid over inclusive project teams that can lead to decision paralysis.
- What is the “Ask”? Be creative and undertake a critical assessment of your company’s requirements. In addition to financial incentives, are there any statutory or regulatory changes that would have a positive effect on the project’s bottom line?
- Who are the Kingmakers? Don’t underestimate the importance of personal relationships cemented by spending time in a community. Identify community power brokers to endorse your project and generate local support.
- Pigs Get Fat; Hogs Get Slaughtered. Don’t be greedy or overplay your hand. The award of economic incentives is a politicized, give and take process. A disgruntled party can derail a project if the incentives recipient is perceived to be driving an unfair bargain.
- Options are Good. Preserve flexibility in documentation to address future business contingencies such as seasonal slow downs and future expansions. Negotiate proportionate clawbacks to prevent a total loss of benefits.
- Under Promise and Over Deliver. Greed is not always good. Many communities have lured projects with significant incentive packages only to be left holding the bag in the aftermath of plant closures. As a result, it is now standard procedure to negotiate clawbacks to guard against failed projects. Of late, economic development agencies are enforcing clawback provisions more aggressively.
- Cash is King. Beware of overly optimistic financial projections. Many incentives are paid out over a period of years, have technical eligibility requirements or are unduly burdensome. All financial projections should be discounted to present value. Although rare, cash grants are the holy grail of economic incentives.