Open for Business: Taking Advantage of Economic Development Incentives
Companies can use economic development incentives to boost profits.
Companies that are starting up, moving or expanding may be able to tap into state and local economic development incentives to save significant money and improve profitability. With 12.1 million people unemployed nationally, states, in particular, are bidding against one another to attract and retain business.
Incentives include tax credits, tax exemptions, tax reductions, low-cost loans, cash grants and employee training reimbursements (see Table 1, p. 38). Many communities offer their own breaks that companies can couple with state programs to offset costs when relocating or adding new facilities. Incentives are usually tied to employment: The more jobs a company plans to create, the more attractive the deals.
The type of jobs also matters. A company that creates 100 manufacturing positions will likely receive more incentives than a firm that provides 100 warehouse jobs. Why? The reality is that manufacturing drives a vibrant economy through attractive wages and innovation.
Location is another factor to consider. Businesses that are willing to set up shop in struggling areas, often known as “enterprise zones,” may get a more lucrative offer. Another plus: Enterprise zones generally have lower taxes and reduced regulations to entice development and spur job growth.
Know the Rules of the Road
A company that is considering relocating or opening a new site needs to make sure the initiative aligns with business goals. If it does, the organization should look at how the move or growth will affect the company’s bottom line. A detailed analysis of operating and labor costs at the company’s current location compared with these costs in other areas is key.
Business-friendly states may seem to be good places to start because they often have reduced taxes and favorable unemployment insurance rates. But companies must balance saving money with the overall environment. Questions that should be addressed include the following:
• Does the area have a qualified workforce?
• Does it have adequate infrastructure?
• Does it meet transportation needs?
• Does it offer a competitive advantage?
A company that is thinking about moving must also consider the quality of life in the prospective location. Employees might not want to make the trek to a new area, especially if they’ll have to sacrifice culture, activities and other interests. For example, a business that is thinking about moving from a small town to Chicago would probably be able to convince employees that the city is a step up. Convincing top people to leave Chicago for a small town might be a tougher sell.
Find the Right Match
After identifying potential communities, a company should contact state and local economic development offices to find out what incentives they may offer to help seal the deal. Many states have become more aggressive in how they compete for business because they’re desperate to create jobs. If one state offers an incentive package, other states may feel compelled to match it or risk being left behind. Companies can increase their competitive advantage by playing one state off another.
One caveat: Make sure that the offers are legitimate. Some states and communities generate what’s commonly known as a “happy letter”—one that says officials are happy to provide various incentives with no commitment that they’ll follow through on them. Also beware of overly optimistic financial projections. Many incentives are paid out over a period of years and have stringent application and eligibility requirements. When the time comes for owners to claim the incentives they negotiated, they may find the process more difficult than they had anticipated.
Above all, owners who are thinking about setting up shop in another state should be discreet. They need to keep their plans out of the public eye as long as possible so they don’t lose their bargaining power. When owners make their final decisions, they can announce their plans to the media.
Negotiating incentives and weighing the options can be tricky. One state may offer cash-oriented incentives, including up-front funding for facility construction and equipment purchases, while another dangles corporate income tax credits and employee training reimbursements. Companies that hire experienced advisers to do the legwork for them often come out ahead. Someone who worked both for a state economic development organization in the past and who has the experience structuring large and small deals is ideal.
Owners should also begin looking long before they plan to start up, relocate or expand; it generally takes six to nine months to negotiate a favorable incentive package. Making an informed decision will help keep owners from being penny-wise and pound-foolish.