There is much to consider in securing state and local incentives for businesses. It takes a coordinated effort that engages stakeholders to align operational goals with potential state and local incentive opportunities.
It is common knowledge that state and local governments routinely compete for new corporate jobs and capital investments. The offers of state and local incentives (tax and otherwise) typically target certain industries, such as life sciences, film production, and manufacturing. In this blog I briefly address how corporations take a strategic approach to securing state and local incentives.
There are two general categories of business incentives, statutory and negotiated/discretionary. Statutory incentives are those which, by law, are available to all eligible companies and do not normally require preapproval from a governmental agency. Negotiated incentive programs are commonly referred to as discretionary because their availability and value are often negotiated with and approved by state or local economic development agencies. Negotiated incentives are reflected in a binding agreement with the applicable economic development agency. Economic development agencies exist to attract and retain businesses that create new jobs and generate tax revenue. Tax incentive programs encompass all areas of state and local tax – corporate income taxes, payroll withholding taxes, property taxes, and sales/use taxes. Negotiated financial incentives, which reduce operational costs, take such forms as low-cost financing, assistance with infrastructure, workforce training grants, utility discounts, and expedited permitting.
A strategic approach to securing negotiated incentives requires a coordinated effort by working together with both state and local economic development agencies. First and foremost, it is necessary for a business to show that there is a competitive environment in site selection, such as by leveraging interest in the project from other jurisdictions. (The site selection process is beyond the scope of this blog.) Once a business has received an incentives agreement from an economic development agency, the business should carefully review the agreement to fully understand the parameters and qualifications. For example, how are key terms defined in the agreement (e.g., “full-time” employment, wage rate, etc.)? It is also critical for a business to confirm the specific benefits offered by the state or local government and the amounts of the incentives. Above all, a business must make sure it is in a position to actually use the benefits, based on its tax situation and legal entity structure.
As a condition to receive incentives, a business must generally meet certain specific requirements, such as job creation targets, capital investment minimums, and operational deadlines. An agreement might require you to create 100 new full-time jobs within 36 months, with full-time defined as employees working at least 35 hours per week and receiving health benefits. In many cases, discretionary incentives will include clawback provisions so that if a business fails to satisfy its performance commitments, it may have to repay incentives already received.
Evaluating an incentives agreement from an economic development agency involves collaboration across several business functions. The internal finance and tax teams should analyze the financial implications of the incentives, including the potential risk of clawbacks. The human resources department must determine whether the proposed job creation and wage targets are attainable. Meanwhile, the operations team should verify that the project’s schedule and capital investment requirements are consistent with the company’s overall project plan. This in-house team should also include legal, governmental affairs, and public relations departments.
Above all, timing is everything! Many incentive programs require preapproval by the economic development agency or agencies prior to the start of a project. Careful timing is essential for making public announcements about the project, obtaining permits, purchasing land and equipment, and signing contracts. If any of these actions occur before contact is made with the appropriate economic development agency, the business will lose any leverage and miss out on valuable incentives. After a public announcement, a state or local government has no reason to incentivize a business to expand its existing operations or invest in new facilities within the jurisdiction.
I would be remiss if I neglected to mention common risks associated with securing incentives. First, overcommitment of anticipated capital investments and new job creation potential can lead to the already mentioned statutory clawbacks. In addition, the lack of a coordinated incentives team and failure to manage compliance responsibilities (i.e., reporting requirements) after securing the incentives can be detrimental.
As you can see, there is much to consider in securing negotiated state and local incentives for businesses. It takes a coordinated effort that engages stakeholders early in the process to align operational goals with potential state and local incentive opportunities.
Jonathan Liss is an adjunct professor at Drexel University and Villanova University School of Law. He can be reached at jal436@drexel.edu.
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Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.
