Economic Development Incentives: The Right Tools for the Right Time

construction worker laying brick at job site

Businesses seeking to expand during a time of real estate shortages and soaring construction costs can turn to economic development incentives to offset costs.

In light of the global pandemic and resulting supply chain disruptions as well as political instability around the world, companies are seeking to restructure their supply chains to expand capacity and reduce costs. Businesses seeking to achieve this, especially during an inflationary period, can turn to economic development incentives to help offset capital and operating costs.

If your organization is considering expanding its operations, boosting capital expenditures, making investments in real estate and equipment, renovating or opening new facilities, there's no better time to take a strategic look at economic development incentives.

What are economic incentive programs and why do they exist?

Economic development incentives take the form of financial assistance provided on a discretionary basis by federal, state or local governmental bodies to attract or retain business operations, promote new business activity, or encourage job retention. Other entities, such as utilities and non-profits, can also make incentives available for these purposes.

Government policy-makers are tasked with creating opportunities that can stimulate state and local economies by encouraging and collaborating with private sector firms. States and municipalities utilize economic development incentives to promote and cultivate growth.

Incentives can be statutory or discretionary in nature and can be in the form of:

  • Grants, rebates or utility rate reductions
  • On-site improvements
  • Income, sales and property tax incentives
  • In-kind support for workforce development
  • Other forms of direct and indirect assistance including infrastructure development.

In nearly all cases, discretionary incentives require that companies have a competing location for the proposed project and state that but for the incentives the project would go elsewhere.

Devising an incentive strategy

An effective incentive strategy is a thoroughly researched game plan that identifies and targets incentives that will most benefit the project by reducing capital expenditures and operating costs, improving site readiness and reducing risks associated with project implementation. Incentives must be evaluated for their true value to the project versus the value presented by economic development organizations and must also be considered in the context of total site-specific investment and geographically variable operating costs as competing locations are evaluated.

An incentive strategy may, for example, target grants for new infrastructure while receiving property and income tax abatements, sales tax exemptions, payroll tax rebates and job creation tax credits.

ADP has negotiated incentives in locations nationwide on behalf of clients in a range of businesses. Here are just a few examples that illustrate the scope and economic benefit for eligible businesses:

  • A new greenfield pharmaceutical technology manufacturing facility in the Pacific Northwest built at a total cost of $45M, producing 90 new jobs benefitted from a $3M economic development incentive amounting to 7% of CAPEX.
  • A company leased and re-purposed a dormant Midwest manufacturing facility for the research and manufacture of renewable energy propulsion technologies at a total capital expenditure of $200M, creating more than 700 high-paying jobs. Economic development incentives offset $7M, or 3% of the total cost.
  • A new greenfield facility located for the manufacture of sustainable building systems with a total project cost of $20M created 200 new jobs. Economic development incentives offset $7M of the total cost—35% of the total capital expenditures.

Negotiating incentives

Unlike federal tax incentives, some of the most lucrative state and local economic development incentives are discretionary and require negotiation. While flexibility is encouraging, the parameters and nuances can often lack transparency, consistency and can vary dramatically between different states and municipalities.

Your organization should quantify and leverage the benefits it can bring to the table. Some of these benefits include new jobs, an increase in commerce for local businesses, positive publicity, improving property values, increased tax receipts, cultural diversity, population growth and revitalized opportunities. Also, consider the social impact of the nature of your business upon the community.

Submitting RFPs to establish contact and groundwork

The first step in the negotiation process is to submit requests for proposals (RFP) to the locations that have been determined to be most advantageous for the proposed project as a result of a rigorous site selection / location evaluation process. RFPs should detail the planned expansion, investment and/or relocation project and emphasize the multi-lateral benefits to the community. This lays the groundwork for negotiations and will be the basis for any incentive offers, and ultimately for the incentives agreements which formalize the incentives and which will typically include "clawbacks" if agreed upon project metrics are not achieved.

Determine the realistic value of the incentives for your project and organization. Procuring large non-refundable income tax credits has little value if internal forecasts project losses in those years, since there will be no income to apply the credit to. Ideally, incentives should be focused on specific project needs which maximize the total value of the incentive package to the project while also maintaining a positive relationship with the community; in the end, the deal reached needs to result in a long-term, "win-win" partnership between the company and the community.

Incentive administration process

Organizations that successfully procure economic development incentives may be subject to probationary periods with clawback provisions and a multitude of benchmarks and reporting requirements. Maintaining compliance under the guidelines and parameters of the incentives is crucial to keeping those incentives and maximizing the actual benefits realized. Failure to meet compliance requirements and/or performance milestones could trigger clawback provisions stipulating the repayment or reimbursement of received benefits.

Navigating the landscape

Economic development incentive programs can provide significant benefits lasting years if you have the right incentive strategy driven by an experienced team of specialists. Keep in mind that the incentive landscape is always changing.

Organizations that want to learn more about what incentives are available to them often benefit from working with a partner experienced in eligibility, negotiation, compliance, and administration.

Learn more about how ADP can help your organization tap into incentives.

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