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Government at all levels continues to provide numerous incentives to companies in varied industrial sectors in order to generate jobs and economic prosperity.
This article was originally published in the Quarter 1 2023 issue of Area Development. By George Tobjy, Managing Director of Client Services, Maxis Advisors
An incentive award of up to $9 billion in federal, state, and local benefits for Micron’s $100 billion chip fab plant near Syracuse, New York, if employment and investment projections are achieved, has set the high bar for a U.S. project incentives award. More than $1.3 billion in incentives has been approved to attract Panasonic’s EV battery facility which is projected to create 4,000 jobs in De Soto, Kansas.
North Carolina was successful in bringing Apple’s 3,000 jobs in machine learning and artificial intelligence to Research Triangle Park with the help of an incentives package estimated at $846 million. While these mega-project announcements and the level of associated incentives awards grab national headlines and are regularly debated on their needs and merits, each year hundreds of thousands of companies in the U.S. alone will secure some level of business incentive and tax benefit to conduct facility expansions, capital investment, and other employment-related activity.
Business incentives, tax credits, and exemptions are regularly provided and deemed absolutely necessary by the federal government, state and local agencies, and other authorities and entities, including ports, airports, utilities, railroads, and workforce training organizations to encourage and support business investment and economic activity in all corners of the country. Our federal system allows state and local governments, and the voters in their states, to set tax and regulatory policies, and the levels of expenditures they feel necessary in their public and social institutions, to develop a healthy and economically productive state and region. In the same vein, state and local agencies are able to determine the levels of government incentives and tax benefits they feel necessary and in the best interests of their citizens to attract and retain companies and generate investment, jobs, and economic and social health for their communities.
The evaluation of states and regions for projects by companies, i.e., the site selection process, requires a detailed review of a multitude of critical project requirements of which the amount of incentives that can be secured is only one — and often not the most important — factor. However, just as the long-term cost of labor in competing locations is critical to deciding the project location, incentives should be fully reviewed to determine their value in the overall project cost calculation and in reducing project investment and long-term tax and other liabilities.
A disciplined approach in analyzing the potential incentives in alternative locations that may be suitable for the project should be conducted before entering into discussions with state and local agencies. Knowing the value of the potential incentives, including the benefits to be realized based on the company’s tax structure or projected tax liabilities in the locations under consideration, is a critical first step. Companies should be clear in presenting their project plans, as well other potential alternative locations for the project, during initial discussions with economic development agencies so that any incentives offers are based on realistic and achievable employment and investment factors and commitments.
The process and timeframe to receive an offer of a package of state and local incentives can differ significantly between states and regions. In some instances, companies can receive an offer letter within a couple of weeks by providing basic project specifications in writing or in meetings with the economic development agencies. In other states and cities, a formal offer of incentives will not be provided for several months until project applications are submitted and approved by economic development boards or local agencies. In either situation there can be opportunities to negotiate the award levels, terms, and conditions of incentives packages before a company commits to or announces their project location decision.
Companies should review and become comfortable with the project agreements, including all project commitments, reporting and compliance terms, incentives payment schedules and fees, default and clawback provisions, and other terms before accepting the incentives and making project commitments, as the likelihood of negotiating these terms is seriously diminished after doing so.
Finally, it can’t be overstated that establishing an internal process to track project employment and investments and accurately meet incentives reporting requirements is the most important part of the incentives process. Companies regularly achieve less than their approved incentives awards or default on their agreements and are removed from programs due to inadequate reporting and compliance procedures.
In recent years, many states and communities have increased the amount of application documentation and detail on such issues as project economic impact, community benefits, projected local labor and workforce participation, ESG and green building commitments, and competing locations prior to approving incentives awards. Similarly, there has been increased rigor and review of qualifying employment and wages, eligible capital investments, and other requirements spelled out in project agreements before compliance reports are approved and benefits paid to companies. States have seen the need to adjust such issues as percentage of time employees are required to work at project sites, or their calculations on employee spending impacts to the local community, as the level of remote workers and underutilized facilities remain stubbornly high. Understanding the level of complexity in securing approvals of both the initial incentives applications as well as the follow-on compliance reporting requirements is important in comparing competing incentives offers.
By all measures, since the start of COVID, the amount of business incentives and funding for companies that has been authorized and awarded exceeds any amount in our country’s history. Of the $3 trillion CARES Act I and II (the Consolidated Adjustment Act) funding, approximately $1.5 trillion was allocated almost equally to large and small businesses through the Payroll Protection Program, Employee Retention Credit, direct grants, loans and loan guarantees, and tax benefits.
Significant funding for investments in transportation, education, healthcare, energy, and economic development projects has been authorized through the $1.9 trillion American Rescue Plan in 2021. While over $600 billion of the $1.2 trillion Infrastructure Investment and Jobs Act will fund highway, transit, and rail projects, the remainder of the investments will be made to support energy, environmental, water, broadband, port, aviation, and other public/private projects.
The Inflation Reduction Act allocates $369 billion to energy security and climate change projects, including significant funding for solar panel, wind turbine, and renewable battery projects, and individual tax credits for the purchase of solar panels and electric vehicles. Finally, while $200 billion of the $280 billion CHIPS Act is allocated to scientific R&D and product commercialization, approximately $53 billion in federal grants for manufacturing, R&D, and training, and another $24 billion in tax credits is available for direct company funding for semiconductor plants. States and communities are utilizing funds from all of these programs and supplementing them with their own incentives to support private-sector investments in their communities.
While the public benefit and need to award large incentives to a Fortune 500 company is regularly debated, all states and other levels of government routinely provide funding to companies to achieve specific outcomes. Some states and communities focus funding on the needs of small businesses, entrepreneurs and new tech, and emerging industry sectors, including renewable energy, electric vehicles and charging infrastructure, craft brewing, and cannabis. Others award significant incentives to projects by large companies in manufacturing, foreign direct investment, life sciences, and film production projects. As the distribution and logistics sector struggles to find properties and welcoming communities for their facilities, incentives can be challenging for projects in this sector in the near term. Cities and states may see the need to refocus efforts to secure large corporate services and financial institutions to underutilized suburban office properties and struggling downtowns through renewed incentives to attract this sector.
While the need to provide incentives to a specific company or industry sector in a state or city may change based on the economic or political climate, the availability and use of incentives by governments at all levels appears certain to remain to generate jobs and achieve economic prosperity for their communities.
George Tobjy has more than 35 years’ experience assisting domestic and international companies with site selection and location analysis, business incentives and tax credits, and financial and tax analysis services. Prior to joining Maxis Advisors, George was a managing director in KPMG’s Global Location and Expansion Services (GLES) practice for 25 years, where he supported major clients including IBM, JPM Chase, Verizon, Warner Media, Bayer Healthcare, Novo Nordisk, Samsung, Raytheon Technologies, Whole Foods, and numerous emerging technology companies in completing investment projects in the U.S. and globally. During that period, George served as National Practice Leader for several years and led the development of KPMG’s international location services network. Prior to joining KPMG, George managed international investment activities for the Port Authority of New York and New Jersey, resulting in the completion of over 140 major investments to the region. During positions in Europe and New York, he provided a range of site selection, incentives, and logistics services to companies and supported the agency’s port and aviation promotion, regional tourism, and trade development programs. George was also based in London, England as the European representative for the City of New York and New York Chamber of Commerce and Industry and prior to that directed retention and expansion of New York City companies for the Chamber.