Understand the Incentives You Are Offered

Businesses that are growing or relocating present opportunities for new economic development in a particular location. State and local economic incentives are available to these businesses and these incentives may be a deciding factor if businesses can get labor, transportation and other needs met in more than one community. Here are several things business leaders can consider as they evaluate these incentives.

States and local governments use various tools that often reduce, forgive or use specific tax revenue to spur business growth. 

It is estimated that state and local governments forgive between $5 and 10 billion in revenue each year. They recognize real or personal property taxes often are expensive costs to businesses. This fact is especially true in states that rely on property taxes. More than 35 states use property tax abatements and almost all 50 states use tax increment financing (TIFs). More communities will participate in these incentives to level the playing field between counties and states.

What types of incentives are offered to spur economic development?

The most frequently used incentives include:

• • Revenue Bonds
  • Payment in lieu of tax (PILOT) programs
  • Low-interest or forgivable loans
  • Small business incentives
  • Business site or zone incentives
  • Grants
  • Foreign trade zones
  • Tax Increment Financing (TIF)
  • New Market Tax Credits
  • State Tax Credits

The type of incentive that states and local governments offer depends on factors including the type and size of the business, its location, the type of financing it needs as well as what funding is available.

It is important to note the different purposes for each of these incentives.

• • Revenue bonds finance income-producing projects and are secured by a specific revenue source. They can be issued by any government agency or fund that is managed in a manner of a business.
  • Payment in lieu of tax (PILOT) programs use temporary, partial tax abatement of future real or personal property taxes that a business would have paid otherwise.
  • Low-interest or forgivable loans are available for state and local governments if the business or project meets certain criteria established by the program.
  • Small business incentives include employee training, counselling and other benefits if the business is considered a small business.
  • Business site or zone incentives are available to businesses that establish themselves in specific areas of a community such as a business park or redevelopment area.
  • Reimbursement grants help businesses with costs such as relocation expenses, infrastructure development, land acquisition and required utilities, among others.
  • Foreign trade zones are designated locations in the United States where companies can use special customs procedures to offer economic advantages for companies involved in international trade.
  • Tax increment funding (TIF) refers to the incremental tax growth created by the development of a parcel or area. A bank makes a loan for the property and receives the additional tax revenue while the initial tax base is kept by the local government. These projects can be used for a specific parcel or an identified district. TIF revenue is usually used for public infrastructure improvements such as roads, crossings and parking. It can also be used for private development in certain situations with state approval.
  • New market tax credits can be sold to create revenue for projects. This incentive requires lenders or other companies to buy the tax credits. The use of these programs cycles with the economy.
  • State tax credits are typically granted to incentivize activity such as job growth, manufacturing, equipment expansion or brownfield redevelopment expenses.

A common approach used by states and local governments is to layer several benefits to provide a multi-faceted and attractive package to a business that is growing or considering a move.

Businesses seeking to take advantage of these benefits – in turn – must fulfill specific requirements for the state or the community. They are:

• • Jobs – creating new jobs or retaining existing jobs
  • Wages, including living wage obligations
  • Capital investment
  • Increased property values
  • Relocation to a particular location or zone
  • Other local priorities such as local business contracting, minority or women-owned business participation

Businesses, especially those located outside a given community, can turn to local counsel for advice on how to navigate through important issues that arise.

It is important to be aware that while many programs are based upon state or federal laws, they often have local rules and policies that can substantially impact the expected benefit. Understanding these rules can help a business maximize the benefit and secure it in a cost-effective matter. Understanding local politics may determine whether the benefit is granted to the business as well as how to pass a “but for” test where a transaction will not progress but for the benefit that must be granted by the local government or board before a benefit can be awarded.

Businesses should understand the benefits that are offered and their sources, the methods to obtain confidentiality when working with state and local governments with open records laws; and the timing required to meet requirements, such as when to hire employees or develop property.

Economic incentives can help businesses looking to grow or move to a new location. But many incentives can be complicated. Having a clear understanding of the granting organization’s expectations is necessary for businesses to reach their desired goals.

Please contact Mark Beutelschies or any member of the Phelps Economic Development team if you have questions or need advice or guidance.