Top 5 Economic Incentives Trends Globally
With an uncertain economy still recovering from the global pandemic, businesses are navigating a dynamic landscape for economic incentives. Over recent years, many governments and economic development organizations around the world have been embarking on an incentives arms race. Since the onset of COVID-19, the economic incentives awarded on an annual basis skyrocketed from USD$60 billion to USD$2 trillion globally.
This new era of economic incentives finds expanded targeting of specific domestic sectors, programs developed to address sustainability and green initiatives, implemented measures to ensure compliance and ROI to taxpayers, significant funding for infrastructure investments, and modified rules to ease the process for capturing incentives.
Important to note, however, that not all governments have expanded their incentive programs during this dynamic period. In the United States, for example, the State of Florida has allowed for key programs to expire, like the Qualified Target Industry Tax Refund (QTI), which was never reinstated since sunset in 2020.
Targeting Domestic Sector Investment
Even the casual local news watcher has heard of the behemoth, transformative incentives legislation approved by the U.S. Congress, the CHIPS Act. Developed to specifically target investment in America’s domestic semiconductor industry, the CHIPS Act included unprecedented funding programs. Led by a USD $52.7 billion initiative for American semiconductor manufacturing, R&D, and workforce development, the legislation set off a firestorm of competitive laws around the world.
To date, according to research by the Semiconductor Industry Association (SIA), the CHIPS Program Office (CPO), a federal entity, has announced that eleven companies will receive USD $29.6 billion in grants and up to $25.1 billion in loan financing in CHIPS funding. These awards cover a reported twenty projects across a dozen states.
Since passage of the CHIPS Act, major economies such as Japan, Taiwan, China, Canada, South Korea, and the European Union (EU), among others, have either established or are currently developing their own initiatives to encourage greater domestic chip production, often incorporating economic incentives.
The EU has earmarked over €4 billion from the Horizon Europe and Digital Europe Programmes, with the expectation that Member States will match this contribution. The goal is to mobilize an additional €43 billion in private investments.
Notable beneficiaries include Intel: their €33 billion investment in Magdeburg, Germany and an investment of over €4.6 billion in Poland (Wroclaw), both creating thousands of jobs and contributing to the EU’s semiconductor strategy. Learn more about the EU Chips Act, along with more recent incentives shifts in Europe, in our latest report.
Beyond semiconductors, governments and economic developers are targeting industries such as electronics. India has had a successful program known as a Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing, which provided significant incentives to drive domestic production, particularly for the mobile phone sector and other consumer electronics. The PLI has since sunset, but expectations are for the program to be reinvigorated later this year.
DRIVING A SUSTAINABLE AND GREEN FUTURE
With increasing demand for sustainability and green initiatives, governments around the world have expanded and introduced economic incentives to drive new investments. With major legislation at the national level, like the Inflation Reduction Act (IRA) in the United States, economic incentives are targeting everything from increased deployment and domestic manufacturing of renewable energy sources, decarbonization from major sources, including industrial users, and energy efficiency and green development.
As noted, the IRA legislation completely shifted the landscape for government funding support for green and sustainability investment. The law, signed in 2022, enacted significant tax credit extensions and expansions for renewables, particularly solar and wind, while also including additional technologies, such as biogas, into the fold. Further, the legislation created new tax credits for the domestic production of clean energy components, established and increased energy efficiency credits and deductions for residential and commercial purposes, expanded incentives for electric vehicles (EV), and allocated robust funding for clean energy financing, climate resiliency grants, and sustainable agriculture.
Similar to the response after passage of the CHIPS Act, other nations started enacting their own legislation to drive domestic green initiatives. In a significant move to bolster the green and digital transition of its economy, the European Commission in March 2023 amended their rules. Until December 31, 2025, member states can offer aid to support the transition to a zero-net emission economy. This includes accelerated implementation of renewable energies and decarbonization of production processes. Additionally, investments in strategic sectors like battery production, photovoltaic panels, wind turbines, heat pumps, electrolyzers, and Carbon Capture, Utilization, and Storage (CCUS) technologies are encouraged.
The Canadian government was the latest to approve economic incentives in the race for a green and sustainable future. Known as Clean Economy Investment Tax Credits (ITCs), the government has set out $93 billion in economic incentives through 2035 to drive towards a net zero future. The initial Clean Economy ITCs to be passed into law include the Clean Technology ITC, the Carbon Capture, Utilization and Storage (CCUS) ITC, the Clean Technology Manufacturing ITC, and the Clean Hydrogen ITC. The Clean Technology ITC and CCUS ITC should be available this fall, with additional insights and rules to be released for the others later this year.
ENSURING TAXPAYER RETURN ON INVESTMENT
As economic incentives programs expand around the world, governments have also introduced measures to ensure an adequate ROI for their taxpayers. Applying more scrutiny and reporting, along with public-accessible databases, governments have developed additional compliance mechanisms to do just that.
For example, in order for a business to claim tax credits under the Inflation Reduction Act (IRA), the investor must provide direct evidence of the respective investment – whether for energy efficiency or renewable energy installations. State and local governments and economic development organizations also required documentation to receive benefits, typically focused on proving out job creation and capital investment.
Over recent years, governments have also instituted modeling and best practices to evaluate the effectiveness of their incentive programs. In the United States, the National Conference of State Legislatures developed a catalog of the various evaluation policies and models deployed across the country: NCSL State Tax Incentive Evaluations Database
Having an economic incentives administration + management program for a business is essential to ensure the company is able to effectively ensure compliance. According to Hickey research data, as much as 73% of incentives that are awarded are ever actually received by businesses. This shortfall can be due to companies not meeting their performance targets; however, often this gap is because the business doesn’t have an effective compliance process in place.
INVESTING IN INFRASTRUCTURE
To drive economic development and growth, there is perhaps no better investment than in core infrastructure. Roadways, ports, rail, broadband, power, wastewater… these are all critical to the future of the global economy, and in many corners of the world – are in desperate need of an upgrade.
Investments in infrastructure can often be overlooked in consideration for economic incentives to support investment and job creation. With trillions of dollars currently being invested and coming into fruition soon, states and provinces, utilities, counties, and municipalities are leveraging these funds for business attraction and retention.
Among the many programs and initiatives from the American Rescue Plan Act (ARPA), an economic stimulus measure passed by U.S. Congress, a State and Local Fiscal Recovery Fund was established. This program allocated nearly $200 billion in funds for pandemic recovery operations, including infrastructure. According to NCSL research, approximately 25% of that funding was allocated to infrastructure investments.
Existing programs are also often overlooked where communities can pursue federal dollars to support economic development, including Community Development Block Grants (CDBG) and Economic Development Administration (EDA) funding. Further, a number of states and provinces, counties, municipalities, and utilities have established their own programs to support infrastructure requirements tied to business investment projects.
STREAMLINING THE INCENTIVES PROCESS
While ensuring economic incentives are targeting sectors, certain initiatives, and providing a sound ROI, governments and economic development organizations are also implementing measures to help streamline the process. These changes are necessarily enacted to make it easier, but instead to ensure the bureaucratic process doesn’t hamper the opportunity for investment.
Across the major economic development initiatives set out in recent years, including many mentioned in this blog, direct, purposeful language was inserted to make certain companies of all shapes and sizes may be eligible. In addition, the programs have inserted language to provide opportunities to those which may not have had the same level of representation in the past. These policies are often in the form of a bonus in application scoring for competitive grants, or even as a carve-out based on legislative intent of the program.
Lawmakers in the State of Illinois made an adjustment to one of their primary incentive programs that went unnoticed by most. Within the application for the Economic Development for a Growing Economy (EDGE) Tax Credit program, a company pursuing the popular incentive had to complete a table providing key data inputs for an alternative, competitive site in another state. Legislation has effectively removed this section. While a company still has to provide certification that the tax credit is primary to their location decision, the business does not have to provide additional details to their business case.
For more information on the key trends impacting economic incentives around the world, or to explore how your business may evaluate the opportunity for your next investment, connect with our Hickey Incentives Team today!