Hickey Wrote the Chapter on Incentives - SelectUSA Investor Guide
Introduction To Economic Development Incentives
When businesses consider expanding or investing in new locations, economic development incentives can play a crucial role in their decision-making process. These incentives provide financial support to minimize upfront costs and accelerate the path to profitability. However, understanding the intricacies of economic development incentives can be challenging. In this blog post, we will summarize chapter 11 in the SelectUSA Investor Guide, Economic Development Incentives - An Introduction to Incentives in the United States, that we had the honor of writing based on our expertise and together we will explore the world of economic development incentives, their types, and how businesses can secure and optimize them for their growth and expansion.
Economic development incentives, also called business incentives, are financial resources provided by government agencies, economic development organizations, and utilities to attract and retain businesses in specific communities. These incentives, offered in exchange for job creation, investments, and other contributions to the local economy, take various forms like tax credits, grants, and infrastructure support. Evaluating these incentives involves considering factors such as type, amount, restrictions, and government administration. It's important to note that incentives are project-specific and not universally available. To navigate this complex landscape, businesses should engage in ongoing conversations with specific locations and narrow down options before exploring incentive packages.
Thorough research and due diligence are crucial before exploring economic development incentives. Understanding the true value and associated commitments is essential for effective evaluation and securing of incentives. Incentives vary across jurisdictions, each with its own rules and regulations. Businesses should develop a strategic approach and action plan aligned with their short and long-term goals. It's important to review the urban or rural nature of the investment, as the approach and value of incentives may differ. By assessing available tools and resources in specific locations, companies can make informed decisions about incentives that align with their investment projects.
The Partners & Types of Economic Development Incentives
Economic development incentives in the United States are typically delivered through public-private partnerships. These partnerships involve the recipient business, government agencies at the state and local levels, and utility providers. State governments offer tax incentives, cash grants, and financing assistance. Local governments have varying authority and offer incentives such as tax exemptions and property tax abatements. Utility providers support growth through infrastructure assistance, energy efficiency rebates, and reduced power rates. The federal government provides funding, financing, and grants for infrastructure, workforce training, and small businesses, often in collaboration with state and local jurisdictions. Here are some of the most common types of incentives offered:
Corporate income tax incentives: The approach to corporate income tax varies by state and local government, and businesses should consider tax liabilities created by the project and company's operation, incentive period, and refundable tax credits.
Consumption tax incentives: Some incentives leverage exemptions of consumption taxes, and businesses must be aware of the specifics of their investments and equipment to assess the opportunity.
Workforce tax incentives: Many states and local governments levy taxes on employment through payroll taxes and offer incentives that reduce or eliminate this tax burden.
Grants: Businesses can be awarded different types of grants from various entities such as the federal government, state agencies, and regional economic development stakeholders.
Infrastructure: Economic developers can leverage federal and state government funding for a project and ensure infrastructure availability.
Lending and Finance: Economic Development Organizations (EDOs) provide financing support to small and mid-sized businesses investing in the US.
Job Training: Job training incentives benefit the community and investing business, and businesses may receive reimbursement for eligible training activities.
Complex incentives: Federal government programs can support development and financing, but due diligence and legal structuring are required to effectively utilize such incentives.
The Process to Secure these Incentives
As we know, securing economic development incentives can be challenging, but a strategic approach can expedite profitability, reduce risk, and contribute to economic growth. Here are the key steps for navigating the incentives process:
Research and Model: Define the project scope and evaluate potential incentive options by developing a financial model.
Economic Development Engagement: Engage with officials from shortlisted communities and secure non-disclosure agreements to protect proprietary information.
Information and Data Disclosure: Work closely with advisors and partners to provide accurate information related to the project, including job creation, capital investments, and anticipated tax generation.
Negotiation: Ensure incentives packages align with business goals and unique requirements of the various economic development stakeholders.
Legal Documentation: Formalize the agreement and commitments through legal documentation with proper legal representation.
Project Announcement: Coordinate with partners for a well-orchestrated announcement that aligns with the business's message and mission.
Incentive Compliance & Aftercare: Meet reporting requirements to receive incentives and develop an aftercare plan to manage compliance effectively.
By following these best practices and working with trusted and qualified service providers like Hickey & Associates, businesses can secure incentives and maximize their benefits.
Concluding Thoughts & Takeaways
Economic development incentives should be viewed as a collaborative partnership between businesses and the community, recognizing economic development officials as valuable allies. Once incentives have been secured, it is crucial to prioritize compliance and establish a comprehensive aftercare plan. This may involve seeking assistance from qualified service providers, including legal counsel, to navigate potential legal risks associated with incentive agreements. Coordinating messaging with economic development partners prior to public announcements can generate enthusiasm and excitement, benefiting job recruitment and overall business development efforts. While incentives play a significant role in location decisions, businesses should consider a range of factors, such as labor availability, logistical considerations, operating costs, and customer proximity, to make informed decisions. In complex incentive processes, involving trusted service providers can help alleviate the time-consuming burden on businesses while providing specialized knowledge and expertise to optimize outcomes.
By understanding the types of incentives available, conducting thorough research, and engaging in strategic negotiations, businesses can secure and optimize incentives for their projects. Collaboration with government agencies, utility providers, and economic development organizations is key to navigating the incentives process and ensuring long-term success. Economic development incentives, when approached as a partnership, can fuel business growth and contribute to the overall economic prosperity of communities.
To read the full chapter, Economic Development Incentives - An Introduction to Incentives in the United States, that Hickey and Associates very own U.S. Managing Director, David Hickey wrote, visit SelectUSA Investor Guide and look out for chapter 11.