The Tax Cuts & Jobs Act of 2017 ushered in a renewed interest for business expansion and real estate development in the U.S. from both domestic and international businesses and investors. This was largely based on the Act’s reduced federal income tax rates and the elimination of many incentives for companies to expand or operate overseas instead of in the U.S.
While the COVID-19 pandemic has completely changed the economic landscape worldwide, one likely consequence of the pandemic should be a new focus on sourcing production, manufacturing, R&D, and distribution to U.S. locations. This new focus will result in increased demand and capacity for physical plants, labs, offices, distribution centers, and other commercial facilities. As a result, state and local governments are expected to implement a host of new tax or non-tax related incentive programs to attract this new economic activity and associated tax revenue.
Historically, competition among U.S. states and localities to attract new investment and employment has been fierce with economic development agencies awarding large-scale incentives that can reduce taxes and other costs of operation or subsidize project costs. This practice should continue in the future, albeit in a somewhat different manner in the short-term due to the pandemic.
Given the significant economic toll COVID-19 has had on most regions of the U.S., state and local economic development agencies or revenue departments will likely need to craft new incentive programs that could be somewhat scaled back initially and more targeted (by industry/level of job creation or investment) from previous programs. Alternatively, future incentive programs could be more performance-based, yielding a benefit to the awardee only when new measurable tax revenues are generated by a project. Furthermore, the federal government will likely inject significant dollars in state coffers, whether in direct aid or indirect assistance, to be used to help subsidize and incentivize new production, R&D, and development projects.
What appears clear is once states open up their economies, the interstate race for economic development in the U.S. should continue or may even intensify, which will benefit businesses looking to expand or relocate in the country. The competition will likely still be fueled with an array of incentives and benefits, including:
Potential Non-Tax Incentives
Potential State and Local Tax Incentives
Some incentives are available without prior approval, while other (usually more lucrative) benefits require some form of prior application and approval. Often, the jurisdiction awarding the incentives will require a certification that the incentive(s) played an essential role in that company’s location decision. This may even include a requirement that there be an actual competition between prospective locations with competing incentive proposals. This is why it is important to not execute any binding commitments, such as a lease or purchase contract, prior to being awarded an incentive.
In light of these considerations, the incentives process must begin early; preferably at least 12 - 18 months prior to a proposed relocation or expansion.
Once a business assembles a list of viable locations based on non-incentive related criteria, the next step is to assess the potential tax and economic development incentives available in each location. After the list of locations has been refined based on tax and incentives considerations, discussions typically begin with the jurisdiction(s) under consideration.
Following a brief review of the project, the jurisdiction will present an offer of incentives and invite a formal application to be submitted by the business. Once the incentive application is approved, there may be a public vote or authorization by the awarding governmental body.
When analyzing potential tax incentive programs, it is important to evaluate whether the business will be able to use the particular incentive based on having meaningful tax liabilities. If an awardee business is not able to utilize the tax incentives, numerous jurisdictions permit businesses to sell or carry forward unused tax credits and other tax benefits. This provides businesses with an opportunity to monetize or utilize tax credits and benefits that could otherwise expire during early years when the business or project may be generating losses.
A final consideration for incentives is the mandatory compliance, which often involves annual reports on project status and number of employees. In light of this, having a reliable payroll reporting system and maintaining invoices from the capital investment component of the project are both essential in securing and claiming the incentives or benefits.
The types of incentives states and localities will be offering post-COVID-19 are currently being discussed and evaluated in state capitals, city halls, and economic policy circles across the U.S. It is critical for businesses (or their advisors) to stay abreast of current and future legislation in this area. Obtaining economic development incentives is a unique process because it involves the interplay of different skill-sets and disciplines, such as state and local tax expertise, economic development, government affairs, real estate, and workforce development etc. While the process may seem daunting, the rewards can be significant. That is why having the right team of advisors in place is an essential component of participating in the interstate race for economic development incentives.