Transcript ncdaonline.org

Smart Moves for Job Retention Incentives
Karin Richmond, PhD and FM, IEDC
New Impetus on Job Preservation
• The American Recovery and Reinvestment Act of
2009 - or the Stimulus Bill - proclaims that job creation
and job preservation are twin tantamount goals of the
stimulus program.
• Savvy economic developers know the value of
sustaining existing jobs.
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Most new investment comes from
companies already in your city
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Pure Retention vs. BR&E Incentives
• BR&E (Business Retention & Expansion) incentive
policies generally require not only jobs to be
“preserved” or retained but new job growth (over
some time period) as a condition of the financial
incentive.
• Both will normally require additional capital
investment over a set time period. Some require the
investment create additional taxable value (certified
by the public appraiser) over net depreciation.
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Pure Retention vs. BR&E Incentives
• Incentives are generally offered to attract investment and to
expand employment rather than to retain or preserve
existing jobs.
– Many times, an outlay in capital may actually
reduce jobs as technology replaces human labor.
– As capital becomes scarce, competition for
available funds for new investment intensifies.
– Retention incentives may improve the ROI analysis,
thus making that location more attractive for
increased capital investment.
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Pure Retention vs. BR&E Incentives
This year, many cities and states have adopted
incentive polices to re-tool or to simply resurrect a
plant from shuttering altogether. Some very current
examples include:
• The Ford Motor facility in Wayne, Michigan
• Mercedes Benz in Tuscaloosa County, Alabama
• Goodyear plant in Topeka, Kansas
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Ford Motor Company
in Wayne, Michigan
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Ford Motor Company
in Wayne, Michigan
• The retooled facility, which once built the hefty
Lincoln Navigator will build Ford's nextgeneration Focus, expected to roll off the line
next year.
• The plant will also build a new battery-electric
version of the Focus. That vehicle is expected to
debut in 2011.
• The state of Michigan approved $159.4 million in
tax incentives in anticipation of a $400 million
investment designed to retain 3,200 jobs.
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Mercedes Benz in Alabama
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Mercedes Benz in Alabama
• In Tuscaloosa County, Alabama, the Tuscaloosa
Industrial Development Authority approved an
$11.5 million tax abatement for $290M new
capital investments, plus a $150K grant for site
preparation, for Mercedes-Benz to expand its
facilities in March 2009.
• This decision was made, in part, to prevent
further job losses and to keep the facility in the
running for a new generation of vehicles.
• No new jobs were required for the incentive deal
even in the light of recent job losses at the plant.
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Goodyear plant in Topeka, Kansas
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Goodyear plant in Topeka, Kansas
• Kansas and Goodyear Tire & Rubber Co. have struck a
deal on $14.2 million in incentives to retain up to 1,400
employees for 10 years
• The incentives will allow $250 million in equipment
upgrades at its Topeka truck and tire plant.
• Kansas Department of Commerce agreed to issue bonds
to cover the cost of retraining Goodyear employees,
paying off the debt with payroll taxes collected from
company workers.
• Goodyear officials had said that without the upgrades, it
might have had to cut 700 jobs – or worse.
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What is your community policy
on job retention?
• Does your city have a retention tax incentive policy in
place?
• Does your state have a retention policy?
• Is it a pure retention tax incentive? Is it another type
of financial incentive - like grants, infrastructure
improvements, fee waivers?
• Are you considering such a policy move? Why?
• Is there any organized opposition?
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Retention Incentives
• Traditional Qualifying Criteria:
– Layoff of permanent employees.
– Threat of plant closure.
– Relocation of plant to another state or country.
– Natural disaster damage.
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Retention Incentives
• Rationale for Retention incentives:
– Attract new capital investment.
– Keep jobs.
– Protect and sustain tax revenues: property taxes,
employment taxes or payroll taxes.
– Improve plant efficiency and insure that the facility
remains technologically relevant.
– Like the strategy Tuscaloosa County used for
Mercedes Benz . . .
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Strategic Questions
• Examine your local and state tax revenue streams.
• Corporate income taxes, payroll taxes, sales taxes on machinery
and equipment, property and school taxes.
• Establish your average, low and high ranges of existing
manufacturers employment. Use those statistics to develop your job
retention levels.
• Forecast capital investment expenditures and establish low,
medium and high dollar brackets.
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Smart practices for job retention
incentives
• The current recession compels us to pay greater
attention to sustaining and preserving existing jobs
and businesses.
• Retention incentives can be a key tool for supporting
your businesses through tough economic times.
• Here are ten suggestions:
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Smart practices for job retention
incentives
• Take a multilateral approach to finance the incentives
- leverage state funds and local abatement programs
to maximize impact.
• Insure they are contingent on retaining jobs for a
fixed time period – for example, three to five years.
• Establish a baseline number of existing employees
prior to the submittal of an application to a taxing
authority.
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Smart practices for job retention
incentives
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Use clawback clauses (recapture) with vigorous enforcement - for
maximum effectiveness and public trust.
• Consider annual job retention certification as the NY Empire
Zone Program instituted to combat “shirt changers”.
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Retention needs often are immediate. Consider front loaded grants, tax
refunds, or forgive payroll taxes rather than long term property tax
abatements.
• Tax credits may not be of value to businesses that are
operating at a loss.
• Adopt shorter term horizons for performance based support.
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Smart practices for job retention
incentives
• Require significant capital investment which is likely
to increase the value of your property tax rolls in
future years and keep the facility technologically
relevant.
• Attach retention incentives to production efficiency
metrics, i.e., an increase in production capacity or a
decrease in cost of per unit production.
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Smart practices for job retention
incentives
10 % Increase in Production - Example
Sample Production
Requirements for a
Retention Incentive
Policy
Product A
Product B
Product C
Product D
Overall Production
2009
2010
2011
2012
Increase
by
Product
2013 Line
2000
2050
2075
2125
2210 10.50%
2000
2010
2040
2070
2100
2000
1980
1970
1960
1950 -2.50%
2000
2005
2210
2290
2540
27%
8000
8045
8295
8445
8800
10%
5%
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Smart practices for job retention
incentives
• Use of standardized areas that professionals can easily access
on the web, such as census tracts and block groups.
• Target your core jobs, especially manufacturing, industrial and
distribution companies.
– Wisconsin has just instituted a new meat-processing tax credit and
a new dairy manufacturing cooperative tax credit.
• Be prepared for controversy – seems to be a growing malaise
spreading around the country for government handouts.
• Kelo v. City of New London
• Cuno v. DaimlerChrysler
• Now, Turken v. Gordon at the Arizona Supreme Court
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Smart practices for job retention
incentives
George P.W. Hunt, Arizona Governor 1910
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Smart practices for job retention
incentives
• Turken v. Gordon currently at the Arizona Supreme Court.
• Challenging “Old Walrus’s” Gift Clause in Arizona’s Constitution
for incentives granted by the City of Phoenix for CityNorth –
huge outdoor mall development.
• Unanimously overturned the lower ruling by the Arizona Court of
Appeals.
– at issue is the state gift clause vs. public purpose clauses
• New York, Maryland and 34 other states have gift clauses
similar to Arizona’s – WSJ, June 6, 2009.
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The Texas Enterprise Zone Program
• The Texas Enterprise Zone program is the most
widely used business tax incentive in the state.
– The Legislature just reallocated this program.
– 105 businesses may be designated every 2 years.
– Hundreds of companies through out Texas are
currently participating in the program.
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Participation Requirements
• Communities may nominate businesses for five years.
Employment and capital investment commitments must be
incurred and met within this timeframe.
• Projects may be anywhere – no geographic limitations.
– If located within a poverty tract, the company commits that at
least 25% of their new employees will meet economically
disadvantaged or enterprise zone residence requirements.
– If located outside of a poverty tract, then at least 35% of their
new employees will meet economically disadvantaged or
enterprise zone residency requirements.
• A business may be granted sales tax incentives for job
retention – no new jobs required.
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Potential Value to a Company
• Any state sales taxes paid in the construction and
operations may be refunded to an approved business
for 5 years, up to $750,000.00 a year.
• Each single project has a refund potential of
$2,500.00 of state sales tax per full time job either
newly created or already existing.
• While this is a back end refund, the company can get
this incentive in as little as six months.
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Looking Ahead
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The stimulus package did not include a federal tax credit for businesses
that create jobs in the United States.
But such a provision was part of the original plan proposed by the
Obama transition team before the president took office and is often
cited as a potential addition to the federal government's arsenal of tax
incentives.
The federal government has some experience with EZ and WOTC
directed at federal zones or economically disadvantaged new hires.
22 states currently have broad, statewide job creation tax credits
(JCTCs) and about another dozen have narrow JCTCs targeting
specific industries or specific geographic zones.
Only a handful of states have job retention tax credits or incentives in
place.
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Looking Ahead at the local level
• “While financial incentives do in many cases help tip the
relocation equation, they are only one piece of that equation.
Governments that act consistently and coherently to support
local businesses across all aspects of economic development –
financial, regulatory and others – will likely be the ones that
ultimately succeed in attracting and retaining successful
businesses.”
– Josh Boger, CEO, Vertex Pharmaceuticals, as quoted in
“Managing Business Expansion Despite the Headlines”, ED
Now, May 2009.
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Thank You
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