One of the most difficult challenges for leaders offering incentives is “How much is enough?” Negotiating the type and amount of incentives to offer businesses is complicated by not knowing the types and amount of incentives being offered by others. Rather than devolving into bidding wars, regions should use incentives to accomplish clearly defined regional goals as part of the overall economic development strategy.
Performance agreements define performance criteria and then make the incentives contingent on achieving those outcomes. Signed performance agreements between the jurisdiction and the firm may not be necessary for statutory incentives (i.e., taxes provided by right in law but that require the firm to report something in exchange such as the creation of jobs or the payment of wages above a certain level), but it is good policy to have a documented mechanism for tracking recipients of statutory incentives. Monitoring statutory tax incentives may require a collaborative arrangement with the relevant taxing authority.
- Orient prospects to financial incentive philosophies and program resources
- Provide prospects with documented standard terms and conditions associated with receiving the incentive (including mandatory performance reporting requirements)
- Initiate incentive application process and acquire verified company financials and project pro forma
- Conduct due diligence to ensure veracity and capacity of the client to deliver on promised community benefits
- Conduct underwriting of the project to assess eligibility, need, incentive size, and anticipate return on investment
- Negotiate discretionary components of the incentive (include appropriate measures and clawback provisions)
- Prepare an agreement that delineates all company performance requirements in exchange for the incentive
- Ensure the agreement is fully signed and enforceable
Houston embraces “community benefit” reforms for city incentives
Companies seeking tax breaks from the city of Houston must choose from among a set of potential community benefits to provide in exchange for city business incentives. Among the negotiated requirements to receive city incentives include: give construction workers safety training, advertise jobs to ex-offenders in the city’s re-entry program, provide affordable housing if the project is a residential development, try to hire workers from poor neighborhoods and the area around a project, offer paid internships for low-income students, develop site designs that aim to reduce crime for instance, by adding extra lighting, and incorporate site improvements that benefit more than the business itself. Houston Chronicle, 2018
Checklists and Guides
Eric Zolt, Tax Incentives and Tax Base Protection Issues: Top Ten Abuses of Tax Incentive Programs (2015). This list (Slide 31) cites different ways that businesses can abuse financial tax incentives, which is useful in designing and negotiating incentives with prospects.
Tips for Maximizing Public Investment: Cost Benefit Analysis
When making a decision, cost benefit analysis offers a way to estimate the strengths and weaknesses of various alternatives investment options. This helps regions mitigate risk.
In general, business incentives have higher benefit-cost ratio if they:
- Document decision-making for more sensitive decisions (e.g., all else being equal or “but for” the incentives)
- Lower the net present value of public costs by targeting new capital, making incentives more upfront, or delivering incentives via cost-effective services
- Invest in export-base firms with high economic multipliers and high worker wages
- Target resources to high unemployment areas
- Emphasize hiring of the local non-employed in areas with excess labor
For a detailed discussion of 10 Steps in Conducting Cost/Benefit Analysis, go to: GovLoop.com
Voice of the Practitioner
Ellen Harpel, President, Business Development Advisors and Founder, Smart Incentives