smart moves for job retention incentives karin richmond, phd and fm, iedc

Smart Moves for Job Retention Incentives

Karin Richmond, PhD and FM, IEDC

2

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.

3

Most new investment comes from companies already in your city

4

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.

5


• 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.

6


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

7

Ford Motor Companyin Wayne, Michigan

8

Ford Motor Companyin Wayne, Michigan

• The retooled facility, which once built the hefty Lincoln Navigator will build Ford's next-generation 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.

9

Mercedes Benz in Alabama

10

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.

11

Goodyear plant in Topeka, Kansas

12

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.

13

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?

14

Retention Incentives

• Traditional Qualifying Criteria:

– Layoff of permanent employees.

– Threat of plant closure.– Relocation of plant to another state or country.

– Natural disaster damage.

15

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 . . .

16

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.

17

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:

18


• 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.

19


• 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”.

• 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.

20


• 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.

21


Sample Production Requirements for a Retention Incentive

Policy 2009 2010 2011 2012 2013

Increase by

Product Line

Product A 2000 2050 2075 2125 2210 10.50%

Product B 2000 2010 2040 2070 2100 5%

Product C 2000 1980 1970 1960 1950 -2.50%

Product D 2000 2005 2210 2290 2540 27%

Overall Production 8000 8045 8295 8445 8800 10%

10 % Increase in Production - Example

22


• 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

23

Smart practices for job retention incentivesGeorge P.W. Hunt, Arizona Governor 1910

24


• 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.

25

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.

26

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.

27

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.

28

Looking Ahead

• 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.

29

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.

30

Thank You