Incentives Still Hot

Here is a good national overview of economic development incentives and what businesses have to say about them.

U.S. companies report that they have been increasing their use of economic incentives and tax credits from state and local governments for expansion, consolidation and relocation activities, but most still believe they have not realized many of the benefits available to them, according to a survey by KPMG LLP, the accounting and tax firm.

Additionally, the majority of companies surveyed said that the presence of economic incentives and tax credits, such as those used for the creation of jobs and sales tax exemptions, are critical factors in strategic corporate real-estate decisions. At present, all 50 states offer some type of incentives or tax credits to companies that choose to expand or relocate within the state, providing a boost to employment and eventually corporate tax rolls.

Among key findings, 63% of respondents said their companies increased the use of incentives and tax credits in the last five years, utilizing state and local credits significantly more than federal credits. Surprisingly, though, 65% indicated they realized three-quarters or less of the dollar value of the benefits available, citing "not acting to qualify" and "lack of awareness of benefits" as major reasons.

Despite the fact that companies aren't taking full advantage of available benefits, 55% of those surveyed felt that incentives and tax credits play a critical role in making final strategic decisions for expansion, relocation and consolidation. Incentives and credits are particularly important in decisions on capital expenditures (35%), real estate portfolio management (30%), mergers and acquisitions (30%), business expansion (28%) and business relocation (28%).

Job creation tax credits (64%) and sales tax exemptions (63%) were the most used state and local incentives and credits, followed by property tax abatement (52%), enterprise zone tax credits (51%), and job training/retraining benefits (5 %). On the federal level, credits were used most by companies for research (39%), worker/welfare-to-work programs (33%), and empowerment zone initiatives (26%).

A total of 79% of respondents said they have been involved in consolidation (to cut costs), expansion (for growth), or both, over the past two years. Expansion activity was significantly higher than consolidation during this period and is expected to be higher in the next year.

Most companies said they were optimistic about future expansion. Some 78% of those who spent $10 million annually at a single location in the last two years plan to spend $10 million at another location in the next year. A majority of firms also believed the U.S. economy will grow over the next 12 months and that their industry in the U.S. will expand over the same period.

Automotive firms are ahead of other industries surveyed in realizing credit/incentive opportunities (95% believe they are receiving all benefits available to them); however, they still struggle with the administrative burden of securing incentive benefits.

Banking firms plan to expand more in the next 12 months than other sectors surveyed, but only 11% said tax credits and incentives are a major influence in real estate decisions. The survey also indicated that banks are taking advantage of statutory and compliance-related incentives and credits, but not those that are negotiated.

Although the majority of consumer products firms have increased their use of incentives and tax credits over the past five years, most have realized less than 75% of the dollar value of available benefits.

For the retail industry, resource constraints have been the largest barrier to incentives and tax credits.