Retention, Retooling, and Rethinking Incentives in a Jobless Recovery

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Retention, Retooling, and Rethinking Incentives
in a Jobless Recovery
January 21, 2004
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Background

• Ryan Company is the largest independent state
  local tax consulting firm in the United States,
  with the largest transaction tax practice in the
  country.

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Representative Clients
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Representative Clients
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Business Incentives Practice

• Our practice has over 40 years experience in the
  negotiation of state local tax incentives.
  
• The Texas Legislature has consistently relied
  upon Ryan Company professionals for advice on
  incentives policy for 20 years.

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History of Incentives

• Recruitment Incentives
• Primary form of economic development from 1930s
  through 1970s for new investment and new jobs.
  
• Abatements, land, infrastructure training were
  utilized to recruit industry from the
  industrialized northern states to the Sunbelt
  south.
• Retention Expansion Incentives
• Became popular during the recession in the
  1980s.
  
• Started with visitation by community leaders.
• Has evolved to include incentives.
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History of Incentives

• Creation of incentives has followed the economy
  hard times creative incentives
  
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Jobless Recovery

• Not only are manufacturing
• jobs at risk, but skilled,
• technical and IT jobs are
• also being exported.
• NASSCOM, India's National Association of Software
  and Service Companies, estimates that an IT
  professional with three to five years'
  programming experience earns 96,000 in Britain,
  75,000 in America and 26,000 in India.

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Retention Incentives

• Incentives are generally offered to attract
  investment and, at times, to provide employment
  to economically disadvantaged workers.
  
• In a slow economy, the competition for available
  internal capital from HQ intensifies.
  
• Retention incentives improve the profitability or
  ROI of existing facilities, thus making the
  location more attractive for increased capital
  investment.

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Retention Incentives

• Rationale for Retention incentives
• Attract capital maintain property tax values.
• Retain jobs employment taxes.
• Improve plant efficiency insure that the
  facility remains technologically relevant.
  
• Utilize existing infrastructure, often a higher
  profit margin for a public sector investment.
  

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Retention Incentives

• Typical Qualifying Criteria
• Layoff of permanent employees.
• Threat of plant closure.
• Relocation of plant to another state or country.
• Destruction or impairment of facility due to
  natural disaster.
  

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Retention Incentives

• Texas 10 Rules
• 10 increase in overall plant production
  capacity.
  
• 10 decrease in overall plant cost-per-unit.

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Retention Incentives
10 Increase in Production - Example
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Retention Incentives

• Texas has just adopted an even more aggressive
  retention provision for re-tooling
  
• The business facility is both adding a new
  business line or product and deleting or
  decreasing an existing business line or product,
  and the designation will prevent the facilitys
  net production capacity from decreasing.
• From SB 275, 78th Regular Session, Texas
  Legislature

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Retention Incentives

• Newly enacted revisions to the Texas Enterprise
  Zone Program will provide up to 7,500 per job
  with a 3.75 million maximum per business project
  for new or retained jobs.
• Declaring, in effect, that investment is valuable
  to the state whether utilized in the retention of
  existing jobs or the creation of new jobs.
  

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New Texas Criteria
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Retention Incentives

• Retention incentives are not as politically
  sexy as those offered under big announcements
  for new jobs.
  
• Retention incentives may be considerably more
  fiscally responsible.
  
• Retention incentives may leverage the issuing
  governments resources for a net greater impact.

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Retention Incentives

• Federal New Markets Tax Credits
• No requirement to create jobs, just add
  investment
  
• Allows a 39 federal tax credit on capital
  investments made to a qualified Community
  Development Entity
  
• Possible for businesses located in disadvantaged
  areas to fund expansions as a pass-through and
  save on the cost of construction and/or upgrades
  

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States with Retention Incentives
Retention incentives across the country
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Michigan Retention Incentives

• Distressed Business Credit
• Business with more than 150 jobs and reducing
  workforce by 30 or more.
  
• Qualifies for 25 wage tax credit.
• Retention Credit
• Eligible business that makes a capital investment
  of 100 million.
  
• Maintains at least 1,500 jobs at the facility.
• Designed to keep the refrigerator manufacturer
  Electrolux from moving.
  
• Both effective December 29, 2003.

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Ohio Job Retention Credits

• Provides corporate franchise or state income tax
  credit for businesses that commit to retain a
  significant number of full-time jobs.
  
• Businesses that currently employ at least 1,000
  full-time employees and make a fixed investment
  of at least 200 million.
  
• New wage tax credit, up to 75 of withholdings.

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Pennsylvania Retention Incentives

• Pennsylvanias Keystone Opportunity and Expansion
  Zones offer incentives to business that either
  expand employment by 20 or make capital
  investments of at least 10 of the gross revenues
  of the business in the previous year.

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Wisconsin Retention Provisions

• Wisconsin requires that a manufacturing
  business
  
• Retains 100 of its full time jobs in Wisconsin
  
  
• Invests at least 2 of its depreciable assets in
  Wisconsin facilities
  
• Maintains at least 5 million average annual
  investment in Wisconsin, or other criteria.

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Strategic Questions

• Examine your tax structure to identify the
  greatest source of tax liability that
  manufacturers suffer.
  
• For example, corporate income taxes, sales taxes
  on machinery and equipment 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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Strategic Questions

• Identify a selection of programs that have been
  politically expedient and have strong success
  history.
  
• Connect the elimination of the highest tax burden
  with an expansion of an existing program. Use
  the built in stake holders as supporters and
  potential testifiers.

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Strategic Questions

• Reconsider the implicit connection your state
  incentives have with locating in a poor area.
  Make a direct connection between hiring
  disadvantaged workers and tax incentives.
• Make the argument that your state may spend its
  revenue on welfare, or worse, incarceration costs
  OR provide real dollars for companies to hire,
  train and retain disadvantaged employees.

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Infrastructure Incentives

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What role could incentives play in the rebuilding
of our national and regional infrastructures?
 
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Infrastructure Investment

• The American Society of Civil Engineers
  found
  
• One-third of major roads in poor or mediocre
  shape
  
• Energy transmission infrastructure, the grid
  relies on older technology, raising questions of
  long-term reliability
  
• 10,000 megawatts of new electric capacity needed
  annually through 2008

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Infrastructure Investment

• The American Society of Civil Engineers found
• 11 billion shortfall in annual drinking water
  investment, 12 billion for wastewater
  
• 29 of bridges deficient or functionally
  obsolete
  
• 2100 unsafe dams
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Old is New Again

• Urge each of you to consider and discuss your
  community development strategies in a jobless
  recovery.
  
• Loss of jobs to keenly competitive off shore
  facilities.
  
• Recessionary drags on investment decisions
  continue.
  
• Non attainment communities have more
  constraints.
  
• Job retention and infrastructure incentives are
  not likely to be politically driven, but driven
  by professionals like you.
  
• The Next Big Thing in economic development may
  be
  

 
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Back to Basics

• Get Back to Basics
• Installing/Upgrading infrastructure.
• Assist existing companies to expand.
• Develop a skilled work force through training
  programs that teach multiple interchangable
  skills.
  
• Focus on tax phase-in policies which encourage
  retention and investment.
  
• Invite City or County water, road or electrical
  Civil Engineers to join your discussions!
  

 
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• Questions Welcome
• This presentation may be found _at_
• www.ryanco.com