SUBSIDIES AND INCENTIVES

In an effort to sustain or increase economic activity in a region, local officials often offer companies a number of inducements to persuade them to locate in an area. Enticing employers to choose one location over another commonly includes a package of incentives that provides various forms of assistance. Earlier efforts at economic development usually entailed direct monetary assistance. Such incentives came in the form of tax breaks, land grants, job training programs, low-interest loans and other government subsidies.

Industrial incentives quickly became accepted as effective tools for attracting firms and are still considered an integral element of economic development. When first employed, they offered a real financial advantage to relocating firms. However, as incentives were increasingly proposed elsewhere, the playing field was leveled across locations, rendering a package of incentives as an expected and essential aspect of location bidding. Today, most localities have in place a number of programs or incentives that designate certain areas of development as eligible for financial assistance or exemption from tax levies.

Property Tax Subsidy/Abatement

Property tax abatement has become a widely used economic development incentive. Municipalities across the country often will award property tax discounts or complete property tax relief for a specified time period to businesses willing to locate within their borders.

Examples:

- Industrial Property Tax Abatements, Michigan statewide

Industrial property tax abatements are intended to spur renovation and expansion of aging manufacturing plants and new plant construction. They have been extended to high-tech companies. Abatements must be approved by the local units of government and issued by the state. Property taxes on buildings, machinery and equipment are reduced by roughly 50 percent for new facilities and 100 percent for renovation projects and are available for up to 12 years.

Employee Training/Retraining Tax Credits

Job training tax credits seek to offset the costs associated with providing employees the skills needed to ensure stability and facilitate growth in the private sector. They are intended to provide companies with an incentive to invest in the local labor force.

Examples:

- Retraining Tax Credit, Georgia statewide

The retraining tax credit allows eligible employers to claim some costs of retraining employees to use new equipment, new technology or new operating systems. The credit can be worth 50 percent of the direct costs of retraining full-time employees for up to $500 per employee per approved retraining program per year. The credit cannot be more than 50 percent of the taxpayer's total state income tax liability for a tax year. Michigan Economic Development Corporation [online]. For more information: http://medc.michigan.org/miadvantage/incentives/.

Job Creation Tax Credits

Job creation tax credits spur job growth and business development by rewarding businesses for creating new employment opportunities. The tax credits provide financial incentives to companies considering start-up, relocation or expansion in a particular area.

Examples:

- High-Tech Job Creation Tax Credits, Michigan statewide

The Michigan Economic Growth Authority (MEGA) offers tax credits to businesses in electronics, communications, medical science and other high technology fields that devote at least 25 percent of operating expenses to research and development. Each credit may be awarded for up to 20 years and for up to 100 percent of the tax related to the project. These tax credits are designed to attract new, innovative and cutting-edge companies that specialize in new technologies.

They are available to firms doing advanced computing, biotechnology, electronic device technology, engineering and laboratory testing related to product development, medical device technology, product research and development, advanced vehicle technology, or technology that assists in the assessment or prevention of threats or damage to human health or the environment. Michigan Economic Growth Authority [online]. For more information: www.growthalliance.com/incmega.html.

- Economic Development through a Growing Economy (EDGE), Indiana statewide

Economic Development through a Growing Economy is a corporate tax-credit program for businesses that create new jobs by expanding or relocating in the state. The credit may be equal to the percentage of the individual income tax withholding generated by new jobs created. Credits can last up to 10 years; if the credits claimed by a company are higher than the company's tax liability, it will receive a state refund. Regional Economic Development Corporation [online]. For more information: http://www.redco.org/data/edge.html.

- Job Tax Credit, Georgia statewide

The Georgia Job Tax Credit Program grants a tax credit to any business in manufacturing, warehousing and distribution, processing, telecommunications, tourism or research and development industries (retail establishments are not included). Counties and certain census tracts in the state are ranked and placed in economic tiers according to their unemployment rate, per capita income and percentage of residents with incomes below the poverty level. A business' ranking determines the amount of the tax credit it may receive.

Credits are potentially available to companies in certain "less developed" census tracts in the metropolitan areas of the state. At least 30 percent of new jobs created in these census tracts must be held by residents of the eligible census tracts or a county that ranks within the top tier, according to the three criteria. The average wages for the new jobs must be above the average wage of the county with the lowest average wage of any county in the state. Health insurance must be available to employees filling the new full-time jobs, but employers are not required to pay the cost of insurance unless this benefit is provided to existing employees. Georgia Department of Community Affairs [online]. For more information: www.dca.state.ga.us/economic/taxcredit.html.

Research and Development Tax Credits

Research and development tax credits act as incentives for businesses to devote resources to activities that will lead to new, improved or technologically advanced products or processes. This is generally perceived as a key to ensure future economic growth.

Examples:

- Research Expense Tax Credit Program, Missouri statewide

The Research Expense Tax Credit Program seeks to induce existing businesses to increase their research efforts in Missouri by offering a tax credit. Any individual, partnership or corporation may claim a tax credit of up to 6.5 percent of qualified research expenses incurred in the state. The research expenses for the current year must exceed the average amount of qualified research expenses incurred in Missouri during the preceding three taxable periods. The total of the tax credits authorized in a single year cannot exceed $10 million. Missouri Department of Economic Development [online]. For more information: www.ded.state.mo.us/communities/communitydevelopment/finance/links.html.

Free Port Laws

Free port laws have been adopted to reduce costs for business involved in interstate commerce. Such laws may encourage local companies to expand their markets and to compete outside the region.

Examples:

- Free Port Law of Arkansas, Arkansas statewide

Arkansas' Free Port Law eliminates tangible personal property taxes on finished goods manufactured within the state and stored for shipment outside of Arkansas. Goods moving through the state and stored in a warehouse, dock, etc., in transit to a destination outside of Arkansas are also exempt from the tax. Little Rock Chamber of Commerce [online]. For more information: http://littlerock.dina.org/business/taxes.html#fpla.

Sales Tax Credits

Sales tax credits provide an incentive, rather than disincentive, for companies to upgrade and expand their machinery and equipment. This can be important to a company's ability to gain or maintain competitive advantage in a given industry.

Examples:

- Manufacturing Machinery and Computer Sales Tax Exemptions, Georgia statewide

Georgia's manufacturing machinery and computer sales tax exemption eliminates the tangible personal property tax on manufacturing machinery that is purchased to replace or upgrade existing machinery or machinery that is being incorporated into the manufacturing process. The exemption may also apply to the sale or lease of computer equipment to be used at facilities of any high-technology company classified under certain NAICS codes if certain conditions are met. Georgia Department of Community Affairs [online]. For more information: www.dca.state.ga.us/economic/summary.html.

Utility discounts

Utility discount programs have entered the array of incentives aimed at attracting business through cost reduction. They aim to reduce the operating costs of businesses and therefore provide a state or region with an edge in retaining or attracting companies.

Examples:

- Power for Jobs Program, New York statewide

New York initiated a low-cost power program for businesses that agree to retain or create jobs in the state. It makes available 450 megawatts of power provided from the New York Power Authority or purchased by the New York Power Authority through a competitive bid process.

The program is designed to assist businesses that are at risk of closing or downsizing their operations or moving out of the state and have a minimum monthly electricity demand of more than 400 kilowatts. Businesses that anticipate expanding operations, increasing electrical usage and creating new jobs may also qualify. Small businesses with an electrical demand of less than 400 kilowatts and nonprofit corporations may also be eligible to participate. New York Power Authority [online]. For more information: www.nypa.gov/powerforjobs/index.html.

Foreign Trade/Free Trade Zones

Foreign trade zones (FTZ) are established to attract and promote international trade and commerce. They are commerce sites located in or near customs ports of entry at industrial parks or terminal warehouse facilities. Trade zones can be used to store foreign or domestic goods, re-package materials, assemble products, or manufacture or re-export goods without paying customs duties. Merchandise can be held indefinitely within an FTZ without any payment of customs duty. Business can use FTZs to reduce duty payments and streamline supply-chain costs to improve their competitive position in domestic and foreign markets.

Examples:

- Greater Metropolitan Area Foreign Trade Zone, Minneapolis/St. Paul region, Minn.

There are six foreign trade zones in the Minneapolis/St. Paul area. As general-purpose zone sites, they allow for zone users to store, distribute, test, repackage and repair items, often in a reduced or no-duty situation. In addition, processing or re-manufacturing can be done within a general-purpose zone, with the permission of the Foreign Trade Zones board. Greater Metropolitan Area Foreign Trade Zone [online]. For more information: http://www.mnftz.com.

Enterprise Zones

Enterprise zones are designated geographic areas suitable to receive financial and non-financial incentives that will attract private investment. Enterprise zones are generally high-poverty areas that have suffered from years of disinvestment. The incentives available through zone programs vary significantly, but most offer various forms of tax relief or refunds, certain regulatory relief to new or expanding zone businesses, infrastructure improvements in the zone and increased or improved city services to the zone.

Other terms may be used to refer to these areas, including empowerment zones, economic development zones and renaissance zones. There have been several attempts to evaluate the effectiveness of these geographically targeted incentive programs.

Examples:

- Louisville/Jefferson County Enterprise Zone, Louisville Ky.

The Louisville/Jefferson County Enterprise Zone was established to revitalize the area's industrial base and create jobs for its residents. It offers special state and local tax incentives and regulatory relief to new and expanding businesses located within its boundaries.

Certified companies in the Louisville/Jefferson County Enterprise Zone are exempt from the Commonwealth of Kentucky sales tax for purchases of new and used equipment and machinery; motor vehicles for business use; and building materials for remodeling, rehabilitation or new construction. They may also take advantage of a corporate income tax credit allowed for hiring unemployed workers or individuals who have been on public assistance for 90 days or more.

Firms may also receive waivers or reductions of fees associated with new construction, renovation, demolition and signage. An existing business must making capital investments of at least 20 percent of the net fixed assets or increase its work force by at least 20 percent (and 25 percent must come from the targeted work force) to qualify for the enterprise zone incentives.

Businesses that are new to the enterprise zone must draw at least 25 percent of their work force from residents of the zone, unemployed individuals or individuals receiving public assistance. City of Louisville, Office of Business Services [online]. For more information: www.louky.org/obs/enterprisezone.htm.

- Lackawanna Empire Zone, Lackawanna, N.Y.

A one square-mile area within the First Ward of the city of Lackawanna was designated by New York state as an Economic Development Zone. The Lackawanna Economic Development Zone offers various incentives to businesses that expand into or start up in the designated area in order to create jobs and advance or spur community growth and investment.

Incentives include low interest loans, investment tax credit, wage tax credit, utility rate discounts, subsidized job training activities, 10-year property tax abatement, sales tax credit on building materials, and a duty-free foreign trade zone. A company can take advantage of these incentives during the 10 years it is classified as a Zone Certified business by the State Department of Labor and State Department of Economic Development. Lackawanna Empire Zone and Renewal Community [online]. For more information: www.lackawannany.com.

see corresponding section in What Works