Playing the Incentives Game

“You can’t get businesses to think about moving without them, and states that don’t offer them are handcuffed from making any major strides in getting businesses to move to their state,” says Jerry Kremer, chairman of Empire Government Strategies, a Uniondale, New York-based economic-development consulting firm and former state legislator.

“Tax incentives are one of the most important things in our [closing] arsenal,” adds Reed Hall, CEO of Wisconsin Economic Development.

Robert Hess, an executive managing director of site consultant Newmark Grubb Knight Frank’s global corporate services practice, argues that the appeal of incentives simply comes down to the bottom line. “If they can move the internal rate of return to 15.1 percent from 14.7 percent on an operation, for instance, it helps make the financial case, and that’s always what’s most important.”

Surprisingly, however, even after going to great trouble to garner financial incentives for site-selection deals, the vast majority of such benefits actually go unclaimed “because companies don’t understand the reporting requirements and don’t file claims properly, or there’s a loss of transition with a change in management,” according to Angela Lockman, a vice president in the workforce-solutions unit of Equifax.

On the other hand, state officials don’t want to be taken by companies and discover a few years down the road that the recipient of huge incentives hasn’t undertaken the expansion or hired the number of employees agreed to. That’s why the number of “clawback” clauses in incentive agreements has multiplied. But so far, in most places, poor monitoring and inadequate measuring sticks have kept states and cities from calculating their true returns on such “investments.”

And here’s a dirty little secret: Sometimes, states really don’t care about actual ROI on incentives because the relatively intangible benefits of being perceived as a serious player in the economic-development game may outweigh the tangible costs.

“Sweeteners can get obscene because states are so anxious to prove they can attract business,” says Kremer of Empire Government Strategies. “Sometimes the only thing they won’t offer is regular haircuts for the executives.”

2013 Best & Worst States for Business Links

2013 Best & Worst States for Business – Homepage
States More Aggressive in Competing With One Another
California Dreaming
Playing the Incentives Game
8 State Advocate CEOs
How CEOs Grade the States
Click here to see a slideshow of the 10 Best States for Business in 2013
Click here to see a slideshow of the 10 Worst States for Business in 2013