Strolling around his desk wearing a wireless headset, Governor Rick Scott of Florida cold-calls chief executives. After chatting about sunny weather, white sand beaches and lifestyle amenities, the governor launches into pitch mode, proclaiming Florida the country’s best place to operate a business. (Chief Executive’s “Best & Worst States for Business” ranks Florida first in the Southeast, and second in the country, behind Texas.)
The talk is backed by cold cash. Last year, Florida spent nearly $4 billion on incentive programs, according to the New York Times’ national database. Florida’s generosity makes it the most welcoming state in the Southeast. Sales tax waivers and job-creation tax credits are available. Several funds, including allocations to provide worker training and to reduce closing costs, are also available.
During the first two quarters of this year, the governor’s direct appeals have lured nearly 80 companies down south, from aerospace giant Northrop Grumman to a local brewery, Grayton Beer Company. Northrop Grumman opened manufacturing facilities and has hired about 1,000 workers; Grayton added about 40.
Scott likes to bring up other topics that make the case for Florida as a manufacturing state. That case includes the pipeline of young workers and managers coming out of universities and technical schools, transportation and logistics positioning with access to multiple deep-water ports, rail, truck and jet service, the absence of a personal income tax and a government’s making good on its promise to be business friendly.
Florida ranks high in other key criteria. Its corporate tax rate tops out at 5.5 percent, lower than all but three regional neighbors. A right-to-work state, Florida offers full corporate-tax rebates based on investment size, work force hiring quotas, target-industry criteria and geographic location. Add discretionary deal-closing grants, training grants and job-creation rebates and Gov. Scott’s waiting to shake your hand.
Aiming to eclipse its old hospitality-industry/retirement-living image, the Sunshine State has embraced the global economy. Business services now comprise the largest employment category, ranking second in the U.S. Jobs in transportation and logistics have boomed—in this, Florida is third-ranked—as the state leverages its location as portal into South America. Additionally, the boom in banking, insurance and credit-industry jobs establishes Florida as fourth-ranked nationally in that cluster.
Over in Louisiana, Governor Bobby Jindal is making a similar case for the Pelican State. Like Scott, Jindal has expanded the state economy’s dependence on subsidized recruitment. His economic inducements, many deployed to rebuild or lure back businesses washed away by Hurricane Katrina, represent 21 percent of state outlays. George Gsell had relocated his 80 year-old water filtration company, MECO, to Houston after Katrina destroyed its facilities and inventory in Covington. Gsell recalls being pursued by the state’s business relocation advocates, known locally as “the Fast Start boys.” Although the invitation was sweetened with at least $5 million in incentives, Gsell contends that Louisiana’s “home boy” work force was the real deal-maker. “In Houston,” he says, “we were just another company looking for engineers. The big oil and gas companies pretty much got them all.”
Gsell isn’t the only chief smitten with Louisiana’s pro-business climate; CEOs nationwide rank Louisiana 11th in the nation, a steep climb from its 47th ranking in 2006. A hiring spree in construction, oil and gas, business services and transportation and logistics helped revive an economy battered by losses in oil and gas, tourism, aerospace, financial services and apparel. Last year, KPMG’s Competitive Alternatives looked beyond the complexity of the state’s byzantine tax structure and ranked New Orleans and Baton Rouge among the most cost competitive cities for their sizes. Jindal says tax reform is his No. 1 goal.
North Carolina earned a No. 3 ranking in Chief Executive polling. With three of the state’s top traditional industries—tobacco, furniture and textiles—in decline, economic development proponents tout the Research Triangle to IP-oriented businesses seeking smart workers, good infrastructure and location to lure investment. While the Triangle and other developed areas have become choice addresses for a wide variety of service firms, research operations, financial players and IT companies of all stripes, development has largely bypassed remote areas. Major income tax reform passed this summer will reduce corporate income tax to 6 percent from 6.9 percent next year, and drop to 5 percent in 2015; lower individual income tax rates to a flat 5.75 percent in 2015; and introduce a $50,000 deduction for small business owners. Additionally, recent legislation cutting unemployment insurance, education expenditures and various entitlements has been generally hailed by business leaders, with some reservations. Says North Carolina Blue Cross and Blue Shield CEO Brad Wilson: “I don’t believe now is the time to start walking away from our investment in public education.”
Tennessee, ranked fourth by CEOs, offers a muscular and expansive transportation and logistics center, anchored by the FedEx headquarters. Tennessee incentivizes aggressively; its $554 million subsidy of Volkswagen’s Chattanooga plant set a new record for auto-industry subsidies, which backfired when the German automaker announced layoffs earlier this year. Transportation and logistics company investments have led job creation over the past decade.
Virginia, ranked No. 7, figures high in most comprehensive headquarters-relocation searches. Incentives are competitive, especially for manufacturers, although finding sites can be tough. Major grants have gone to Orbital Sciences, Canon and Rolls-Royce. The governor’s use of subsidies has become a political liability, possibly tightening the spigot for future deals. Lifestyle and infrastructure—two seaports and an international airport—garner high marks. Also, a $6 billion highway improvement program was recently announced.
South Carolina, No. 8, offers a business-friendly climate and good quality of life. Companies in manufacturing, health services and construction are hiring, reducing persistent unemployment. However, government and military sectors cast a big shadow, leaving the regional economy vulnerable to public sector belt-tightening. The state’s Chamber of Commerce is pushing for infrastructure improvement, workforce development programs, and comprehensive tax reform.
Georgia, ranked No. 10, is not just the home of the Coca-Cola Company. Hartsfield International Airport, among the world’s busiest, gives Georgia companies global connectivity. Alan Dabbiere moved his mobile-technology management company, Air Watch, from the Silicon Valley to Atlanta and found hiring people got much easier. Cluster growth in the last decade has favored chemical products, construction materials, processed foods and heavy machinery.
Alabama, ranked No. 16, continues to rebuild after experiencing significant contraction during the Great Recession. Strong gains in the automotive-manufacturing industry, rising exports and a housing market on the rebound signal a more robust business climate. Regional economists predict employment gains in professional and business services, healthcare, tourism and retail. Strong ports and a well-trained work force—plus a $158 million incentive package—have helped attract companies like Airbus.
Kentucky, No. 29, boasts two international airports, two top air-cargo hubs and third place in the country’s total air cargo shipment rankings. Extensive air, rail, maritime and roadway connections bolster the state’s position as a top transportation and logistics hub. Kentucky spends roughly $324 per capita to attract companies, and oil, gas, mining and agriculture business are top beneficiaries. Years of state and regional investments have strengthened the community-college system and other technical and workforce training, much of it supporting advanced manufacturing skills and mindsets. It is the only Southeast state without right-to-work legislation.
Mississippi, ranked No. 32, has the smallest budget in the Southeast for incentives. Recent arrivals include SiliCorr ($76 million), Stion and Virdia (both $75 million). Tax rates—both personal and corporate—cap out at 5 percent. Cluster formation in recent years include: aerospace and aviation, health care, automotive, shipbuilding, energy, agribusiness and advanced manufacturing.
Airbus Comes to Alabama
Airbus’s decision to build a $600 million manufacturing and assembly plant in Mobile, Alabama, makes little sense in P&L terms. The company will ship components across the ocean to Mobile, pay local workers to assemble them into jets and then reship them back. While non-unionized U.S. labor costs will be lower, any benefits will be wiped away by shipping costs.
Lowering costs, clearly, was not the reason parent company EADS made the investment. It’s all about being close to the customer—U.S. commercial airlines and, potentially, military procurement bosses. With a foothold in the market of archrival Boeing, Airbus now sees itself as better positioned to compete in the U.S., a key market where its share lingers around 30 percent. Over the long term, Airbus plans to increase the percentage of local parts, scoring local points and reducing its costs, as well.
The roots of the Mobile deal are in Paris, where in June 2011 Alabama Governor Robert Bentley scheduled a meeting with EADS chief Tom Enders. EADS had just lost a $35 billion Defense contract, after Boeing had successfully challenged the deal on the grounds of unfair subsidies. Although Airbus had picked out a site in Mobile in preparation for executing the contract, the two men had never met. When they sat down two years ago in Paris, apparently there was much to discuss. When the conversation ended, the governor had committed, in principle, to offer significant accommodations; the CEO had committed to reviving his plan to manufacture jets in Alabama.
Ultimately, Alabama agreed to provide $158 million in financial and logistical support in exchange for a promise to hire 1,000 Alabamians. The deal was not hard to sell at home. Explaining it in Europe was a different matter. “The perception at Airbus, as you can imagine, was skeptical,” recounts Allan McArtor, who founded Legend Airlines in Texas and held a series of Washington posts before being appointed executive chairman of Airbus Americas. “For Europeans without much experience in America, Alabama was something they knew about from movies, if at all. Perceptions were decades old. Many didn’t realize what industrial and technological capabilities exist in the Southeast.”
The New Incentives Game
The first thing to know about incentives is: they’re the last things you should discuss. “Incentives are relative to final-stage relocation negotiations,” says Gregory Burkart, managing director of the Detroit office Duff & Phelps, a financial advisory firm. Burkart, a specialist in structuring and negotiating government-sponsored economic development incentive packages, suggests focusing your search on availability and cost of labor. Don’t bring up subsidies, grants or other forms of government give-backs until you’ve narrowed your choices down to two or three finalists.
Your costs will typically entail real estate, utilities, transportation, architects, building services, professional fees, labor and more; government negotiators, on the other hand, are concerned primarily with job generation. “The more jobs you bring to the table and the more the jobs pay, the more value the deal will have to the officials across the table,” says Burkart. “That’s your leverage.”
While cash incentives are often discussed first, they also become headline fodder and are politically risky. Increasingly, cash incentives are deployed as closing-round deal sweeteners budgeted to the “governor’s discretionary fund.” For years, cash grants were often effectively traded for job-creation commitments. In the face of public backlash in situations where those commitments were not honored, government negotiators now seek to avoid cash deals. Executives who press for cash may find their best bet is a loan with a forgiveness covenant pegged to new jobs.
Many other incentives are available—some listed publicly, some stored in the memory bank of the government negotiating team. Often, incentive programs are renamed from year to year in an effort to avoid backlash from soured deals. The most advantageous incentive packages, from the executive’s point of view, are generally those negotiated across multiple levels of government.
Look into—and ask your negotiating partner to do the same—what subsidies, grants, loans, refunds or waivers might be available on other levels, including federal, county, municipal, industrial development authority, port authority or business/industrial zoning authority. When it comes to negotiating incentives, don’t wait for offers. Ask for what you want.