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Economic Development 2000: Beyond the

Bottom line on incentives? ‘To the victor goes the spoils’

Investing in incentives is investing in the state, Dr. C.R. “Buzz” Canup told nearly 700 business leaders who gathered in Hattiesburg, Jackson and Oxford earlier this month to learn more about the results of Mississippi Department of Economic and Community Development’s 13-city tour and agenda for the upcoming legislative special session.

“Credits, rebates, abatements, grants and cost avoidance are commonly offered incentives to entice business and industry,” said Canup, a consultant with Atlanta-based KPMG Consulting Group, a national firm with a strong reputation in economic development hired by the state to study its economic development strategies. “Today’s incentives are different because of media coverage, the involvement of local communities, more sophisticated legislation and constant revisions.”

INCENTIVES PAYOFF? `LONG-TERM PROSPERITY`

J.C. Burns, executive director of MDECD, said it’s unfortunate that the main ingredient in the economic development market is incentives.

“But incentives have to be addressed,” he said. “The payoff will be long-term prosperity.”

Canup’s overview pinpointed opportunities for improving Mississippi’s incentives and positioning the state more competitively in the global marketplace.

“I’m here to provide insights into how people look at Mississippi from a strategic perspective and the key is the incentive program,” Canup said. “Incentives can never make a bad location look good, but incentives can make a good location look better.”

Way back when, New York offered a better deal

The first state tax incentive occurred in 1791 when New Jersey offered Alexander Hamilton a tax abatement to locate a manufacturing plant there, Canup said.

“What do you think happened next? New York offered a better deal,” Canup said. “That’s why it’s important to not only know targeted industries and planned incentives, but to also know what your competitors are doing. You’re not only competing with the state next door, but also with Ireland, Singapore, Mexico and China.”

Emerging incentive trends include performance-based incentives, where the incentive grant is withheld until certain employment and/or capital investment levels are reached, and “wild card” incentives at the local level, where local authorities are given great latitude and community needs are balanced with company needs, Canup said.

MAKING A DIFFERENCE AT THE LOCAL LEVEL

“Many times, local communities make the difference, create the synergy and entice new and expanding industries,” he said.

Clinton Mayor Rosemary Aultman said tax increment financing is a wild card incentive the city has successfully used on several projects.

“We just used tax increment financing on our new Super Wal-Mart and adjoining development, where the difference in the taxes we’re currently collecting are pledged against projected taxes to pay for infrastructure improvements, road building projects or whatever is needed to attract a client,” Aultman said. “Basically, all cities have the same wild card initiatives available to them because so much of what a city can or cannot do is determined by state statute.”

The use of wage standards, where states that want to attract high-tech/high-wage jobs tie incentive grants to certain minimum weekly wages, or tiering structures, is an emerging trend in North Carolina, South Carolina and Florida. In Texas, grants of matching training funds are tied to a company’s guarantee that trainees will be paid a higher wage after completion of training. In Georgia, an economic development strategy included targeting a wider range of industries, such as aircraft engine parts and components and high-tech companies, like Yamacraw.

“Grants available through MDECD and joint ventures with Hinds County on package development have been successfully used for infrastructure improvements,” said Aultman.

GOING GLOBAL ALSO A FACTOR

Other emerging incentive trends include international trade via foreign trade zones (FTZ), where companies avoid customs and duties, Canup said.

“From a global perspective, there is multi-national corporate activity,” he said. “There are tax holidays in Singapore, a downturn in Asia, inter-jurisdictional vs. interstate competition, the European community cash incentives, which include caps at 25% of the project cost, plus intangibles, and where countries like Belgium can target fab plants with $900 million, and NAFTA.”

TAXING QUESTIONS DEMAND ATTENTION

Basic taxes include personal income, corporate income, franchise/net worth, excise, sales and use, property/ad valorem and payroll/employment.

“In Michigan, a plan sets up zones in economically distressed areas in which companies pay no payroll or property taxes,” he said. “In Oklahoma, a program rebates payroll taxes collected from workers back to employers.”

Mississippi legislators discussed a plan similar to Oklahoma’s during the 2000 session, but did not take action, Burns said.

“One of the reasons could have been that we had not yet had a chance to study the implications of that legislation, which appears to have far-reaching effects,” Burns said. “We’ll address it now, in a time frame where we have the ability to look at the issues, and see if it makes sense for us in Mississippi.”

Income tax credits include job tax credits, investment tax credits, training/retraining credits, childcare credits, research and development credits, apportionment formulas, employment tax retention and environmental tax credits.

“Alabama has an investment tax credit of 100% of inventory providing a 5% tax credit per year for 20 years,” Canup said. “But that’s a two-edged sword. If the company is not profitable, the advantage is zero.”

Property tax incentives include fee-in-lieu of property tax, rebates, accelerated depreciation schedules, “freeport” exemptions, property classifications of real vs. personal, enterprise zones and pollution exemptions/credits.

“Many states chasing high-tech companies are using accelerated depreciation schedules over 36 months, depreciating down to 10% to 20%,” he said.

TRAINING INCENTIVES ATTRACTIVE

Training incentives include state-developed training programs, custom designed incentives, reimbursements, cooperative relationships with area universities and technical schools, direct grants and income tax credits.

Canup said advantages to industrial development bonds (IDBs), another commonly used incentive, include a reduction in interest costs and a minimization of property, sales and use taxes while disadvantages include Internal Revenue Code restrictions and the cost of implementation.

“Enterprise zones are sweeping attempts to entice industry to locate in less developed areas, where unemployment and poverty rates are high, or in disaster areas due to natural/civil disturbances, such as California, Georgia and North Carolina,” Canup said.

Other incentives include business incubator funds, utility credits and rate reductions, defense industry conversions, grants, assistance with site selection, access roads and other sewer or utility expansions, industry specific incentives and relocation assistance.

STATES OFFER OWN, UNIQUE INCENTIVES

Unique incentives offered by other states include Florida’s refunds for sales, income or property tax, Indiana’s “EDGE” program, Oklahoma’s payroll tax cash rebates and Michigan’s 100% tax-free enterprise zones.

“While Mississippi has many elements in place, th
ere’s a need for boosting the program to get into the same ballgame as competing
Southern states,” Burns said.

“Sharp incentives bring strong success, like Honda and Mercedes in Alabama, Bridgestone Tire in South Carolina, FedEx in Greensboro, N.C., UPS in Louisville, Ky., and Dell Computers in Nashville, Tenn.”

Or, as Canup describ

About Lynne W. Jeter

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