A CPA's primer on transient businesses and economic incentives
Company movement and location decisions have filled the news a lot in the past year. From Carrier leaving Indiana for Mexico, to reversing course after the election and staying in Indiana, 2016 has seen just about everything in terms of company movement.
As we enter 2017, capital, companies and labor are more fluid than ever before. Whether we are talking about Fortune 100 companies or growing closely held businesses, location is increasingly identified as one of the leading factors determining the future success of a company.
While international movement gets the most press, businesses are also looking across city, county and state lines for more ideal business conditions. How are local and state governments competing for businesses? And what do CPAs need to know about their clients’ location decisions?
Why are companies considering location alternatives now more than ever?
More and more often, companies are chasing critical location drivers as valuable to their success. Each company’s success is driven by different factors, including skilled labor, cheap labor, high intellectual capital, low energy or transportation costs, cost of construction or occupancy, or stable and favorable taxing and regulatory environments. Location can have a profound effect on these success factors—the greater the disparity between different locations in key areas, the greater the importance of location.
What does the increased movement of businesses mean for CPAs?
As a location advisor who works primarily with CPAs, this is an interesting question. While some of the firms we work with are regional or national, a good number are locally based firms. For local firms, the idea of clients looking to move can be a scary one, but if the long-term success of clients is a priority, then location can’t be ignored as a critical business decision.
CPAs can hide their heads in the sand and hope clients never look beyond their current geographic reach—or they can proactively help clients ensure their location will contribute to, not impede, their success.
CPAs should also understand that a strategic location process doesn’t mean a business is going to move. Most of the time, strategic location processes are designed to ensure that businesses have the best opportunity to succeed where they already are. Many businesses choose to expand on or near existing facilities, but drive significant value by exploring and understanding the advantages and disadvantages of multiple locations. This allows them to identify and close any gaps present at their desired location through economic incentives and other opportunities.
What are economic incentives?
Labor, resources, transportation costs, taxes and regulations are just a few of the data points that drive location decisions. With these factors differing so greatly from country to country, state to state and municipality to municipality, economic incentives are one way for governments and businesses to even the playing field. Economic incentives include a variety of tools state and local governments may utilize to help them attract and retain business. These often include job creation tax credits, tax abatement, tax increment financing, training grants, business development grants, low-interest/no-interest loans, investment tax credits and more.
What role do economic incentives play for businesses and municipalities?
Businesses face national and international competition that force them to look at all factors that affect growth and profitability. Smart businesses negotiate incentives concurrently to planning investments or workforce increases—allowing them to perform a complete tax and cost comparative analysis—ultimately ensuring that whatever location is selected will provide an optimal environment for that success.
Municipalities use incentives to help them attract and retain high value businesses. Whether on a local, state or national level, governments choose to compete for businesses in different ways. Some states work to create a sustained business friendly environment through the reduction or simplification of taxes and the streamlining of permitting and regulations. Other states combine higher tax environments with discretionary incentives designed to be used sparingly in support of high value projects. Regardless of the approach, any given location can have a gap relative to a specific business project at any given time. Closing these gaps in order to attract or retain high value business is the purpose of most economic incentive programs.
Was the Indiana/Carrier deal an anomaly?
Yes and no. Most states are using incentives primarily to compete for new jobs rather than to retain existing jobs. The $7 million incentive deal was an anomaly in that situations arise less frequently that Indiana will incentivize for job retention. Indiana doesn’t offer a lot of job retention credits—in fact, most states don’t offer retention incentives frequently. In order for the IEDC (Indiana Economic Development Corporation) to incentivize job retention, a business must take several very concrete steps toward actually moving. This ensures businesses are not holding up the state for incentives by threating to leave, but it also allows the state to compete for jobs that it truly risks losing. A retention agreement of the magnitude of the Carrier deal was certainly unusual, but the IEDC’s use of available incentive programs as a response to the situation was not.
If you are looking to help bring value to clients through incentives, you’ll be better off focusing on new investment, facilities expansions or relocations, and job creation. Retention incentive opportunities may come along every so often, but with clients consistently growing and investing—expansion, investment and job creation incentive opportunities will present themselves on an ongoing basis.
How can CPAs help clients with location decisions and economic incentives?
For CPAs, the first step is acceptance. Accept that your clients make location decisions all the time. Some make proactive, informed, value driven decisions; some make passive decisions; but all of your clients make location decisions when they invest, hire and grow.
Once you accept that clients are making location decisions, the next step is to help them make informed decisions that drive value throughout the process. The way to do this is to employ a proactive process that allows for project and client specific comparative analysis, site selection and concurrent incentive procurement and negotiation. In the long run, clients that employ a strategic approach to location are more likely to grow and succeed. They are also more likely to make their current locations great places for them to do business.
Here are four easy steps to help ensure clients are making informed location decisions and driving value through economic incentives:
1. Educate your team and your clients: Local and state incentive opportunities vary widely from city to city, county to county and state to state. Your clients’ opportunities will be driven by programs, locations and the specifics of their growth, expansion and investment plans.
2. Discuss growth and investment plans: Once you know the programs, you also need to know what your clients are planning. Facility needs, equipment purchases, job creation, training and other capex can all drive incentive opportunities. With an understanding of incentive programs, location alternatives and growth plans, a skilled advisor will be able to identify when and how to pursue incentives.
3. Identify opportunities and triggers: In order to capitalize on incentives, you and your clients need to know how to recognize opportunities. Develop and distribute a list of key triggers that may indicate opportunity. These include relocations, expansions, significant capital expenditures, employee increases and more.
4. Be ready to help: If your firm has a site selection and incentives practice, you’re all set. You will just need to walk down the hall when you see opportunity and get your team working. If you don’t, consider finding a trusted partner that does. Being able to deliver this service to your clients will help you demonstrate value and set you apart in your market.
Growing companies are benefiting from incentives in cities and states across the country. If your clients aren’t benefiting, they may be at a disadvantage versus their competition. In the world of consulting and accounting, where there is value, there is opportunity—and there is a lot of value in economic incentives.