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In hard times, economic development specialists have created unique and innovative incentive packages to help ease the financial burden on existing companies and make it attractive for new ones to locate to their states.
Industry has faced enormous economic challenges in the past year. An unprecedented global financial crisis has caused businesses of every size and across every sector to suffer massive layoffs and downsizing, with 2.6 million people being put out of work in 2008.
During these difficult times, federal and state governments have taken dramatic measures to kick-start the economy and improve the job climate. Federal and state business incentives, aimed at pulling the U.S. economy out of the prolonged recession, have been designed to create higher-paying jobs, stimulate growth within small business, and help transition the economy to a clean energy future.
The Obama Administration’s federal economic recovery plan, which was moving through Congress at press time, could help businesses of all types. The plan includes business incentives that reduce corporate tax rates and provide capital for equipment, tax breaks, and targeted assistance for key industries. The stimulus package has been tailored to promote a clean energy economy and impact the employment situation immediately, so companies must be green, and have projects that are shovel-ready, short-term, and job-producing.
While they await the final structure of the federal relief package, state economic development executives have unveiled plans to provide incentive packages that will provide immediate assistance to create jobs, strengthen local economies, and boost key industries.
“In these tough economic times, business incentives are becoming extremely important,” says Mike Hickey, owner and founder of Hickey and Associates, LLC, a business consulting firm that has successfully negotiated hundreds of millions of dollars in funding support for companies in diverse industries for the past 20 years.
“Right now, states are competing nationally and internationally to develop business incentives that are helping companies reduce their costs and mitigate the risk of doing business in that particular community,” Hickey says.
According to Hickey, it is critical for companies to recognize that every state has a standard toolbox of incentives; however, companies must look beyond that. “Companies need to recognize incentives that are of high value versus those that seem high value, but are not necessarily to that particular company. High-value incentives include cash grants, training grants, infrastructure support, property tax abatements, sales tax exemptions—the ones that really do reduce costs. What may not be of great value is the corporate income tax because it always depends on the type of industry, how much they pay in taxes, and whether that is of significant value or not to that company,” he explains.
Specific industries, including high-tech and alternative energy, will most likely reap the benefits of many new incentives. These industries are fast becoming a treasured target for economic officials because they promise the development of new technology, immediate job creation, higher paying salaries, and continued growth.
“No matter where you are doing business today, companies from big to small are looking at ways to enhance revenues and cut costs, so they are very bottom-line oriented in terms of making the decision about where they are going to stay and do business,” says Caren Franzini, CEO of New Jersey’s Economic Development Agency. “It’s critical for all states to lower the costs of businesses to stay in the state, and to make incentives attractive for other companies to come into the state for the first time.”
Green Energy: Wave of the Future
President Obama’s goal is to double alternative energy production in the next three years. This is good news for green business, as incentives will provide much-needed tax breaks to help spur environmental industry growth.
Green businesses are a rising sector in the national economy. According to the business trade association New Energy Finance of Washington, D.C., global investments in green energy services grew 41% in the second quarter of 2008, raising more than $5.8 billion in venture capital and investments.
Recognizing the potential of the green industry to provide new jobs, state business leaders have developed incentives to expand support for renewable energy and alternative energy technologies. These incentives not only will support sustainable energy companies, but also will provide jobs for the electrical contractors, builders, truck drivers, roofing companies, and other professionals involved in these types of projects.
For example, Oregon’s Business Energy Tax Credit (BETC) program has been a key driver for Oregon’s emerging green economy. The BETC program allows manufacturers to apply during one calendar year to receive a $20-million credit over five years. The next year, manufacturers could apply for an additional $20- million credit toward a second phase if the project meets eligibility tests. At the end of 2008, the state legislature doubled the amount of project costs, to $40 million, for companies that are eligible for 50% tax credits on renewable-energy plants.
The BETC program helped lure SANYO Electric Company, a Japanese solar company, to Oregon. In September 2008, state officials announced that Sanyo will receive $40 million of renewable-energy tax credits to build a solar factory in the Renewable Energy and Technology Park in Salem, OR. In addition to the green tax incentives, the company also received $285,000 in workforce training dollars. This project is estimated to inject $84 million into the local economy.
“We chose Oregon for its workforce and its forward-looking Business Energy Tax Credit program for renewable energy sources, such as solar,” said Misturu Yabuno, vice president of SANYO Solar of Oregon LLC. “BETC helps our cash flow, which is important because the business will be in a position to grow. We will need to hire more skilled workers, which will increase to as many as 200 as we move forward from 2010.”
Growth from High Technology and Biotech
Many state incentive programs are developing flexible and attractive incentive programs to draw high-tech, biotech, and life science companies to their communities.
New Jersey, well known for its pharmaceutical industry, has several incentive programs to promote high-tech/biotech growth. The state makes cash grants available through the Business Employment Incentive Program (BEIP) to expanding or relocating businesses that create new jobs in the state. Companies must create at least 10 new jobs if they are high-tech/biotech companies and 25 new jobs if they are in non-technology business categories. In 2008, the program provided 27 grants worth an estimated $78 million over 10 years, with businesses planning to create nearly 4,300 new jobs.
The BEIP helped Swiss-based Octapharma USA relocate its corporate headquarters and 25 jobs from Virginia to Hoboken, NJ. The program also helped Fraba, a seller of medical diagnostic and industrial automation products, to establish its U.S. corporate headquarters in Hamilton Township, NJ. The agreements were worth an estimated $517,500 and $75,000, respectively.
New Jersey’s Edison Fund provides increased access to early-stage capital and specialized assistance to existing mid-size and large tech and life science businesses. In 2008, the program provided nearly $84 million to 108 early-stage and established technology and life science businesses in the state, leveraging more than $129.6 million in total project costs and creating more than 900 new jobs.
New Jersey’s Technology Transfer Program allows qualified businesses to sell tax losses or R&D tax credits to raise cash to finance their growth operations. In 2008, 80 companies were approved to participate in the program and share the $60-million allocation available under this program.
A unique new incentive package recently announced in New York also will benefit high technology and biotech companies.
“In an effort to encourage 21st century business and build upon our state’s tremendous workforce, the Governor is seeking to provide targeted grants or loans within the manufacturing, financial services, agribusiness or high-tech industries that demonstrate substantial job creation unlikely to occur without state assistance,” says Dennis Mullen, upstate president, Empire State Development.
The Growth, Achievement and Investment Strategy Fund is a $50- million loan and grant fund targeted at job creation. A key component for high-tech and biotech companies is a provision that seeks to spend $5 million to expand eligibility for the state’s existing R&D Tax Credit in 2010 to life science and technology businesses with fewer than 100 employees in New York but more than 100 staffers worldwide.
Small Business Growth, Urban Revitalization
Small businesses are a major part of the economy in every community across the country, providing revenue and household-supporting jobs. Today, however, many businesses are finding that they don’t have enough resources to get by without layoffs and downsizing.
To help weather the economic turndown, federal and state economic development leaders have created stimulus packages. The Obama Administration’s economic recovery plan calls for at least $300 billion in tax cuts that include letting companies write off their 2008 losses against profits earned in the past five years, instead of in the most recent two years. This will provide immediate tax refunds to companies struggling with both a credit crunch and the impact of the recession.
But state leaders can’t just sit by and wait while the plan is negotiated in Congress. Many say that small businesses need help now, and it is important to expand and develop new incentives geared at stimulating growth within small- to mid-size businesses to put money into their pockets.
New Jersey Gov. Jon Corzine recently unveiled a multifaceted plan to provide immediate assistance for businesses and ease the financial burden on small- to mid-size businesses. The plan includes two new and innovative programs, including the $120-million InvestNJ Business Grant Program and the $50-million Main Street Business Assistance Program, which provides the state’s small businesses the incentives and liquidity they need to stay afloat in the economic crisis.
According to NJEDA’s Franzini, the new plan eliminates the “throw out” rule, “regular place of business” standards and the alternative minimum assessment from its tax laws and amended the corporation business tax to mirror federal law, so businesses can now realize the tax benefits of carrying forward net operating losses over a 20-year period, rather than over a seven-year period.
“This will help companies create jobs and invest in their business,” says Franzini. “We want to make the business climate stronger for companies to consider our state.”
New Jersey’s economic incentives this past year and into 2009 also focus on creating economic revitalization in the state’s urban centers. In 2008, NJ’s Urban Assistance Program, administered by the state’s Economic Development Agency, supported 146 projects, delivering nearly $300 million in financing assistance and business incentives, nearly $975 million in total investment, and more than 4,000 new jobs.
Another key component of New Jersey’s urban program is its Urban Fund, which provided financing and business incentives for 73 projects totaling nearly $192 million in 2008. These projects are expected to result in a total investment of nearly $795 million and the creation of more than 3,000 new jobs.
One key project under the Urban Fund included CityWorks to support the redevelopment of West Lake Avenue in Neptune, NJ, an economically distressed area that has been in decline since the 1960s. CityWorks received a $12.7-million New Markets Tax Credits Program loan, a $2- million Local Development Financing Fund loan, a $1-million EDA guarantee of a $10.7-million TD Bank loan, and a $250,000 direct loan through the Brownfields Redevelopment loan program. The $18.75-million redevelopment project is serving as a catalyst for economic growth throughout the community and is expected to create more than 370 construction jobs and nearly 100 new, full-time jobs by the time it is completed.
Another unique urban revitalization incentive is New Jersey’s Urban Plus program, which provides low-interest financing up to $5 million for small, female-owned or minority-owned businesses, manufacturers, redevelopers and nonprofit organizations in targeted municipalities. The program helped Clarke Caton Hintz (CCH), an architecture and planning firm, receive a $1.5-million low-interest loan in June 2008 to renovate a historic building in Trenton that will be used as the company’s new headquarters.
John D.S. Hatch, a Clarke Caton Hintz partner managing the renovation project in Trenton, says the Urban Plus loan was critical to the project. “We needed to find financing that was as cost-effective as possible. We had done work with the EDA before, so we looked to see what EDA product would be the best fit for us,” Hatch says. “Urban Plus worked.”
Value of Incentives Should Be Long-term
According to Mike Hickey, what’s most important for companies is to recognize the incentives that are of greatest value to the company not only for the short-term, but the long-term as well.
“Companies need to be able to thrive in a community and not just survive,” says Hickey.
“The two most important factors to companies are cost of doing business and finding available talent at sufficient numbers and wages. Infrastructure is an expectation, so communities have to package incentives that help the particular industry they want to attract into the state, as well as help companies out once they are located there,” he explains.
Yes, the current economic downturn is hurting businesses—just as much on Main Street as it is on Wall Street. But while these are difficult times, they also are a time of opportunity, a time when federal and state leaders can refocus their energies to provide unique and innovative incentives that will ease the financial burden on businesses and put Americans back to work. The road to recovery is paved with incentives.
Green Incentives: $$$
• A bill introduced in Maryland will provide tax breaks to companies in Prince George’s County that provide services with minimal pollution. The proposed bill would establish special zones where green businesses can get a break on property taxes.
• The Massachusetts Department of Energy Resources (DOER) has released regulations expanding support for green technologies mandated by the Green Communities Act, energy reform legislation enacted by the state last year. This law calls for changes in the state’s Renewable Energy Portfolio Standards (RPS) that would double the rate of increase in the use of new renewable energy.
• Kansas Governor Kathleen Sebelius has unveiled a new energy proposal that requires 20% of Kansas’ energy production to come from renewable sources by 2010. Under the proposed legislation, financial incentives will be available for companies that make renewable energy components, such as wind turbines, to locate in Kansas. Gov. Sebelius’ energy proposals include an innovative method of financing new renewable energy plants: bonds that would be paid off with the state income taxes paid by the employees of those businesses.
Unique, New Small Business Incentives
• Newly elected Missouri Governor Jay Nixon’s “Show Me Jobs” plan will expand tax credits for business and tap another state fund to make loans to small companies.
• Minnesota Governor Tim Pawlenty’s 2009 budget proposes boosting financing available for small business by creating a $50-million package for tax credits that he says will create over $100-million in new investments. The proposal also includes a 25% refundable tax credit for small business owners that reinvest their businesses quickly to stimulate the economy; a capital gains exemption for investments in small businesses and a 100% up-front exemption on equipment purchases that would be depreciated fully right away.
Jersey City’s UEZ: Another 15 Years of Success on Tap
Mayor Jerramiah T. Healy announced with pride last year that the New Jersey Commerce Commission had approved the extension of Jersey City’s Urban Enterprise Zone program for another 15 years. The state’s decision was both a validation of the UEZ program’s record of success and a long-term commitment to urban development in Jersey City.
“We appreciate the vote of confidence we received from the New Jersey Commerce Commission with this renewal, and look forward to continuing our partnership with them in making Jersey City New Jersey’s premier city,” Mayor Healy said.
The extension of the UEZ program, administered by the Jersey City Economic Development Corporation, will enable Jersey City to undertake bigger and better improvement projects within UEZ areas. The New Jersey Urban Enterprise Zone program was created in 1983 to foster an economic climate that revitalizes communities and stimulates their growth by encouraging businesses to develop private-sector jobs through public and private investment. Qualified businesses in the UEZ are eligible for tax incentives, reduced unemployment insurance, business counseling and marketing support. Certified UEZ retailers collect just 3.5% sales tax—half the normal sales tax—an attractive incentive that they may display in their establishments and incorporate in their advertising. About one-third of Jersey City’s neighborhoods—nearly all of the commercial areas—have been designated as part of the UEZ. Funds from the sales-tax collection in these areas are reinvested in Jersey City business development programs, and used for capital investment and municipal services. Since the beginning of the UEZ in Jersey City, more than $81 million have been reinvested in 107 UEZ projects, generating more than $10.5 billion in capital investments. The projects include the establishment of the Special Improvement Districts (SIDs) in the Central Avenue, Historic Downtown, McGinley Square and Journal Square areas, as well as the $7.5-million Journal Square streetscape.
According to Eugene Nelson, CEO of the Jersey City Economic Development Corp., there are approximately 2,500 businesses within the present Jersey City UEZ boundaries, about 700 of which are certified UEZ businesses. In Jersey City, UEZ business enrollments have accounted for the creation of more than 17,500 full-time jobs. UEZ Benefits for Jersey City Businesses: Here are key elements of participation in the UEZ Program
• Qualified retail businesses may charge 50% of the state’s 7 % sales tax on certain “in person” purchases.
• Revenue generated from the 3.5% sales tax is maintained in a Zone Assistance Fund (ZAF) and is dedicated to use within the zone for certain economic development and/or public service improvement projects.
• Sales tax refund for purchase of certain materials and tangible personal property. Small UEZ Businesses, with less than $1 million in annual gross receipts, can purchase certain goods and materials sales tax free.
• One-time corporation tax credit of $1,500 for each new, full-time permanent employee who is a resident of a municipality in which a zone is located and who had been unemployed for at least 90 days or dependent upon public assistance.
• Subsidized unemployment insurance costs for certain new employees with gross salaries of less than $4,500 per quarter.
• Tax credit against the Corporation Business Tax of 8% of Investment in the zone by an approved “In Lieu” agreement with the UEZ Authority and Municipality.
• Priority financial assistance for loans, grants and job training.
• Business Retention and Relocation Assistance Grant (BRRAG) for relocation and retention of at least 250 non-retail jobs where the grant is a material factor. Special limitations/bonuses for UEZs.
• Business Employment Incentive Program (BEIP) applicants may be eligible for a grant award of up to 50 percent of the state income taxes withheld for new employees hired and may increase up to 80 percent if “Smart Growth.”
• Business Improvement Grant (Max Value of $20,000): 1:1 matching grant to make facade improvements to business and/or buildings.