Spring 2006 issue of Horizons

INDUSTRY PUBLIC SECTOR Deposit and Investment Risks ASK Rubi Brown

tage that will translate into greater credits and incentives in the long run. Before you get to the negotiating table, you need to research the avail- able incentives and their potential magnitude. Unless your business involves obtaining and negotiating tax credits and incentives for others, it would be wise to contact those who regularly perform these services. This could be an accountant, tax advisor or attorney with whom you have an existing relationship or a professional whose practice is limited to incentive consulting. Starting with one of these professionals will allow you to maintain a certain level of anonymity so that you have future leverage in negotiations with government agencies. Any of these professionals will have direct experience with obtaining credits and incentives for other clients or will be able to make the contacts to facili- tate the research required before you contact those local or state gov- ernment representatives. Regardless of which professional is used, engaging them early in the process will result in a greater level of ben- efits. In obtaining tax credits and incentives, the winning negotiator doesn't reveal the strategy to the local or state officials until it is absolutely necessary. As much as a taxpayer may want to boast about the prosperity of his business and future plans, to do so greatly hinders any advantage in optimizing the tax credits and incentives available. Once an expansion or relocation plan is announced, the governmental authority knows exactly the parameters in which it must operate. Recently, a large corporate entity that needed additional office space revealed in a press release the actual competing communities, which were located in Michigan and Missouri. By doing some simple research, Missouri was able to determine the maximum benefit the corporation would receive in Michigan, then pared back its incentive offering to become marginally better than Michigan. The full disclosure by the cor- poration effectively cost it additional incentives. Use a Phased Approach In response to some taxpayers not living up to their commitments regarding employment levels or length of commitment to the communi- ty, most incentive packages now contain a “claw-back” provision. Those previously provided incentives received over a period of years must be returned to the government - usually in one lump sum - when the com- mitments are not achieved. Most of the current generation of credits or incentives are frequently tied to a level of newly created or retained jobs. It is important that the taxpayer be conservative in setting the bar for expectations. The penalty for failure to attain the promised employment goal is often severe. Businesses often find that expansion creates additional expansion opportunities. In negotiating the original package, it is best not to create an atmosphere of mistrust, as you may want to seek additional credits and incentives before the term of the initial set expires. Most govern- mental agencies are willing to use a series of phases to achieve the final project. Unless there is a change in the enabling legislation that authorizes the credits and incentives, the second or third set of incent-

Negotiating for State and Local Tax Incentives Requires a Process and Strategy

Harlan J. Kwiatek, CPA, JD, LLM Robert D. Neu, CPA Eugene C. Hendrickson, CPA

State and local governments have devised numerous tax and non-tax incentive programs to attract business enter- prises, fueling economic growth of a state or a particular region within a state. Some of these incentives are widely known, while others are designed to benefit only a limited number of taxpayers and slip through the legislative process with little or no fanfare. Representing the former is Michigan's Act 198, a 50 percent property tax exemption enacted to mitigate the property tax expense related to new capital expenditures taxpayers were experiencing when they expanded their Michigan manufacturing facili- ties. An example of the latter is Missouri's reduction in its assessment ratio for tooling and equipment acquired to expand or enhance a product line located within an enter- prise zone. This change was designed to aid Ford Motor Company's two Missouri assembly plants located within enterprise zones, well away from the usual urban setting for enterprise zones. Soon, other taxpayers realized the application of this tweak to the property tax laws and also benefited from the 25 percent reduction in tax. For many years, the battle for business pitted one state against another state. Today's state against state battle for business investment continues, but now this battle often pits one local government against another local govern- ment. The key to attracting incentives lies in taking advan- tage of these battles to maximize the offer of business incentives. Business development executives must have a process and strategy for pursuing incentive packages available to businesses that are expanding or relocating. Know the Players The more knowledge a taxpayer garners regarding the tax credits and incentives game and its players (both visible and invisible), the better a taxpayer can gain an advan-

3 • spring 2006 issue