A Guide to U.S. Incentives and Credits for Foreign Investors

Most foreign companies that choose to invest in the United States typically have made the decision based on market factors that drive the need to expand from their home countries. Once the decision is made to invest in the United States, these companies face the difficult tasks of determining the best site location and transportation infrastructure, finding qualified workers and capital necessary for construction, and learning about legal ramifications, tax structures, and other difficult factors. Add to this decision matrix the fact that incentives and credits offered in the United States are completely different than those offered in the rest of the world.

A key difference is that incentives and credits are determined primarily at the state level and not the U.S. government level. To the foreign investor, the myriad of incentive and credit programs and the regulations and requirements of each can be daunting compared to the investor’s working knowledge of comparable incentive programs offered by the home country. In addition, the range and complexity of incentives and credits offered by each U.S. state or local community are constantly evolving, making the comparison of various incentive and credit packages more difficult than expected.

This article will discuss the impact that U.S. incentives and credits have on projects, the difference between incentives and credits, and the important factors to consider throughout the incentive and credit process. The potential incentives offered by the U.S. federal government will not be addressed in this article, but there are incentives and credits available at the federal government level that could be applicable to qualified projects.

Recent Incentive Impacts
Foreign investment in the United States has been ongoing since the 1980s. Outlays by foreign investors to acquire or to establish U.S. businesses were $161.5 billion in 2006, significantly more than the $91.4 billion in 2005. Most of the foreign investments in 2006 were made in manufacturing, finance and insurance, real estate, and rental and leasing. The major portion of the overall 2006 investment was made by Europe, followed by the Asia–Pacific region and the Middle East (see Figure 1). Within the manufacturing sector, the largest investments were in computers, electronics products, and chemicals.

U.S. states are directing more attention to attracting foreign investment, resulting in a number of states visiting foreign companies and governmental authorities to promote themselves. For example, according to the U.S. Bureau of Economic Analysis, the states of Colorado, Georgia, Oklahoma, Oregon, and Wisconsin each have at least one foreign-trade office in a another country, including the Netherlands, the United Kingdom, Israel, China, Japan, Taiwan, and Mexico.

Not only are these states highlighting their available sites, location factors, employee skill sets, training opportunities, transportation infrastructure, labor availability, and favorable tax structures, they are also communicating other tangible influences such as university and college relationships to industry research, low cost of living, affordable housing opportunities, and community events and activities. Once these tangible factors are outlined, U.S. states concentrate on touting the various incentive and credit programs that can be tailored to meet each company’s needs and objectives. Some states will go beyond the current incentive and credit programs to enact special legislation that will address specific company objectives.

As an example of incentives a foreign company may receive in the United States, Kia Motors Corporation received an overall incentive package of $201.4 million for its facility in West Point, Georgia. State officials reported the breakdown of incentives as follows: $65.6 million in job tax credits over five years; $35.7 million for land purchase; $24.8 million for site preparation; $30 million for public infrastructure (new interstate interchange and access road); $20.2 million for an onsite training center; $5.5 million for maintenance and operations for the first five years; $5.7 million for training curriculum costs; and $13.9 million in sales tax exemptions.

Overview of Incentives and Credits
Incentives and credits offered by U.S. states and local communities have been in place for well over a century. How these incentives and credits are applied by the states, the benefits, and the qualifying factors associated with each have continued to evolve, addressing the changing tax environment and changing business landscape of domestic companies. These continuous changes have, over the past decade, begun to focus more on the objectives of foreign investors.

Each U.S. state has developed and continues to implement its own unique incentive and credit programs that are targeted to the type of industry each individual state desires to attract, whether that be for foreign or domestic investment. But in every case and for every project, irrespective of the industry type, there are three factors that all economic development authorities (EDAs) view as the starting point for incentive and credit discussions: capital investment, creation of new jobs, and the associated wages. The quantitative measure of each of these factors is important to demonstrate the economic and fiscal impacts of the project to EDAs. States determine the types of incentives and credits that may be applicable to the project and to what extent they need to compete to entice foreign investment while other states are being considered in the company’s location decision.

It is also important to remember that incentive and credit programs are funded by states and local communities through various types of taxes, public–private partnerships, and other funding mechanisms. The allocation of these funds to any one project will be determined based upon the factors mentioned above. Thus, for example, if Project A has $1 million of capital expenditure, 30 new jobs, and a wage range of $10.00 to $12.00 per hour; and Project B has $20 million of capital expenditure, 100 new jobs, and a wage range of $15.00 to $20.00 per hour; one can see that the potential for incentives and credits funding will be potentially more for Project B.

When a foreign company is considering multiple states for location of a project, states and local communities compete with each other to secure the project. However, foreign investors must understand the differences between the types of incentives and credits that may be offered by each state. These differences can have a significant impact on the actual value of the benefits as it relates to the project’s objectives. All incentives and credits offered by states have been legislatively codified. A variety of these enacted incentives and credits have statutory requirements that must be met in order to receive the associated benefit. However, states have also provided language (often called enabling legislation) that allows each state or local community the ability to offer these incentives and credits at its own discretion.

Statutory Versus Discretionary Incentives
Tax incentives can be either statutory or discretionary depending upon the laws of each state and/or local jurisdiction. Statutory incentives and credits are those that require a company to meet all of the requirements set forth in the state law to qualify for the specific incentive. Discretionary incentives are those incentives in which the awarding of the benefit and the final amount of the benefit is established by the state or local community based upon certain criteria.

Statutory tax credits are typically those credits that are applicable to a company’s state or local income tax liability. These credits will have specific requirements set forth in a state’s legislative code that outline the qualifying factors a project must meet in order to receive the credit. Companies are either eligible or not eligible to receive the benefits of statutory credits. For example, if a jobs tax credit is available to a project and the requirements are the project must create 50 new jobs and have an average wage of $15.00 per hour, the project will be eligible to receive this credit as long as it meets or exceeds the credit requirements. If the project does not meet the credit requirements, even though the project meets the industry qualification, the credit will not be awarded. Statutory credits are also designed in most cases to have a “carry forward” period in the event a company is unable to utilize the credit in the first year or subsequent years.

Statutory tax credits can include jobs credits for new employment, investment tax credits for a project’s qualified capital investment, port credits for export and import activities, training credits for new or existing employees, headquarters credits, enterprise zone credits, and others. States can also create different benefit levels for the same credit, which encourages companies to make investments in economically distressed areas. These distressed areas are designated by states as specific zones. Typically, these distressed areas are identified via a tier system or named as “enterprise zones,” “renewal zones,” “renaissance zones,” and others. For example, in Georgia, the job credit is based upon the tier designation for each county. Georgia has four tiers that outline the number of new jobs that must be created to qualify for the jobs credit. It is important to understand the underlying principles and intent of tax credits before proceeding.

Additionally, the federal government may also designate zones within a state, such as “empowerment zones.” The qualifications to obtain credits within these federal zones can be reduced or waived when capital investment, new job hiring, and wages are placed in these zones.

For discretionary incentives or credits, the amount of the benefit may depend upon the amount of capital investment, how many new jobs are created and the level of new job wages. Additionally, these discretionary incentives can be increased by states and local communities if the project exceeds the particular qualifications of the incentive or is of great importance to the state or community. These special cases can include global headquarters, super projects like automobile plants, and first-time investment by a foreign company. Tax incentives that are typically discretionary may include job grants, abatements of property taxes, infrastructure grants, sales tax exemptions for other than production equipment, training grants, forgivable loans, refunds of employee withholding taxes, and many others too numerous to mention here. Some discretionary incentives may only apply to specific industries each state has designated. Most of these discretionary incentives are negotiable to some extent; however, it is important to understand the basic underlying principles and requirements in each program offered before beginning the incentive and credit discussions.

Other discretionary benefits are awarded dependent upon the company meeting the qualifications of related pivotal programs such as “industrial revenue bonds” or “tax increment financing,” in order to receive the intended incentive or credit. In some states, the use of industrial revenue bond financing is a requirement to receive abatements. Industrial revenue bonds can be either tax-exempt or taxable, depending upon the capital expenditure of the project. These financing programs offered by a state’s industrial development authority can be structured within the established legal requirements that may provide projects with benefits such as lower interest rates, longer amortization periods, or other favorable market terms. These programs have specific legal requirements that a company must follow, and great care should be taken to ensure all of these requirements are met in accordance with the regulations set forth by each state.

Tax increment financing is another related program that may be required in order to receive an extended abatement. Tax increment financing uses bond financing that can provide immediate up-front dollars to a project to provide for public improvements, private development, or both, depending upon the rules set by each state or local community. While tax increment financing involves the use of bond financing for a project, the twist with this financing tool is that the principal and interest due on the issuing bond is repaid by the incremental property taxes, incremental sales taxes, or a combination of both. The states have set forth guidelines that dictate the use of tax increment financing for projects and the legal parameters that apply to each.

Evaluating the Incentive Package
With the amount of risk and cost involved in expanding one’s investment in the United States, it is easy to understand the vast effort required to conduct site selection, transportation and labor studies, analysis of tax obligations, and other considerations. Therefore, it certainly stands to reason that understanding and evaluating the incentive package should be no less painstaking. The myriad of state and local incentives and credits that can be applicable to a specific project can vary dramatically between states and local communities. Just understanding the requirements, processes, applications, and how the benefits are applied for one incentive or credit can be overwhelming. Further understanding the obligations and commitments that must be made by the company to finalize the benefits are just as important — if not more — than the amount of the benefits themselves.

When the appropriate due diligence for site selection is completed and the selected site(s) are equal in all consideration, the underlying business consideration can be lost as the various incentive and credit assistance packages take priority. Clearly, careful and intelligent consideration must be given to the incentives package being offered and negotiated, especially when a company is looking at two or more competing states. Given the number and complexity of various incentive and credit packages, the “true economic dollar value” must be determined as part of the overall planning process. If the underlying state and local tax burden is not carefully considered as part of the incentive and credit package, the overall benefits produced from one state’s incentive offer can not accurately be compared with a competing state’s offer.

For example, a hypothetical incentive and credit package of $6 million from one state may actually be worth less than a $4 million incentive and credit package from a competing state. How can this be? If the total value of the benefits is higher from one state versus another, it would stand to reason the higher incentive package should be worth more to the project. This is a misconception. The true economic value of any incentive and credit package is dependent upon many factors such as the legal tax structure of the proposed facility, the tax treatment of raw materials and supplies, income projections of the proposed facility, the taxation policy of building and equipment costs, infrastructure needs of the site, unemployment rates, and local community taxes and fees, just to name a few.

For example, a state offers a jobs tax credit for a two-year period that will offset 50 percent of the proposed facility’s state income tax. Let’s say the jobs tax credit is worth $5,000 per new job created. Let’s also assume the project will create 200 new jobs. Thus the credit would be worth $1 million dollars. This appears to be a very substantial incentive. However, if the proposed facility does not anticipate having any income tax liability for the next five years, what is the actual economic value of this incentive? This type of analysis should be undertaken at each stage of the negotiation phase of the project. It is also important to analyze the timing of the benefit stream for each incentive that is negotiated. When the incentive or credit benefit will be realized can have an impact on the finances of the project.

Another critical factor within the overall incentives and credits negotiation process is to understand that over the past few years, most states and in some cases local jurisdictions have been aggressive in seeking reimbursement of discretionary incentives and tax credits when the company does not uphold its obligations under the agreement or contract. These “clawback” positions can sometimes be enacted into existing legislation, or created as regulations by other state authorities such as the Department of Revenue, City or County Commissioners Office, and other public authorities. Clawback provisions generally require the company to commit to such project attributes as when new jobs are to be created, the amount of capital investment to be spent, or meeting certain defined wage standards. Other provisions may outline specific uses of the benefit awarded and contain monthly, quarterly, semiannual, or annual reporting requirements. Thus, great care should be given to understanding the agreements or contracts that typically become the “operating document” for these benefits.

Jeff Miller is a partner with Incentis Group, LLC, a national credits and incentives practice. He has more than 20 years experience in structuring and negotiating incentive and credit packages throughout the United States. He has authored several articles on credits and incentives for various periodicals, and has been a featured speaker at trade organizations and seminars. Jeremy Huelsman and Dora Mcfadden of Incentis Group, LLC also contributed to this article.