Each year, Area Development conducts a survey of site selection consultants to determine what factors are most important to companies looking to expand or relocate. Its 2018 survey identified state and local incentives as the fifth most important factor, behind skilled labor availability, proximity to major markets, highway accessibility, and labor costs. Those findings are consistent with the widely recognized view among economic development professionals that incentives alone will not bring a project to a community, but for competitive projects, they can be a key differentiator.
In South Carolina, we distinguish between incentives at the state level and the local level, as well as incentives that are discretionary versus non-discretionary. While a wide variety of incentives may be available depending on the project, the most commonly used and economically significant incentives are property tax agreements, job development credits, and grants.
Property tax agreements are negotiated between companies and counties, and they generally provide for a fee in lieu of tax (FILOT) and/or special source revenue credits (SSRCs). In a relatively simple deal, a FILOT agreement would reduce the assessment ratio down from what has historically been 10.5% on manufacturers’ property to 6%, which is the rate applicable to commercial real estate. SSRCs might further reduce FILOT payments. SSRCs tend to be more heavily negotiated and are often subject to “clawbacks,” which require repayment of some or all of the tax savings if the company does not fulfill its investment and job commitments. Stay tuned for next month’s blog post on the issues that counties consider in negotiating incentives.
At the state level, the South Carolina Department of Commerce has an experienced team that negotiates with prospects for job development credits and grants. Job development credits are refunds of employee income tax withholding paid to the state. They are a percentage of the wages paid to eligible employees, generally including only employees paid at or above the applicable county’s per capita income level. They are paid on a quarterly basis over ten years, and importantly, they are only paid after a company has reached its investment and job commitments.
Grants are paid on the front end of a deal, and companies therefore find them more valuable. At the same time, because grants involve cash outlays, the state tends to be very careful about the projects to which it provides funding. All state grants are subject to performance agreements that require the company to meet and maintain its investment and job commitments and repay funds if they do not comply.
Both incentives are subject to approval by the Coordinating Council for Economic Development, which considers a wide variety of factors, including but not limited to the investment amount, the quantity and quality of jobs, the competitiveness of the project, the location, and the overall economic impact. In the case of job development credits or grants, the incentives must be used only for “eligible expenses,” which tend to be real estate or infrastructure costs.
In contrast to the incentives described above, South Carolina also offers a number of “non-discretionary” incentives, meaning that no negotiations or approvals are required. For example, the job tax credit is a state income tax credit for large businesses creating ten or more new, full-time jobs or small businesses creating two or more new, full-time jobs over a five-year period. Investment tax credits offset state income taxes for companies investing in new production equipment. Various sales tax exemptions eliminate sales and use tax on certain types of purchases, such as manufacturing equipment. While no approvals are required for non-discretionary incentives, companies must ensure that they are making appropriate filings and taking the necessary compliance steps to utilize these incentives.
Other incentives tend to be focused on more specific types of investments or activities. For instance, the state offers incentives for investments in corporate headquarters, for the use of South Carolina port facilities, for investments in public infrastructure, and for the rehabilitation of certain abandoned or historic buildings, among many others. Those incentives tend to be addressed on a project-by-project basis.
Companies that are successful in negotiating incentives start the process early, are well-advised, and communicate effectively with county and state leaders. Certainly, companies can be ambitious, but managing expectations is important. Moreover, companies should understand that their commitments to investments and jobs are not just numbers in a press release; they are obligations set out in formal, legally binding agreements with consequences.
My business law professor was fond of saying that if a student did not know the answer to a question, “money” was usually an acceptable answer. In my view, site location decisions fit that model, and companies make such decisions based on the projected impact of all factors on their bottom line. While incentives are not always the driver for the location of a project, they can and often do play a pivotal role.
Previously published on the South Carolina Economic Developers' Association blog on May 10, 2019.