Economic Development Incentives

An economic development incentive can be strictly defined as “cash or near-cash assistance provided on a discretionary basis to attract or retain business operations. In practice, however, it is a broadly used term denoting an array of benefits designed to promote new business activity or to encourage business or job retention. These benefits principally encompass tax and economic incentives provided by federal, state or local governmental bodies. Other entities, such as utilities and non-profits, can also make incentives available for these purposes. They accord the recipient, in some manner, a monetary benefit (i.e., tax incentives) or an in-kind benefit (e.g., state regulatory releases of environmental liability, municipal infrastructure improvements). Private enterprises, including individuals, are generally the ultimate beneficiary of economic development incentives. Depending on the incentive in question, other qualified parties are eligible to receive them, as in the case of municipalities, utilities, or economic development agencies.

Economic development incentives consist of two classes of benefits: (i) one mandatory or automatic and (ii) the other discretionary. The former classes of benefits generally comprise tax incentives, which are established by federal, state or local law, immediately triggered by a specified type of business activity. For example, a private enterprise automatically qualifies for a state sales and use tax exemption or rebate when it purchases manufacturing equipment. Discretionary incentives can consist of either tax or economic benefits and can be established by federal, state or local law, by policy of a public body or other entity, or by negotiation among transaction participants. Generally speaking, discretionary incentives consist of more complicated arrangements than automatic or mandatory incentives, and necessitate a private enterprise to solicit the incentive from, and to negotiate with, the public body or other entity conferring them.

The following illustrates economic development incentives made available to private enterprises or other recipients:

• Industrial development bond financing, exempting interest from federal or state income taxes, for designated capital expenditures.

• Federal or state new markets income tax credits for qualified capital investment for low-income communities or for low-income persons.

• State or local taxable bond financing used to effect ad valorem property tax exemptions.

• Tax increment financing, allocating all or a portion of new taxes (i.e., ad valorem property taxes, sales taxes) generated by projects or capital investment for the direct or indirect benefit of a private enterprise.

• Federal or state job training grants funded to local governments or private enterprises for the training of new employees or the re-training of existing employees.

• Refundable or non-refundable state income tax credits for job creation or retention, or capital investment, by private enterprises.

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