January 23, 2012

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Tax Incentives Build Utah Businesses

Marie Mischel

January 23, 2012

Since August, Utah Gov. Gary R. Herbert has continued his predecessor’s business-friendly policy of offering tax credits to high-paying companies that either expand or relocate to Utah. Economic development tax increment financing (EDTIF) is a common method to encourage business growth. At the state level, in Utah, the program essentially offers a tax credit to qualifying companies; a post-performance policy that doesn’t divert taxes from other taxpayers. “Those are the kinds of incentives we like to see because it means that we’re not taking existing tax dollars, or supporting businesses that are oftentimes just in competition with other businesses who are paying the taxes,” says Lane Beattie, Salt Lake Chamber president. “We want tax policies to drive economic development, not restrict it, not take away from it, not dry it up.” How It Works With the ongoing economic downturn, many companies are making do with fewer employees and being extremely cautious about expansion. “Consequently, we can stimulate our Utah economy by attracting really well-run, strong companies that pay good wages and benefits. That’s why corporate incentives, on top of everything else we do, are important,” says Spencer Eccles, executive director of economic development for the Governor’s Office of Economic Development (GED), whose goal is “to nurture an environment where Utah companies can be successful,” according to goed.utah.gov. GOED also encourages growth of existing businesses; 10 of 11 of its last tax incentives were given to either homegrown companies like Merit Medical or those like E-Bay that already have operations in the Beehive State. To qualify for EDTIF, companies along the Wasatch Front must pay more than 125 percent of the average salary; if they’re located in the 17 rural counties, they must pay 100 percent of the average. In either case, they must also offer benefits, meet certain investment goals such as the number of jobs offered and show that they were considering locating or expanding outside Utah. One example of EDTIF’s success is the Proctor & Gamble facility in Tremonton, which is scheduled to open this spring. At capacity, it will employ more than 1,000 people and is expected to generate almost $100 million in new state revenue and $400 million in wages over 10 years. “Proctor & Gamble defines blue chip companies,” says Derek Miller, GOED’s managing director for business incentives and growth. “They’re exactly the right kind of partner for the state of Utah.” The “right kind of partner” is a company that’s profitable, reputable, sustainable and pays wages that will allow Utah residents to have good jobs and support their family, he adds. Nationwide competition for such companies is stiff. For example, four of ATK’s five divisions are in the Beehive State. GOED recently offered a $40 million EDTIF to have the company’s aerospace structures division locate here, estimating that over 20 years the division would generate $100 million in new taxes. However, ATK chose to locate the division in Mississippi, which gave $140 million in incentives. “Rarely is Utah the top bidder, but the state is competitive,” Eccles says. “We have to be; we’re competing with other very aggressive states or other countries.” Nevertheless, Utah doesn’t offer companies money upfront. “Any incentives we offer are simply a rebate or a credit of taxes paid by the company,” Eccles says. “They come simply from the company hitting the requirements of the incentive that they agreed to when the offer was issued. That has to do with the number of jobs created, company investment and salaries, plus the competition for the project. The tax incentives are coming from a tax credit earned by that company and not from anybody else.” While some criticize incentives, “in the real world and especially now that the economy’s under pressure, states are very, very competitive with each other in that regard and incentives like these tax credits that we have are really the only tool in the tool box for us to compete against other states, other than the natural incentives that we have with workforce,” says Jeff Edwards, president and CEO of the Economic Development Corporation of Utah (EDCUtah), a 23-year-old non-profit organization whose mission is to attract and grow competitive, high-value companies and spur the development and expansion of local Utah businesses, according to www.edcutah.org. “If the tax incentive program were subtracted from the whole program, we could still compete, certainly, but not on the same level that we could with the program.” Natural Incentives Although Utah isn’t always the top bidder when it comes to tax incentives, the state has other assets that business executives seek. “Every single company that we work with…they all want to know about the same four things, and the number one thing every time is workforce; they want to know about our people,” Miller says. “Number two is our business operating environment and number three is our market access. Number four is quality of life.” Edwards, agrees that the quality and quantity of the local workforce is a solid draw for executives. “If you distill all the different projects – and it varies by industry, of course – but the number one thing that comes forward is workforce,” Edwards says. “That is the most important decision factor for a company as they decide where to put a facility.” When executives conduct a site visit, Edwards asks them to meet one-on-one with existing employers because, “Our employers here rate their employees here very high. They say, ‘These are people who are reliable, they show up to work on time, we don’t have lost time, they’re intelligent, they do what we need them to do.’ They just give them really high marks on our workforce. It’s not just a marketing slogan; it really is a reality, and that speaks volumes to a new company that’s considering coming here.” Additionally, Utah offers a lower cost of doing business than other places, Edwards says, including the cost of utilities, real estate, taxes and wages. “You add all those things together, and Utah comes in significantly under the national average cost of doing business. You can make a compelling case to say, ‘Not only will you get a good workforce here, but you can also do an operation in Utah for less than you could somewhere else.’” Utah also has “a stable government environment,” Edwards says. “Even with the challenges we face right now, we are so much better off than other states are in terms of where we are with our budget. We have a fiscally responsible government; we didn’t have to raise taxes last time we went through this, and that’s a very strong playing card that we’ve got to work with.” Helping Utah’s Own Beattie says that while some Utah companies might fear the competition, new companies from out-of-state strengthen other existing companies within Utah. “They buy supplies locally, their employees shop locally. You need both to have a vibrant economy.” As formentioned, Utah companies are eligible for tax credit incentives for expansions. In FY ’09, 10 of the 17 offered incentives were for businesses with Utah locations; in FY ’10, 10 of the last 11 fell into that category. “We would view a retention project with the same value as a recruiting project,” Edwards says. Likewise, GOED has programs to help Utah companies of all sizes and in all business sectors, Miller says. Looking Ahead Despite the economy, many companies are seriously considering Utah as a place for expansion or relocation. “We have had more projects that we are working on now than we have ever had,” says EDCUtah’s Edwards. “And the majority of these projects are very serious. These guys are spending serious money on doing their due diligence and hiring consultants and doing geotechnical work and all kinds of very expensive things. They’re not just out kicking the tires; they’re doing some very serious looking.” However, he adds, “They just can’t pull the trigger. From what we can tell, the challenge is that their board of directors says it looks good but they want to wait to see what will happen with the national economy.” Therefore, Edwards projects 2010 will be a year of slow growth. He particularly sees the homeland defense sector as one with the potential for strong growth. Likewise, in spite of a reduced budget, GOED officials see a productive future. Cuts to GOED’s operating budget aren’t as significant as they appear because a number of one-time monies were spent last year and are not expected to carry over to the new year, Eccles says. “We believe that we’re in a good position to fulfill all of our requirements and obligations and continue to do our job properly. Incentive offers haven’t been reduced because, as Miller points out, that’s not a legislative appropriation but instead a tax credit based on money that the companies themselves already paid. Another reason for optimism is that the companies that received incentives have, as an aggregate, performed at least at an 80 percent level of what they were expected to do, despite the economy. Without the thousands of jobs created by these companies, both those that expanded locally and those brought in from out of state, the state’s unemployment would be much higher, Miller says. “Thank goodness we have these new and expanded companies in Utah. Because of the millions of dollars in taxes they have and will be paying, Utah is in an enviable economic situation compared to many other places around the country.”
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