Following are highlights of some of the most significant state incentives and other economic development policy initiatives emerging from 2017 legislative sessions as identified by BLS & Company’s research department. Real-time updates are available on our website here.
In July 2017, the Michigan Legislature passed Senate bills 242-244—referred to as the “Good Jobs” bills—providing new incentives for businesses that have significant job creation and/or pay above-average wages. The incentive allows companies to retain up to 100% of new employee withholding taxes for a period of up to 10 years (the 2017 employee withholding rate in Michigan is 4.25%). While the legislation has been highlighted as an attempt by the State to lure a potential Foxconn manufacturing investment, the program is available to all companies.
The program’s requirements and benefits are as follows:
Companies that create a minimum of 500 jobs, and pay at least 100% of the average regional wage, are eligible to retain 50% of qualifying employee withholding taxes for a period of five years.
Companies that create a minimum of 3,000 jobs, and pay at least 100% of the average regional wage, are eligible to retain 100% of qualifying employee withholdings taxes for a period of 10 years.
Companies that create a minimum of 250 jobs and pay at least 125% of the average regional wage are eligible to retain 100% of qualifying employee withholding taxes for a period of 10 years (irrespective of average wage).
The legislation permits the state to approve up to 15 projects per year (with an annual rollover) under the new program, and the total authorized amount of retained new employee withholdings under the program overall is limited to $200 million (although no annual funding targets have not been established, as of this writing). As such, the program requires the state to be selective and set priorities for the use of this limited allocation of incentives. The state has not yet issued regulations describing how this process will work, potentially creating uncertainties for companies in the process of making competitive location decisions.
Following a scare earlier this year by the Texas House of Representatives, which initially passed a budget defunding the Texas Enterprise Fund, the 85th Texas Legislature approved a two-year budget which fully funds the state’s most important business incentive tool. The Texas Enterprise Fund (TEF), one of the most well-known state incentive tools throughout the U.S., received a two-year funding allocation of $107 million.
TEF is a “deal closing fund” which provides discretionary cash grants to businesses that pay above county average wages and create a minimum of 25 or 75 jobs in rural and urban areas, respectively. TEF award amounts are determined by several factors, including average project wages, number of net new jobs, capital investment, community support, and the availability of program funds. The approval timeline for TEF awards has also been statutorily reduced to 30 days, with an optional 15-day extension from the previous 90-day timeline. However, making these turn-around times work in practice requires careful planning and clear expectations as to project scheduling needs.
Amid a budget battle over Enterprise Florida, the state’s primary economic development arm, the Florida Legislature recently approved a budget which keeps intact some of the state’s existing incentive programs, but created a new $85 million Job Growth Fund. The new grant program can provide funding to local governments for public infrastructure projects (including transportation and utility needs), as well as for job training initiatives. The Job Growth Fund represents a compromise to break a long-standing impasse, and is partly in response to the elimination of the state’s former deal “closing fund” (Quick Action Closing Fund) which was defunded during the 2016 legislative session.
It is important to note that the new grant program is explicitly not permitted to be used to fund incentives to individual companies, which makes it potentially less impactful for companies making competitive location decisions. However, the Governor has discretion over the use of these new grant funds, and new guidelines will be forthcoming.
Also in 2017, the Florida Legislature approved targeted new incentives specifically focused on the data center industry. Under the new program, server equipment, construction materials and electricity used at a data center property will be exempt from sales and use taxes. To qualify, the data center must have an electric demand of at least 15 megawatts (MW) and make a total capital investment of at least $150 million. Similar data center legislation failed during the 2016 legislative session.
The Governor’s Office of Economic Development (GO-Biz) announced a new pool of $230 million in corporate income tax credits for expanding companies via the California Competes Tax Credit program (Cal Competes) during its fiscal year 2017-18. This program poses some special challenges in that applications can only be made three times a year – timing which may not coincide with company project timelines. In addition, the program limits the share of the annual pool of tax credits that can be awarded during any single application period. For 2017-18, GO-Biz is accepting applications, and awarding credits as follows:
Given that demand for these new tax credits can be expected to far exceed such a limited supply, the state has created a two-tiered competitive process. The Phase 1 screening will be based on the ratio of costs versus benefits to the state. The “cut off” score will vary from year to year. The Phase 2 cut entails a second vetting based on additional economic impact and public policy considerations. In addition, the amount of tax credits available to any single business is limited to no more than 20% of all credits awarded during a fiscal year, and 25% of the total capacity is reserved for small businesses (those with less than $2 million in gross receipts). The credits are not refundable or transferrable, but may be carried forward for up to six years. The tax credits are awarded by a committee consisting of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, as well as two legislative appointees.
Taken together, the allocation limits and the various stages of the award process create multiple uncertainties for companies making location decisions on project or market-driven schedules. BLS & Co. is communicating with the state about these concerns, and will keep our clients and friends up to date on any new developments.
NYS Life Sciences Initiative
Although New York has a number of well-funded discretionary programs, which notably were deployed in attracting Aetna’s headquarters from Connecticut, special efforts have been focused on specific growth industries. For example, Governor Andrew Cuomo has launched a new $650 million life sciences initiative, focused on growing research clusters in New York, as well as to expand the state’s ability to capture the growth from commercialization of research occurring in New York. This initiative consists substantially of an allocation of existing funding capacity under already established incentives programs (e.g., Excelsior program) to life sciences Projects, as well as new funding and program tools for targeted investments in expanded R&D capacity, ranging from state capital grants and refundable tax credits for large-scale development of new lab facilities and “innovation” space and equipment ($200 million) to a 25% tax credit to induce angel investments.
This multi-faceted initiative includes $250 million in tax incentives for new and existing life science companies to better compete with other states actively recruiting New York’s top life science talent. The new initiative helps address the need for the state to draw more capital to the life sciences sector from early stage and angel investors, in addition to making it more attractive for new and existing firms in life sciences to locate, invent, commercialize and produce in New York.
This initiative also includes 100 million in investment capital for early stage life science initiatives, with an additional match of at least $100 million for operating support from private sector partnerships. Part of the investment will include a new life science launch competition, modeled on the highly successful 43North innovation competition, which will further support the growth of the life science sector.
In addition, for projects located in New York City, Mayor Bill de Blasio has announced a complimentary plan to invest $500 million over 10 years in life sciences projects, infrastructure and workforce development initiatives. The city program consists of a targeting existing funding capacity to life sciences projects, as well as new program tools and funding.
In May, Governor Doug Ducey signed into law a bill which amends the state’s Quality Jobs Tax Credit program. The program was modified this year to allow businesses that make lower capital investments, but create higher paying jobs, to be eligible for the incentive. The tax credit program was also extended until 2025 during the legislative session.
In the midst of a three-year budget battle between the Governor and Legislature, the state’s primary business incentive tool – the Illinois Economic Development for a Growing Economy (EDGE) Tax Credit Program – was allowed to expire (again) at the end of April. Now with a new two-year budget passed and permanent income tax increases enacted, the Legislature returned to considering the EDGE program, and on August 13th the Legislature passed House Bill 162 which reinstated the former EDGE program until June 30th, 2022, with a number of policy changes. Governor Rauner is expected to sign the bill once it is received from the Senate, which has until September 12th to submit the bill to the Executive branch. A summary of the changes to the EDGE program are as follows:
Old EDGE Tax Credit Calculation (expired):
For new employees:
DCEO would award up to 100% of the incremental income tax created by new employees.
For retained employees:
New EDGE Tax Credit Calculation (House Bill 162):
For new employees, the legislation allows for the lesser of the following:
If the project is located in an underserved area, then the credit may not exceed:
For retained employees the credit may not exceed:
Another legislative change that will affect the both the new EDGE program and existing EDGE agreements is the permanent increase in corporate tax rate (5.25% to 7.0%) and personal income tax rate (3.75% to 4.95%). While higher tax rates are rarely seen as good for economic development, the “silver lining” for EDGE recipients is that increased tax liability will allow increased utilization of EDGE credits that previously may have been stranded due to the credits being non-refundable. In addition, given that the actual value of the EDGE tax credits is based on the incremental income tax revenues from eligible jobs, higher personal income tax rates may result in higher EDGE awards for existing EDGE agreements.
However, it also is important to evaluate the higher personal income tax rates and new EDGE percentage caps together. Under the old program, EDGE credits were awarded at 100% of the incremental income taxes created under the 3.75% tax rate, whereas the new program will reduce the credit to 50% of the incremental tax revenue for most projects, but in the context of the new 4.95% tax rate. Thus, the effective impact is not a full 50% reduction in the maximum benefit. Rather, the new maximum credit value will be equivalent to 2.475% of payroll.
Finally, there is speculation that the program could be amended in future legislative sessions to make EDGE credits transferable, thus enabling businesses without state tax liability to monetize awarded EDGE credits, which would bring Illinois into competitive mainstream with other states that are moving toward transferable tax credits.
For real-time updates on state incentive programs please visit the BLS & Co. website at www.BLSstrategies.com. For more information about how incentives can add value to your next business location decision, please call 609-924-9775 or email us at info@BLSstrategies.com.
Kyle Syers is a Credits and Incentives Consultant at Biggins Lacy Shapiro & Co., one of the largest, most highly regarded site selection and incentives advisory firms in North America. BLS & Co. helps manage the complexities associated with finding optimal location and securing incentives to support new ventures.
Follow Kyle on LinkedIn here or contact him directly at Ksyers@BLSstrategies.com.