When Indiana Trumped Mexico
Dominating the news last week was the deal that kept Carrier from sending jobs to Mexico. Some on the right celebrated this deal as a sign that Donald Trump's tough economic approach will work. Those on the left are skeptical, wondering how the President-Elect could keep a company in the United States so quickly and easily when Indiana had presumably been working on this very same deal for 18 months. Some on both sides feel like Carrier held him hostage with demands of a better deal. What gets lost in the headlines and political commentary is that these types of deals take place every day across the country and are primarily negotiated with state and local officials.
In this case, tremendous emphasis has been placed on the retention of approximately 800 jobs that Carrier previously announced would be moved to Mexico. However, one of the keys to this deal is a sizeable capital investment of at least $16 million to renovate one of their plants in Indiana. Without the added capital investment, the $7 million in state incentives would likely be significantly less.
In breaking down the $7 million incentive package, approximately $1 million is dedicated to offsetting renovation costs, another $1 million will be used to train Carrier employees and $5 million will be awarded to Carrier in the form of conditional EDGE tax credits. The EDGE tax credits provide a small refund of the employee withholding tax paid by the company over a 10-year period.
Taking a step back, looking at the total incentives package and applying it solely to 800 retained jobs, that breaks down to an investment of $8,750 per job for the state of Indiana spread out over 10 years. Adding in an additional 269 jobs that were not being moved to Mexico, but will be retained in Indianapolis and that state investment drops to $6,548 per job. As economic development deals go, this one seems fairly conservative.
A company can qualify for incentives in a number of ways, including relocations, expansion of an existing facility, routine capital upgrades and renovations. The process of negotiating incentives is both complex and time-consuming, especially when negotiating with multiple parties at the state and local levels. Furthermore, it can be challenging to place an accurate valuation on incentive packages. For example, a state may offer a significant amount of tax credits as part of the overall package. Unused tax credits may or may not carry over, which means the true value depends heavily on the state's tax laws and the company's projected tax liability.
If a company will not be generating significant tax liability on the front-end there are ways to supplement unusable tax credits by negotiating a custom-tailored incentive package based on the company's needs. This approach will offset particular costs and significantly boost the project's ROI.
You may not be thinking about moving thousands of jobs to Mexico, and thus earning mentions in Donald Trump's Twitter feed. However, if your company has plans in the coming year to relocate, expand or make a capital investment at your operation, Global Growth Advisors can add value to your project through our experience negotiating incentives across the country. The results will be sure to affect your bottom line through increased ROI.
Kris Phillips is a co-founder and Principal of Global Growth Advisors LLC, a professional firm that negotiates and maximizes incentives packages for companies investing in the United States.