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"Cost Reduction" is the mantra of any contemporary successful business. As a competitive edge, company management is striving to identify and capture incentives that reward expansion, production increases or investments geared to cost reductions or job retention. Many companies have offshored operations in order to cut costs and increase profits. As a result, state and local government agencies are recognizing the need for retention incentives. This article is intended to parlay these notions to illustrate that capital investments, even if those investments result in short- term job reductions, may be eligible for lucrative incentives in several states.

While the statistics on job losses vary depending on the source, Forrester Research Inc. has estimated that 3.3 million U.S. service jobs will go offshore by 2015. And, that number appears to be increasing.1 Further, according to AngelouEconomics, the majority of job losses will be in offsite support occupations (back office, customer and corporate support) because these functions are typically repetitive in nature and do not require large amounts of employee or client interaction.2 While there is no immediate remedy to the offshoring epidemic, there are several states that have embraced a true job retention incentive and tax credit strategy. A significant number of these initiatives do not require job creation as a component of their incentive package, but rather focus on job retention and capital spend.

Job Retention

In discussing business retention incentives, or job retention incentives, it may be useful to first define the traditional meaning of economic development. As stated by the International Economic Development Council (IEDC), "the main goal of economic development is improving the economic well-being of a community through efforts that entail job creation, job retention, tax base enhancements and quality of life."3

A typical big win for an economic development (ED) professional has historically been an announcement by a company in his/her community as a location for a facility that creates 500 or more jobs with a capital investment of at least $500 million. Clearly, an announcement like the one just described is not an everyday occurrence. Given the massive job losses on an annual basis coupled with the need for cost reduction, the question has become: should incentives be developed only for once-in-a-lifetime project locations, or for projects with smaller, yet substantial, capital improvement and job retention commitments? The answer lies in a bit of both.

Let's face the facts; it is much easier to keep jobs in one's community than it is to create new ones. Recognizing this, many state and local ED professionals have devised programs to regularly and systematically visit their existing businesses. In other words, ED professionals are trying to get to know their business neighbors. Not only have they found these visits to help in cases of retention, but it has also proven to be extremely valuable for expansion and location opportunities.

What Does This Mean to Companies?

Companies have begun to realize the value in securing job retention incentive packages. Therefore, companies recognize the benefit of participating in a business retention and expansion (BRE) program. A BRE program facilitates a "getting to know you" focus that has been adopted by many economic development organizations. According to the IEDC, "BRE is one of the main priorities of state and local development professionals."4

BRE programs consist of business visitations by local leaders and/or volunteers, at which time many ED professionals administer a survey. The survey accomplishes several things. First, it provides valuable corporate intelligence. Second, it uncovers issues that have gone unreported, or simply not mentioned, by local business leaders. Examples include: a local business climate increasingly non-conducive to their industrial sector; a need to develop cluster sectors within the community; the lack of competitive suppliers in their community; or workforce and training assistance specific to their needs. Third, the visitation and survey process fosters goodwill between the local and business communities. Finally, and most importantly, BRE programs encourage communication, relationship building and mutual expectation management. After all, an ED professional should be the first to know why a local business is relocating or closing operations well before it is announced. One of many goals of the ED professional is to create strong relationships so that he/she is alerted to problems before they result in the downsizing or closing of an operation.

At the conclusion of the BRE interview process, company management and ED professionals will have a mutual understanding of the company's need for available job retention incentives. This understanding provides valuable information for the local ED professional and/or elected officials to present a picture of the overall business climate for their community, complete with concerns and praises.

Follow the Money

Clearly, companies should seek out communities that not only have a meaningful BRE program, but that also have well-defined retention incentives. It is not uncommon for high profile incentive packages to be developed specifically for large existing employers. However, many communities are now offering retention incentive programs to small and mid-size employers.
When looking to retain employees and/or expand a facility, a company should not hesitate in asking its community what incentives are in place to help with the retention/expansion project.

A Different Approach

Currently, there are a dozen or so states that have begun to offer job retention programs that fully recognize today's new economy. One significant difference from previous incentive programs is that some programs do not require new job creation. The focus is to simply maintain existing jobs along with capital improvements and enhancements to the business and/or its facilities to qualify the company for benefits. Some of these states have programs that businesses can take advantage of as they begin to make capital investments that will enhance production capacity or lower their production costs. The following listing is not meant to be inclusive of all job retention incentives; rather it provides information on the more well known, or publicized, programs.

Table 1: Examples of State Job Retention Incentives

State. Program. Description.

Delaware. Investment and Employment Credit. For a taxpayer that invests the greater of $1 million or 15 percent of the unadjusted basis of the facility with no new jobs, every retained job can earn an alternative income tax credit equal to 75 percent of the standard job tax credit.

Illinois. High Impact Business Designation. Designation is contingent on the business undertaking a "large scale investment and development project." The project must involve a minimum of $12 million investment causing the creation of 500 jobs or an investment of $30 million causing the retention of 1,500 full-time jobs.

Iowa. Community Economic Betterment Account (CEBA) and Economic Development Set-Aside (EDSA). Provides financial assistance to companies that create new employment opportunities and/or retain existing jobs, and make new capital investment in Iowa.

Kentucky. Enterprise Zones. The business may increase its capital investment by 20 percent during an 18-month period with no job creation requirement, or increase its total workforce by 20 percent, of which, 25 percent of the new employees must meet a targeted workforce criteria.

Michigan. Michigan Economic Growth Authority (MEGA). Job retention incentives contingent upon meeting one of the following two provisions: 1) the business maintains 150 retained jobs at a facility, maintains 1,000 or more full-time jobs in Michigan and makes new capital investment, or 2) the business is located in Michigan at the time of the application, maintains at least 100 retained jobs at a single facility, and agrees to make new capital investment, by the end of 2006, equal to the greater of $150,000 per retained job at the facility, or $15 million. This program also provides incentives for new jobs.

Minnesota. Job Opportunity Building Zones (JOBZ). Provides local and state tax exemptions to new and expanding businesses throughout Minnesota, with the exception of the seven-county Minneapolis-St. Paul metropolitan area. Businesses qualify for job retention incentives if they make a minimum capital investment equal to 10 percent of gross revenues with no job creation. New job incentives require an increase of employment by 20 percent within the first year.

New Jersey.Business Retention and Relocation Assistance Grant (BRAG). Businesses that have operated in New Jersey for at least 10 years and that relocate and retain at least 250 jobs within the state are eligible for business tax credits and exemptions. When at least 500 jobs are relocated within the state, a maximum regular benefit of a $1,500 credit issued per full-time job may be granted. Relocating 2,000-plus jobs into a designated urban center can qualify a business for an additional grant.

New York. Empire Zones Qualified Empire Zone. Enterprises are eligible for sales tax exemption, real property and business tax credits for businesses hiring new employees, making capital investments or preventing job loss in the zone by retaining all or some of their existing jobs.

Ohio. Ohio Job Retention Tax Credits. Businesses that retain at least 1,000 full-time employees and make a fixed investment of at least $200 million during a three-year period are eligible. The credit provides a non-refundable tax credit for up to 75 percent of state income taxes withheld per employee for up to 15 years. Non-refundable tax credits can be used to reduce the applicant's corporate franchise or income tax liability of company operations in Ohio.

Pennsylvania. Keystone Opportunity, Expansion,
and Improvement Zones. Offers incentives to a business that either expand employment by 20 percent or make capital investments of at least 10 percent of the gross revenues of the business in the previous year.

Texas. Enterprise Zones. Dependent upon the amount of capital investment, the number of new jobs created or retained and the distress level of the community. Additionally, businesses are eligible if the investment increases the production capacity by 10 percent, or reduces the overall cost per unit produced by 10 percent, or if an investment in re-tooling prevents the facility production from falling. Only 85 designations may be awarded every two years.

Wisconsin. Development Zones Credits. Tax credits available based on the number of full-time jobs created or retained in the state and on amounts spent for environmental remediation in a Development Zone, Development Opportunity Zone, Enterprise Zone or Agricultural Zone.

Wisconsin. Manufacturing Investment Credit. Business must retain 100 percent of its full-time jobs in Wisconsin; invest at least 2 percent of its depreciable assets in Wisconsin facilities; and maintain at least $5 million average annual investment in Wisconsin.

Case Study: The Texas Model

Recognizing that job retention along with capital investment is something worth incentivizing, the state of Texas significantly expanded the benefits available to companies under the Texas Enterprise Zone Program in 2001 and 2003. More specifically, this program allows businesses to obtain tax incentives for current employees without a requirement to add new jobs. The traditional development pattern of newly created jobs along with new capital investment continues to qualify for Enterprise Zone incentives.

With the revamped program, a business does not need to be physically located within a Texas Enterprise Zone to be eligible for the program's tax incentives. In fact, the entire state can be considered an Enterprise Zone, as a company can receive program benefits in or out of geographically distressed areas. Prior to the expansion of the program, qualifying businesses were required to be located in pre-determined geographic areas. This requirement significantly limited the number of eligible businesses who might participate in the program. If the business is not physically located within a designated zone, then a greater percentage of the business' new hires must come from economically disadvantaged backgrounds. Specifically, a business in a zone must agree to hire 25 percent of its new hires from a disadvantaged background, while a business outside a zone is required to hire 35 percent.

Additionally, there is a unique job retention provision in Texas' statute, which allows generous incentives for businesses that invest in their facilities and ultimately improve plant or operation efficiency. If such an investment either: 1) increases the production capacity by 10 percent, or 2) reduces the overall cost per unit produced by 10 percent, or 3) if a capital investment in re-tooling prevents the plant production from falling, the businesses can comply with, and receive substantial incentive rewards. No job creation is required to participate in the program.

And it seems to be working. Since Sept. 1, 2001, when the new criterion on production was first instituted, more than 9,389 jobs have been retained or projected to be retained. Capital investment to retain these jobs has been staggering: more than $5.2 billion estimated to date.

Summing It Up

With the dramatic trends toward offshoring, businesses are able to capitalize on the need for state and local governments to serve their communities by accepting the notion that job retention is equally as important as job creation. This article suggests that incentives related to job retention bolster this emerging philosophy. Some governments appear to be reaching this conclusion; however, much more can be done.

On the national front, President Bush believes America's economic prosperity should extend to every corner of our country. To help reach that goal, he has proposed a new Opportunity Zone initiative to assist America's transitioning neighborhoods (those areas that have lost a significant portion of their economic base as a result of our changing economy). For example, this program would support those communities that have sustained a loss of manufacturing employment and are in the process of transitioning to a more diverse, broad-based economy.

Businesses in need of expansion/retention aid should take the opportunity to contact their local ED professionals if they have not already been contacted as part of a BRE program. On the other hand, if businesses are asked to take part in a BRE survey, they should take advantage of the opportunity and ask the local leaders and volunteers conducting the survey about state and local retention incentives.

ED professionals and public policymakers recognize the need to retain and grow existing businesses. Based upon this recognition, they are increasing formulation of policies that provide funding to implement this strategy. Rather than crafting case-by-case incentives, they have shifted to developing business retention incentives in which all existing businesses can participate by investing in new capital, increasing production, increasing net worth or whatever the performance criteria desired by the local or state leaders. This approach may also help to dissuade detractors from suggesting favoritism is at play in doling out incentive dollars.

Job retention incentives demonstrate to business leaders and citizens alike that the local, state and federal governments are committed to existing industries and committed to helping those industries during harsh economic times. Rather than paying lip service to the importance of keeping businesses in the United States, job retention incentives demonstrate that government leaders and policy makers are dedicated to the businesses that have been on our shores for years, and hopefully, will remain for years to come.

Knowing this, companies should seek help from their communities and be aware of retention/expansion incentive opportunities. If a company knocks on the door of government, it may be surprised at how much help is already in place. In most instances, companies need only to ask.

The views expressed by the authors do not necessarily reflect those of Ryan & Company.

Karin Richmond is a member of the board of directors of the International Economic Development Council and lead manager of the Texas practice within the Business Credits and Incentives practice of Ryan & Company. Co-author Trista Fugate works with Richmond in the Business Credits and Incentives practice of Ryan & Company.
Ryan & Company is America's largest independent state and local tax consulting firm and provides a comprehensive range of state and local tax services on a multistate basis. With locations throughout the United States, Ryan & Company serves many of the world's most prominent Fortune 1000 companies. For more information, visit www.ryanco.com.

End Notes
1. McCarthy, J. C. (2004, May 14). "Near-Term
Growth Of Offshoring Accelerating: Resizing
U.S. Services Jobs Going Offshore."
IT Views and Business Trends.
Retrieved January 13, 2005, from
www.forrester.com/Research/Document/Excerpt/0,7211,34426,00.html
2. AngelouEconomics. (2004, October.)
"The Future of White-Collar Offshoring.
Retrieved" January 19, 2005 from
www.angeloueconomics.com/documents/Offshoring WhitePaper_001.pdf
3. Economic Development Reference Guide. (2004).
Retrieved August 25, 2004, from
www.iedconline.org/hotlinks/whtecodev.html
4. Ibid.