State Incentives Economic Development Term Paper

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Incentives and Economic Development

When attracting new businesses to our community, or encouraging the start-up or expansion of businesses that are already here, the Beacon Council promotes the many advantages of doing business in Miami-Dade County. Those advantages include a number of business incentive programs and a favorable tax structure that have encouraged many domestic and international companies to relocate or expand their operations here.

BMW, Mercedes-Benz and Federal Express are just a few big companies that have been lured to various states by hundreds of millions of dollars in business incentive packages, bringing promises of new jobs and economic development to these states.

In 1992, BMW decided to build in South Carolina after the state offered the company $130 million in business incentives (McIntosh, et al., 1999). Mercedes-Benz's decision to build its first United States factory in Alabama was strongly influenced by the state's offer of more than $300 million in both financial and tax incentives. In 1996, Federal Express was attracted to North Carolina by a business incentive package that was worth hundreds of millions of dollars.

These high-profile companies were baited with state incentives in exchange for the investment of capital within the state. States refer to these capital investments as "enhanced investments" or super investments (McIntosh, et al., 1999). Many states feel that when enhanced investments are involved, it is necessary to use special legislation to persuade the investing company to make the investment within that state.

Most states view offer by companies to relocate or expand operations in their state as a positive factor for their state's economy and increased employment for local residents. Therefore, state officials often grant incentives to ensure the relocation or expansion.

An Investment in the State

According to the Joint Legislative Audit and Review Committee, state incentives that aim to lure or keep businesses in the state are cost-effective, even if time of economic recession (Shear, 2002). The committee studied state incentive programs in Virginia and found that the programs were cost-effective.

During the period between 1997 and 1998, when the Internet economic boom was at its peak, the state of Virginia offered businesses more than $30 million in state incentives. The committee found that this amount was recovered in higher income taxes in three to five years.

This year, the committee was presented with a request for the study of the practice of providing businesses with cash payments or other cash-oriented incentives. Virginia currently offers cash grants through the Governor's Opportunity Fund and payments that correlate with the number of jobs created after a business comes to the state. The committee says that both programs are worth continuing (Shear).

If the state eliminated funding of its two largest business incentive grant programs, there would be longer-term consequences," according to the committee's report. "In two or three years, the state's resulting loss in individual income tax revenues would likely be more than the amount saved by cutting these programs." (Shear)

In Northern Virginia, the committee studied MCI WorldCom Inc., which was promised a $2 million payment from the opportunity fund and $300,000 in payments tied to the company's 3,500 jobs. The study revealed that those workers had paid $7.6 million in income taxes by last year.

According to the report, Virginia has promised companies about $170 million over the next 13 years (Shear). However, this amount could shrink if companies scale back their plans in Virginia or they fail to meet the requirements for earning the payments.

Offers and Benefits to Companies

Many states, including West Virginia, offer a Super Tax Credit program that provides substantial tax credits for businesses that create jobs in specific industries, such as manufacturing, information processing, and destination tourism projects (WVDO, 2002). For example, West Virginia takes off about 80% of its basic business tax liability over ten years if businesses create jobs for 50 people or more.

The Corporate Headquarters Relocation Credit is another popular incentive, which is available to corporations in particular industries that relocate their headquarters to the state. If at least 15 jobs are created, the allowable credit is 10% of qualified investment.

If the corporate headquarters relocation results in 50 or more new jobs, then the allowable credit is 50% of qualified investment. Qualified investment includes the reasonable and necessary expenses the corporation takes on when moving its headquarters to the state.

In 2001, Toyota responded to state incentives when it announced that it would bring production of engines and transmissions for its Lexus RX300 sport utility vehicle to its West Virginia plant (WVDO, 2002). The Lexus move brought 200 jobs, bring Toyota's total employment at the site to more than 1,000, with investment exceeding $950 million.

The city was originally able to lure the company to the state in 1996 with a heft state incentive package that included $15 million in tax credits over 12 years. The state also spent $3.38 million to purchase 230 acres in Buffalo and make site improvements, and provided $300,000 in worker training.

The incentives turned out to be a smart investment for the state. In 2000, 8,849 jobs were created, even higher than the 8,576 jobs added in 1999. Investment in business growth showed the biggest increase, up to $1.7 billion in 2000, compared to $617 million the previous year (WVDO, 2002).

Maryland's Business Incentives

Maryland is another state that is known for using business incentives as bait for companies looking to locate or expand corporate facilities. Between the years of 1995 and 1999, state officials cut 16 individual taxes on businesses (MDBE, 2002).

As a result of these decreases, state projections revealed that the state's businesses would save $2.2 billion over a five-year period. In 1998, the state established the Job Creation Tax Credit program, which provides income tax credits to companies for creating jobs.

Maryland seems to be another success story. The state's growth in employment has averaged 2.5% per year, and the first 11 months of 2000 were on pace to match this average. For three years in a row, the state's job growth rate has averaged 2.5% per year (MDBE, 2002).

In the past, Maryland's economic growth has been relatively slow. However, since the implementation of these incentive programs, its economic growth has been well above the national average.

In the late 1990's, several companies, including TRW, Bell Atlantic and T. Rowe Price, have seen major corporate expansions. This led to a major shift in the state's economy. Once known as a poor blue-collar town, Baltimore now is a main attraction for modern manufacturing facilities, such as the 400,000-square-foot Allison Transmission plant (MDBE, 2002).

The state realizes the importance of offering unique incentive packages to potential investors. For example, Maryland officials recently offered ClosetMaid, a storage products company, over one million dollars in training and recruitment aid and tax credits build a 200,000-square-foot manufacturing plant in the state (MDBE, 2002). The plant is expected to employ about 800 people within five years.

The company is also eligible to receive up to $5.5 million in tax credits through the One Maryland program, which provides financial assistance and tax credits in "distressed" areas of the state. Rob Clements, ClosetMaid's president, says the company "would not have seriously considered Garrett County prior to this initiative." (MDBE, 2002)

Competition for Businesses

There are many ways that states persuade businesses to relocate or expand in their state. For example, the State of Florida has three major incentive programs designed to lure companies. The Qualified Target Industry Tax Refund Program gives a tax refund of up to $3,000 per new job created. Additional bonuses are available for higher paying jobs. The Quick Response Training Program provides customized start-up training grants. Finally, the Economic Development Transportation Road Fund Program allows up to $2 million for public transportation improvements as an inducement for a company's expansion or relocation.

Over the years, most states in the South Atlantic Region have made huge efforts to attract companies that would bring jobs and taxes to the area. Extensive training incentives have been used to attract companies from the Northeast and Midwest. Today, just about every state in the country has a package of business incentives that aim to make their state the best choice.

Training programs designed to meet a company's unique needs are still a big draw to the South Atlantic Region. North Carolina, South Carolina and Virginia were the first states to offer these programs back in the late 1950s and early 1960s (Mooradian, 2000).

This region has another competitive edge over the rest of the country, as low union participation is a "a strong suit for the region" because companies love this (Mooradian, 2000). Labor costs remain lower in this region, giving states a cost advantage.

Due to the fact that the states of this region depend on state incentives to draw businesses, there is a strong element of competition amongst the states. For example, in 1999, Maryland and Virginia engaged in a battle of incentives for Marriott's headquarters (Mooradian, 2000).

In 1999, Marriott decided…

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