Incentives Watch: The Ghosts of Incentive Packages Past and Present

For states hoping to attract economic investment, it seems that incentive packages have been reduced to a mere prerequisite. As states across the country battle to host the next new headquarters or manufacturing plant, every penny of foregone tax revenue could make the difference in a company’s final decision. As noted in my last blog, however, incentive packages may not always live up to the hype, and can become an early Christmas for some and a lump of coal for others. Three incentive packages from across the country highlight the strengths of such packages, but also reveal important weaknesses.

Mickey Changes His Mind

In an unusual move, Walt Disney Co. recently asked the city of Anaheim, home to California’s Disneyland, to abandon tax incentive packages agreed to in 2015 and 2016. Disneyland, the economic engine of Anaheim, and Walt Disney Co., its biggest corporate citizen, ironed out incentive packages between the city that included the construction of a 10,000 space parking garage, a ban on a tax on ticket sales, and Transient Occupancy Tax (hotel tax) rebates. In exchange, Disney invested over $1 billion in a Star Wars themed section of the park, and the construction of four luxury hotels. However, changing political winds, including the defeat of two pro-Disney councilmembers in a recent election, appear to have altered the relationship between Anaheim and Walt Disney Co.

In its request to scrap the package, Walt Disney claimed that the incentives had created an adversarial climate and that the private-public partnership would suffer if continued. Part of the “adversarial environment” is a shift in public attitudes towards incentive packages. People have begun to ask why a company worth $152 billion needs to ask for more incentives, and whether the investment would have been made even without it. Lurking in the background of Disney’s request is Anaheim’s November ballot initiative to raise the minimum wage to $18 an hour—but only for companies that receive city subsidies and incentives. Though unusual, the unraveling of this type of public-private relationship is far from rare.

Musk’s Brief Respite

In 2014, Tesla Motors Inc. and the Nevada Governor’s Office of Economic Development entered into an incentive agreement to construct and operate a “gigafactory” outside of Reno, Nevada. From all indications, the agreement seems to be going well. The terms of the agreement require $3.5 billion in capital investments and the hiring of 6,500 Nevada residents over 10 years. So far, Tesla appears to be on track to meet and even exceed these targets, with plans to invest $5 billion in the factory and hire 10,000 residents. The news comes in light of renewed criticism of such agreements, and whether they represent a net negative or positive. Time will tell whether Nevada will see any return on investment, especially from a company that has yet to make a profit.

North Carolina Bids Up; Falls Flat

In August 2017, Japanese automakers Toyota and Mazda announced plans to open a massive new assembly plant. This list of possible sites was narrowed to two: Greensboro, North Carolina and Huntsville, Alabama. Yet even when the value of the incentive package North Carolina offered grew to an estimated $1.6 billion, (equal to the value of Toyota and Mazda’s entire investment) Huntsville, Alabama was declared the winner. 

According to many, North Carolina lost the competition not because of the size of the incentive package, but because of a less flashy, yet arguably more important factor: supply chains. The joint-venture’s chosen plant site in Alabama (which offered $1 billion itself), lies along the route of a multi-state automotive manufacturing and supply corridor. Toyota and Mazda were wary of “bending the supply chain” eastward toward North Carolina.

The examples above illustrate how state tax incentives may put a particular location on the radar, but that incentives alone are not necessarily the deciding factor. In the competitive world of capital investment, companies often look beyond incentive packages to real business needs such as skilled employment and a “business friendly environment.” A valuable offer may boost an area’s chances of landing an investment, but the ultimate choice of location may come down to old-fashioned common sense.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How can states better partner with private entities to push economic growth and job creation forward?

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.