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Business expansion planning ideas.

As more companies try to remain competitive in today's global marketplace, executive management must continually look at ways to expand, modernize, combine and relocate operations to ensure their viability and provide an acceptable rate of return for shareholders. When contemplating new or additional growth decisions, a well laid-out strategy is essential, especially when multiple sites are being considered. The optimum strategy for any expansion is one that is both efficient and cost-effective. Traditional strategies placed more emphasis on efficiency and often overlooked the financial assistance offered by state and local governments when developing and implementing the cost-effectiveness issues. In today's booming economy, the cost effectiveness of any expansion strategy can be greatly enhanced with a thorough understanding of the tax and nontax incentives available from state and local governments.

In recent years, state and local governments have developed programs that provide numerous incentives to encourage economic growth in their communities. Most states now have programs to encourage job creation, attraction and retention, capital investment, research and development, accessibility to foreign markets, reuse of existing brownfield sites and the retraining of existing work forces. The majority of the more lucrative incentives offered are directly linked to the number of new jobs created and to the dollar amount of the capital investment associated with an expansion. More progressive programs have recently been established by which state and local officials have begun working with rail service carriers and utility companies to ensure access to quality transportation and favorable utility prices and services throughout an entire state.

States are very aware that business incentives are an attractive way to lure and spur new economic growth. As a result, they are continually updating and expanding their business development programs as they compete for new economic growth. This new economic growth can be partially financed with the following incentives:

1. Jobs credits; 2. Machinery and equipment investment tax credits; 3. Property tax abatements; 4. Sales/use tax credits; 5. Export tax credits; 6. Industrial development revenue bonds; 7. Tax incremental financing; 8. Site development/public infrastructure grants; 9. Work force training and recruitment assistance; and 10. Rail and brownfield tax credits.

Some states have also created enterprise and other special zones, which enable a company, to `pay little or no taxes over a certain negotiated period of time. These states believe that the creation and designation of these zones is a good way to stimulate and spur new and additional economic growth.

The incentives granted for a business expansion are negotiated after a demonstrated need by one state to level the playing field relative to other viable states. A cross-state comparison can be prepared, summarizing certain costs between alternative sites under consideration by a company. Labor, utility, transportation, building/site, machinery and equipment and taxes are the various cost categories a state will look at when trying to determine the amount of incentives it will offer. An incentive package can run from one to 23 years and may be in the form of credits on future income/franchise taxes, loans, grants or cash. Formal agreements/contracts are drafted between a company and a state, which document certain criteria to be maintained to ensure future eligibility of the incentives offered.

Offering incentive packages has not come without criticism, especially when property taxes are abated. State and local officials are often criticized for abating property taxes that local residents and school boards feel are not necessary. They are accused of "giving away the farm" to lure this new economic growth. State officials think just the opposite, and are working closer than ever with local and regional organizations (e.g., chambers of commerce and other various economic development commissions) to enhance future incentive packages. They believe that incentives create better fiscal soundness; this financing eventually leads to successful long-term investments, which in turn improve the state's overall financial condition with additional revenues, help curb unemployment levels and help reduce related unemployment insurance taxes, as well as putting additional revenues into workers' compensation funds. Measurement of the intangible benefits is just as important, as each state competes for the illustrious title of being the "best" in new business additions and expansions.

As the economy continues to boom, there will undoubtedly be more growth and expansion in the business sector. Management's current strategy should include a shopping list of the various business programs and incentives available. The shopping list is readily available, as each state has a Website on the Internet.
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Author:Uminski, Dean J.
Publication:The Tax Adviser
Date:Sep 1, 1998
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