Credits and Incentives
31 Dec, 2002By: Tim Lima
An Opportunity to Improve Your Bottom Line
In today’s tough economic times, all companies are looking for a little extra help to increase their bottom lines. Firms in the auto industry and the aerospace industry have a distinct advantage. These two industries are highly coveted by state and local governments and are eligible for most state and local tax credits, incentives, grants and low interest financing programs. These incentives can be broken up a number of ways. The first step typically is to separate statutory incentives (i.e. “Credits”) from negotiated incentives (i.e. “Incentives”).
Credits are available to all qualified businesses (1) in a certain statutorily defined geographic area, (2) upon meeting certain specific statutorily established thresholds or statutorily based criteria, or (3) upon meeting both. SomeCredits require companies to file applications prior to the investment, while others either don’t require an application or require the application to be filed within a certain period after the investment. In a number of cases, existing business locations can qualify for these Credits. The most common Credits can are; hiring, investment, training, property tax and sales and use tax.
There are over 150 various hiring credits available across the United States. Hiring credits range from federal (Work Opportunity Tax Credit, Welfare to Work Tax Credit, Federal Empowerment Zones, Renewal Communities), to state (California Enterprise Zone, Arizona Enterprise Zone) to local (Philadelphia Jobs Creation Credit). Hiring credits are one of the most common forms of statutory benefits utilized.
One example of a statutory credit is the California Enterprise Zone program. A business that has a facility located in one of the 39 Enterprise Zones in California is eligible for a number of credits, including a credit for each employee it hires who meets certain eligibility standards. This Credit is a five year credit and is worth 50% of the employee’s 1st year wages up to $10.13 per hour. Each subsequent year’s credit percentage is reduced by 10% until it is completely phased out in year six. The maximum potential 5 year hiring credit is over $32,000. Employee turnover, however, often reduces the actual benefit received by a company to an amount significantly less than this.
Investment credits are available in a number of states for capital investments made in manufacturing equipment. Illinois, for example, allows companies a replacement tax credit of .5% on all qualified equipment purchased. If the company has experienced employment growth of at least 1% over the prior year, then the replacement tax credit becomes 1%. In addition, if the location is within an Illinois enterprise zone, the credit potential is increased to 1.5%.
Incentives cover a much broader array of benefits which are available to companies. These benefits include training grants, wage subsidies, infrastructure improvements, tax increment financings (“TIFS”), property tax abatements and land acquisition costs. Incentives are less concrete in their applicability and their success often depends on successfully navigating through a number of local, regional and state economic development agencies (See Sidebar). Most local communities have an individual that functions as the economic development director. This individual is generally an employee of the city or of the chamber of commerce. The local economic development director willgenerally be familiar with all state and local incentive programs, community college training programs and grant programs. He or she will also have access to key contact people at the state, county, community college and local governments.
Training grants and credits are a common incentive opportunity for Automotive and Aerospace companies due to the large number of skilled workers needed. Does this job opening look familiar to you?
“SKILLED MACHINIST NEEDED TO OPERATE AND SET-UP CNC MACHINERY OF MOLD PLATES. MUST BE ABLE TO USE MACHINERY TO ROUTE GATES AND RUNNERS AND REPAIR MOLDS, MOLD PLATES AND BASES. ABILITY TO PROGRAM COMPUTERIZED MACHINERY. PREVIOUS EXPERIENCE AS A MACHINIST PREFERRED.”
Companies currently face a critical shortage of skilled workers to fill the growing number of high tech, high skilled job openings that exist today within the automotive and aerospace industries. The job opportunities for high skilled workers will outpace those for unskilled workers. The standard 4-year college degree that was required to get a high-paying job is no longer. Workers still need to be educated, but technical and trade schools are the new “higher education” providers.
Technology changes and a global marketplace have pushed businesses to constantly revisit process improvements in an effort to remain competitive with countries like China and India that have an abundance of high skilled workers from which to choose. Changes in the economy have forced companies to continue to cut costs and become increasingly focused on their ability to recruit and retain quality employees. According the latest information from the Department of Labor, Bureau of Labor Statistics, forecasts through 2010 show that the automotive and aerospace industries will continue average job growth across all job titles of 9% and 25%, respectively.
Continued job growth, coupled with a shortage of skilled workers, has pushed incumbent worker training to the forefront of most high performance workplaces. Incumbent worker training saves money by eliminating recruiting costs and increasing retentionof current employees; thus avoiding the high cost of turnover. Skills upgrade training provides opportunities to preserve one of the most critical factors to sustained growth and competitiveness in business today; intellectual property. Companies are also employing strategies such as cross training (training workers to do more than one job) to increase productivity and reduce costs by utilizing existing workers.
Federal, state and local governments have a vested interest in maintaining high quality jobs. As a result, innovative programs have been designed that encourage and reward companies for participating in varous hiring and training activities that positively impact the economy of the state and local area. The various approaches to these incentives are briefly discussed below.
These programs can tremendously offset the cost of hiring, training, and retaining your organization’s workforce. To receive many of these financial incentives, a company may be required to sign an agreement to retain the employees that are receiving the training, agree to stay in the local community for an agreed upon length of time, andmake some sort of in-kind contribution to the training.
Most states have grant programs that provide funding directly to businesses to offset the costs associated with training for new and existing workers.
Key factors in obtaining grant funds are:
* Relocating or expanding businesses
* New job creation
* New technology
* High wage
* Advancement opportunities available for trainees
In California, for example, a business may need to provide training to 500 full-time current employees. Training will include 60 hours of classroom instruction covering Total Quality Management, Computer Skills, Basic Math and Literacy, Production Techniques. The Employment Training Panel(ETP) provides funding to qualified California businesses to cover the expense of such training. Training costs are reimbursed at a pre-determined rate ($13 per hour of classroom training and $8 per hour of computer-based training) for approved training projects. In this case, the business could receive a maximum grant benefit of $390,000.
The shortage of skilled workers has created a need for companies to look beyond traditional recruiting pools of applicants. Previously untapped populations of available workers are now receiving trainingto fill those vacant positions. A wage subsidy allows an employer to be reimbursed for part of the wages paid to an employee as an incentive to hire and train “disadvantaged” workers for jobs that result in higher paying permanent employment. Some examples of those groups are:
* Dislocated Workers
In one state program, for example, participating employers receive a cash reimbursement (typically 50%) of wages paid for hiring an eligible employee. Therefore, a business opening a new facility and hiring 10 former welfare recipients through a 4-week wage subsidy program could be eligible for a reimbursement on a portion of their wages. If the employees are full time (40 hours per week) and are paid $7 per hour, at the end of the four-week period the business has paid those employees $11,200 in wages and would be due a maximum cash reimbursement of $5,600.
Other Sources for Skilled Workers
Partnerships and collaborations
One-stop – As the name indicates, is a single location that provides employers and job seekers with access to services. The one-stop can serve as a recruiting source to fill open positions, provide information regarding local training providers, and provide access to program dollars available to fund training initiatives. To locate the one-stop office in your area, you can visit www.servicelocator.org .
Community colleges have been propelled to the forefront as a key partner in addressing the skills shortage that exists. Community colleges are now incorporatingworkforce development offices into their system to address the issues skills issues and concerns of businesses within the community.
Economic Development Departments have divisions specifically designated to address the workforce needs of local employers. Many have funding set aside specifically to maintain high pay, high skill jobs within the local area.
The tax, human resource and planning departments all have to work closely together to be timely appraised of future expansion plans, training programs, and future purchases to maximize a company’s Credit and Incentive opportunities. Many Credit and Incentive programs work prospectively and require applications to be completed and approved by the city, county or state economic development agencies before companies have begun to execute their expansion, growth or training plans. The state and local governments do not want to award funds to a company that has already gone forwardwith their expansion plans. This is commonly known as the “but for” test. Many governments will not grant negotiated benefits unless it can be clearly demonstrated that “but for” the negotiated benefit the company would choose another site located outside of the granting jurisdiction.
A company should be in contact with the state and local economic development officials at least 60 to90 days before any expansion activity is finalized. Often times, once a building permit is issued or a press release is made, it will be too late to secure negotiated benefits.