New Indiana law gives public access to business incentive awards

“Incentives almost always come up,” said Wathen, the president and chief executive officer of the Economic Development Coalition of Southwest Indiana.

Over the past 10 years or so, and especially since the recent recession, Wathen said companies pursuing expansions and new facilities are more and more interested in pursuing tax breaks, training grants and other economic development assistance.

“Companies are looking at ways to reduce their overall costs, especially now in light of what happened in 2008,” Wathen said.

And for their part, Wathen said, states often are eager to offer incentives to spur investment.

“States are just getting a lot more aggressive.”

In Indiana, state-level incentives are offered by the Indiana Economic Development Corp.

A new state law that took effect July 1 gives the public easier access to information about which companies have signed incentives agreements with the IEDC.

As required by that law, the IEDC has recently added to its website an “Indiana Transparency Portal” that includes information on agreements signed since 2005, the year the agency came into existence. The information includes things like what types of incentives the company is eligible to receive; the financial value of these incentives; the company’s expansion plans and incentives paid to date.

Evansville-based Berry Plastics is among this area’s companies that has made heaviest use of incentives.

Berry has been approved to receive more than $30 million incentives for numerous expansion projects since 2005.

“From Berry’s perspective, certainly our strategy is to avail ourselves of all available resources, which includes incentives,” said Kevin Wilson, Berry’s director of corporate development. “We have consistently pursued these opportunities when we’re making investments in infrastructure, buildings, equipment” and employee training, Wilson said.

The plastics company operates some 68 U.S. facilities. Wilson noted that incentives, help Berry continue to maintain and grow its workforce and provide job opportunities for local residents.

But companies also sometimes make a choice not to pursue incentives.

Last year, Toyota was approved for nearly $3 million in incentives related to the company’s plan to rev up its production of Highlander sports utility vehicles.

But this is the only Indiana state incentives deal Toyota has entered into since 2005.

Kelly Dillon, a spokeswoman for the Gibson County plant, said Toyota does not always pursue incentives for various reasons.

One big reason: Not enough time.

Going through the channels to apply for incentives takes time, Dillon said, and sometimes Toyota needs to act quickly. And sometimes Toyota decides that its expansion project isn’t large enough to justify the time and expense involved in applying.

“We weigh all of those different aspects,” Dillon said.

Economic developer Wathen offered some other reasons companies pass up incentives.

Privacy, Wathen said, is one consideration. Sometimes companies in very competitive industries don’t want to accept public money because they fear that they will tip off competitors.

“They want to keep the entire thing entirely under wraps,” Wathen said.

Reporting requirements might also play a role.

In Indiana, for instance, EDGE tax credits are based on the number of new jobs a company expects to create. To receive this credit, the company must make annual reports to the IEDC documenting how many jobs it actually added.

To receive an HBI tax credit, which is based on a company’s capital investment, the company must receive advance approval from the IEDC to make the investment, and it must prove it has made the full investment before it can receive the credit.

“They may look at it and say, ‘You know, this is not really worth all of our efforts,’” Wathen said.

Even Berry does not always pursue incentives for every eligible project.

“There’s definitely a cost/benefit to a lot of these incentives. It may appear to be free money, but there’s a lot of work that goes into it,” said Jason Humphrey, Berry’s tax director.

Incentive programs can vary widely from state to state.

“States design incentives in lots of different ways,” said Josh Goodman, who works at the Pew Charitable Trusts and is an expert on state economic development tax incentives.

A state may design its incentives to promote a particular industry or activity, or to lure development to distressed regions, Goodman said.

New Mexico offers tax incentives to microbreweries and small wineries. Oregon offers numerous tax credits related to renewable energy. Indiana offers grants to communities that improve their streets, rail lines, sewers or other infrastructure to support economic development.

In Indiana, incentives are only awarded to competitive projects, said IEDC spokeswoman Katelyn Hancock.

In this case, “competitive” means that Indiana is competing with other states for a particular project.

“The company has to be looking at locations outside of Indiana for that project and for those jobs,” Hancock said.

And sometimes, Hancock said, a company that receives an initial award isn’t eligible for future incentives.

A company, for instance, that gets incentives to add a new production line might add new equipment as part of that expansion. Once that plant has the equipment, it might be the only place the company will consider manufacturing that particular product, so it wouldn’t be considered a competitive project in the IEDC’s view.

The project also must produce more in goods and services than can be consumed in the local market.

So, for instance, the IEDC would not offer incentives to a retailer considering opening a big-box store in an Indiana city.

“Retail, they don’t need extra incentives because they’re coming here to serve the local market,” Hancock said.

But that retailer could qualify for incentives if it was considering building a distribution warehouse in Indiana, for instance, or if it wanted to move its corporate headquarters here.

Evansville-based retailer Shoe Carnival is an example of just this situation. In 2007, the company received state incentives when it opened a new distribution center in Northern Vanderburgh County; and new corporate offices on Evansville’s East Side.

Another requirement: the company seeking incentives must be a primary employer. In other words, a manufacturer seeking to expand its production line would have to add employees to its payroll to claim tax credits. It couldn’t hire extra temporary workers through an outside agency and also claim the tax credit.

Something else to know about state incentives: Companies don’t always use the full amount of their incentive awards.

When the IEDC and a company enter into an incentives contract, the contract specifies how much the company is eligible to receive in incentives. It also specifies what the company must do to receive those incentives.

Since the tax credits are performance-based, a company that doesn’t carry through with its plans won’t get the full amount it could have.

A company might qualify for a certain amount in tax credits, for instance, based on its plan to add 100 employees over the next five years. But if the company ends up adding only 10 employees over that time period, it will be able to use only a fraction of the approved amount.

Occasionally, a company must return incentives received. This happened last year when Whirlpool repaid the state for $800,000 in tax incentives the company was awarded in 2004.

The original agreement was for up to $1.1 million in incentives. In 2009, after Whirlpool announced it was closing its Evansville production facility, the company said it would keep its product design center here. The IEDC said Whirlpool could retain the tax credits provided it kept the design center open through the end of 2013, with a minimum of 260 full-time jobs.

Last year Whirlpool’s Evansville employment dipped below 260, so the company had to repay a portion of the incentives award. Whirlpool is in the process of moving its product design center to the Benton Harbor, Mich. area, where the company is based.

Another reason companies may not use their full incentives awards is the company’s bottom line.

Wathen offered the example of a startup company that qualifies for state tax credits. If the startup is not profitable for its first several years, it has no tax liability for those years and thus cannot claim a tax credit. And since most tax credits in Indiana are good for up to 10 years, that startup won’t be able to use the full amount of its incentive award.

The impact

So how are all these state incentives programs working in Indiana and around the U.S.?

That’s a tough question to answer, according to the Pew Charitable Trusts’ Goodman.

According to a 2012 report from the Pew Charitable Trusts, many states are not doing a good job evaluating the return from the incentives they offer.

“It is particularly important that policymakers know if these investments are cost-effective. But most do not have the data to make that determination,” says the report, called Evidence Counts.

The report found that half of U.S. states, including Indiana, are “trailing behind” when it comes to evaluating their incentives’ effectiveness.

Though Indiana does require recipients to document their investments and job creation, Goodman said job creation doesn’t tell the whole story.

The real question states should be asking, Goodman said, is this: How many of the jobs created by a company were only created because of an incentive?

“The whole point of an incentive is to get a company to do something that it wouldn’t otherwise have done,” Goodman said.

That question, Goodman admitted, is hard to accurately answer.

But it’s an important one, he said, because without knowing how well incentives work states don’t have a good picture if what they’re spending is worth it. And on the flip side, research could reveal which state incentives programs are achieving their goals.

“States don’t want to be spending money on ineffective programs when they could be using those dollars for something else.”