Economic Incentives Retooled
New incentives freshen Alabama’s array of economic development tools
When Alabama reached into its economic incentive toolbox in the early 1990s, the state pulled out a hammer. On the strength of an incentives package worth nearly $240 million, Alabama surprised most observers by becoming the site of the first Mercedes-Benz automobile assembly plant in the United States.
Two decades later, however, Alabama’s incentive toolbox looked largely the same, while many of the neighboring states in the Southeast had come up with bigger and stronger hammers. So after several years of planning, the 2015 state Legislature approved new economic development incentives designed to keep Alabama competitive when it comes to attracting and maintaining businesses.
“For years, Alabama was one of the most competitive states in the country, particularly in the Southeast,” says Rick Davis, senior vice president of economic development for the Birmingham Business Alliance. “What’s happened is, our sister states haven’t been sitting back watching us win without doing something about it. They’ve gotten more competitive as the years have gone along. So we had to get stronger.”
Alabama Commerce Secretary Greg Canfield says his office began evaluating the situation nearly three years ago, and then started working with the Legislature to craft changes to the incentive packages being offered by the state.
“We found there were some shortcomings in our incentives and the structure of those incentives relative to many of our competitors in the Southeast,” Canfield says. “So we entered into this process with three goals in mind: to create a set of incentives that were competitive, were sustainable and would help us achieve certain strategic objectives.”
The changes passed in the 2015 Legislature primarily involve job credits, investment credits and abatements. For the most part, this legislation merely updated and improved many of the economic incentives the state has been using for years, Davis says.
“What this law did was tweak those incentives that were already on the books and made them more competitive,” Davis says. “It gave us another way to leverage those incentives so we could compete on a more level playing field. It wasn’t a significant overhaul of what we already had. It was more of a fine-tuning of some plans that were already good. We just made them better.”
Here is a quick look at the new incentives, and what officials hope the changes will accomplish:
One thing Alabama was missing, says Canfield, was an incentive based strictly on the creation of jobs. Most of the incentives were based upon capital investment, and without that the state was having a hard time offering competitive incentives, even if the project included substantial job creation.
“And after all, one of our primary goals is to create jobs in the state of Alabama,” Canfield says. “So with the Jobs Credit, we have for the first time an incentive that rewards pure job creation.”
Under this incentive, a company that moves or expands into Alabama will receive a cash refund of up to 3 percent of the previous year’s gross payroll. This refund can be paid annually for up to 10 years, but only after the company has been doing business in the state for 12 months.
“It’s competitive because, while there are other states offering similar types of job-creation tax credits, not all of them are doing so in cash. Some are just tax credits,” Canfield says. “And it’s sustainable because it is pay as you go. New jobs are created, and we collect and benefit from the economic impact of the payroll for 12 months before we pay that first incentive payment.”
In most cases, a project must generate at least 50 new jobs to qualify. Exceptions can be granted to projects in some smaller counties or projects that create net new jobs in specific fields including chemical manufacturing, data centers, metals and machining, engineering, design and research.
This is a reformulation of an older credit called the Capital Credit. Canfield says that program had so many limitations and regulations that site consultants began to refer to it as “the phantom credit.”
“On paper it looked like a company could achieve a very powerful tax credit for their new capital investment in a project,” Canfield says. “But in reality there were so many restrictions that most companies were able to recover less than 5 percent over a 20-year period. So it had no real value in making the deal.”
The new Investment Credit improves those numbers to 15 percent over 10 years (1.5 percent per year). Credit can be taken against the Alabama income tax liability and/or the utility tax liability.
“We removed all those restrictions that the old Capital Credit had, giving it more value and making us more competitive,” Canfield said. “And it’s also sustainable, because prior to giving that credit, the company has to make the investment and formulate new capital in the state of Alabama. It allows us to properly [give incentives to] companies that are making large capital investments in Alabama.”
In addition, Canfield says there are extra incentives for a company that moves or expands into a county that has a population of less than 25,000, noting that smaller counties typically have some of the highest unemployment rates in the state. For companies making an investment in one of those counties, the Jobs Credit incentive increases from 3 percent to 4 percent, and the length of the Investment Credit expands from 10 years to 15.
“It’s the state’s first ever real strategy to craft incentives to help these targeted counties that need more job creation,” Canfield says.
Reinvestment and Abatements Act
While it is important to attract new business to Alabama, Canfield says the state cannot overlook the companies already here. Those companies need incentives to encourage capital improvements, he says, to prevent existing plants and facilities from becoming obsolete and eventually closing.
Under this act, the state will abate the non-educational sales and use taxes on construction materials and equipment used to upgrade an existing facility. In addition, property tax increases associated with the improvement can be abated for up to 20 years. For example, if a company makes a capital investment in an existing facility that increases the property valuation by $10 million, that increase will not be part of the property valuation for 20 years. And any increase in utility taxes can be abated for 10 years.
“This is our first ever opportunity to incentivize existing industry in the state and provide them with an inducement to make new capital investment that is not tied necessarily to job creation,” Canfield says. “The goal is to make them more viable in the long term, and reduce the number of plant closures.”
Bill Taylor, president of the Economic Development Partnership of Alabama, says these new incentives are essential for Alabama’s ability to offer packages specifically tailored to a company, rather than a one-size-fits-all approach.
“It’s much more targeted today than what it was even 10 years ago. You have to match what a corporation is looking for,” Taylor says. “This new plan was designed exactly for that, to give us more of a targeted approach to economic development. The package that the state has put together will absolutely help, no question.”
Cary Estes and Art Meripol are freelance contributors to Business Alabama. Both are based in Birmingham.