Providing public financial incentives to companies for making investments and adding jobs has become a sophisticated, albeit distasteful, aspect of the business recruitment process worldwide.
Four companies have visited the Kitsap Peninsula during the past three months as part of their due diligence process for expansions. In every case, management was looking at more than one location . And in every case, they wanted to know what financial incentives they could expect.
In the West, and in particular in Washington, we cringe every time the question is asked. We don’t compete well on incentives.
That’s in large part due to Washington’s Constitution, and also in large part to the historically conservative approach to business incentives in public policy. As with other Western states, there is a prohibition in the state constitution against utilizing state and local public funds to directly benefit private companies. The restrictions resulted from the days when communities throughout the West were trying to encourage the railroads to build through their towns, ensuring economic prosperity. Economic development is an old game.
Many other states do not have these restrictions in their constitutions. In Texas, for example, Gov. Richard Perry has lured significant investment and jobs to his state through the deployment of an enterprise fund that was capitalized at $295 million. The Texas governor made no-interest loans to many companies, including Washington’s own Washington Mutual, for key investments and jobs. If the companies deliver the economic impacts they purport, the loans are forgiven. Couldn’t do that legally in Washington even if lawmakers decided they wanted to.
The good news is, we don’t often compete against Texas on the incentives front. More commonly, we see companies considering Washington, Oregon, Idaho, California, Nevada, Utah and Arizona — the West. So we most often compete against our neighbors. And while all of them have some legal restrictions, there are differences that have emerged through public policy initiatives in the states.
Here’s a sample of who does what for business in a couple of neighboring states.
Oregon: No state sales tax, which provides substantial benefit to companies with large capital construction projects for their facilities. In Washington, we charge sales tax on both construction materials and labor, so the sales tax bill can be large. Oregon also has enterprise zone legislation that allows many localities to forgive property taxes in the early years of a new company’s entry into the state. The state also has recently adopted new incentives for alternative energy companies, particularly solar.
Idaho: This state has one of the more attractive workforce training programs in the West . Idaho capitalizes a workforce training fund with a 3 percent set aside of the unemployment insurance taxes paid by every business in the state. Companies can get training expense reimbursements as high as $3,000 for every worker . Idaho also has incentives for corporate headquarters operations, large and small.
California: This state’s high cost and regulatory environment is renowned. Yet despite the out-migration of many companies over the years, its economy continues to produce some of the world’s most innovative new businesses. Its incentives aren’t in tax law or training subsidies; it’s in research, funding and human capital.
Our neighboring states also have in common corporate income taxes. Income tax systems favor unprofitable or low margin companies, whereas Washington’s gross receipts tax structure favors profitability. So there are built in tax benefits for companies new to those states; they can take investment tax credits on new investment, and pay taxes only in years of profitability .
Although this is a very limited view of the business environment in other states, it begins to frame the complexity of issues businesses examine when choosing new expansion locations. Fortunately most companies don’t make expansion decisions solely on how much incentive they can attract.
