Why do governments provide incentives?

Why do governments provide incentives?

Governments can offer financial assistance to private businesses making investments through the use of economic incentives. Incentives can include tax abatements, tax revenue sharing, grants, infrastructure assistance, no or low-interest financing, free land, tax credits and other financial resources. But the question is, why? Why do government agencies invest public resources to support business development? The answer lies within the classic “but for” requirement of economic incentives. Understanding the “but for” and how to properly prepare the information required by government entities is critical to your project’s success.

The “but for”

Government’s assistance for business development is motivated by several factors; however the core driver is focused on not letting the constraints of financial feasibility solely determine private development at the expense of the communities greater good. “But for” the government support, the private development would not occur. There could be environmental contamination that must be cleaned up before development can occur, a labor market mismatch that requires workforce training, tight lending standards that make capital inaccessible or expensive, or many other obstacles to the feasibility of an investment. The “but for” requirement can be met in many different ways, but incentive applicants must address this requirement with a clear and consistent message to program administrators, elected officials and taxpayers. 

To ensure clear and consistent messaging, Baker Tilly’s incentive specialists prepare a “but for” memo for our clients that addresses the ‘but for’ requirement, articulates their project and crafts the business case for the project in terminology that is easily digestible by governmental entities.

Incentives follow economic impacts

By providing assistance through incentives, governments are choosing to invest public resources to make private investments feasible and therefore receive investment returns in the form of economic impacts. 

Typically the form of an incentive is driven by which economic impacts benefit the government agency granting the incentive. Local municipalities tend to receive the majority of their operating revenue from property taxes, so their incentives are typically tied to property tax in the form of abatements, rebates or tax incremental financing. Generally, state governments are interested in creating jobs and therefore offer job creation and/or retention tax credits used to offset state income tax liability. At the federal government level, specific programs aligned with national social policies, such as the New Markets Tax Credit, Historic Tax Credit or Low-Income Housing Tax Credit, offer tax credits that can be sold on the open market to create up-front capital sources for projects.  

In order to highlight the economic impact relevant to each level of government, Baker Tilly’s incentive specialists prepare a unique economic impact report for each incentive program that a project may utilize. Each customized economic impact study quantifies the specific impacts that are important for the program and the impacted government and taxpayers.

Understanding the investment decision of government entities is the key to securing meaningful government incentives. Governments must address the “but for” requirements and also quantify the return on investment to the taxpayers. Providing this information to program administrators with the “but for” memo and the economic impact report allows for the clear and consistent messaging necessary to ensure that your project is accurately positioned for incentives.

For more information on this deal, or to learn how Baker Tilly Capital specialists can help, contact our team.

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