Business Incentives and Economic Development Expenditures: An Overview of Virginia s Program Investments and Outcomes

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1 Business Incentives and Ecnmic Develpment Expenditures: An Overview f Virginia s Prgram Investments and Outcmes Summary Acrss the cuntry, state ecnmic develpment incentives have evlved int a cmplex mixture f prgrams with diverse structures and gals. The Cuncil fr Cmmunity and Ecnmic Research (C2ER) and the Center fr Reginal Ecnmic Cmpetitiveness (CREC) have been wrking t catalg and dcument the range f available state prgrams thrugh the C2ER State Business Incentives Database, which includes detailed infrmatin abut almst 2,000 stateadministered incentives prgrams frm every state, and the C2ER State Ecnmic Develpment Expenditures Database, a cmpilatin f ecnmic develpment expenditure budget data frm every state. This reprt builds n that wrk by taking a deeper lk at Virginia s array f incentive prgrams and includes an analysis f the available utcme data that is used by state plicy makers and prgram administratrs t gauge prgram effectiveness. In rder t create a cmprehensive picture f Virginia s ecnmic develpment landscape, we reviewed and culled data frm a range f state statutes, reprts and websites, including annual tax reprts and annual state budgets. The numbers cntained in this reprt are CREC and C2ER s best estimate f the dllars spent n ecnmic develpment incentives in the state f Virginia. The Center fr Reginal Ecnmic Cmpetiveness (CREC) is wrking with the Pew Charitable Trusts (Pew) n the Business Incentives Initiative. This initiative engages frwardthinking teams f ecnmic develpment plicymakers and practitiners frm six states, including Virginia. These leaders are wrking tgether t identify effective ways t manage and assess ecnmic develpment incentive plicies and practices, imprve data cllectin and reprting n incentive investments, and develp natinal standards. The initiative is supprted by a grant frm the Laura and Jhn Arnld Fundatin. In FY 2013, the mst recent year fr which reliable spending data are available fr all prgram types, Virginia spent $173 millin n budgeted ecnmic develpment expenditures, and $121 millin 1 n ecnmic develpment tax expenditures (tax credits nly). 2 Accrding t the Tax Plicy Center and fr the purpses f this reprt, tax expenditures are defined as revenue lsses attributable t tax prvisins that ften result frm the use f the tax system t prmte scial gals withut incurring direct expenditures. 3 1 This figure nly includes tax expenditures fr tax credit incentives, as tax expenditure data was nt available fr ther types f tax incentives ffered by Virginia, including tax exemptins, tax deductins, and preferential rates. 2 Please see Appendices fr detailed lists f all items included in this reprt as incentives, ecnmic develpment prgram expenditures, and ecnmic develpment tax expenditures. 3 Tax Expenditures: What are they and hw are they structured? Tax Plicy Center. Accessed Nvember 25, 2014 at: 1 P a g e

2 Overview f Virginia s Business Incentives Virginia has a large number f incentive prgrams, with a ttal f 57 active prgrams in The C2ER State Business Incentives Database defines state business incentives as state-administered prgrams designed t influence business investment behavirs. States design their business incentives t influence these behavirs thrugh tax incentives, as well as thrugh nn-tax prgrams such as grants, lans, business assistance, and ther investment vehicles. These incentives help businesses address ne r mre needs, such as capital access, wrkfrce preparatin, technlgy transfer, site facility imprvements, and s frth. 4 Figure 1: Virginia State Business Incentives by Agency, 2014 State Agency Number f Prgrams 21 Authrity 10 Virginia Ecnmic Develpment 8 Center fr Innvative Technlgy 4 Virginia Calfield Ecnmic Develpment Authrity 2 f Transprtatin 2 Virginia Film Office 2 Virginia Tbacc Indemnificatin and Cmmunity Revitalizatin Cmmissin 2 Virginia Prt Authrity 1 f Agriculture and Cnsumer Services 1 f Envirnmental Quality 1 f Husing and Cmmunity Develpment 1 f Rail and Public Transprtatin 1 Virginia Lcalities 1 Surce: C2ER State Business Incentives Database Accrding t the C2ER State Business Incentives Database, there are 14 state agencies respnsible fr the administratin f Virginia s business incentives. The primary agencies respnsible fr administering business incentives in Virginia are the Department, Authrity, and Virginia Ecnmic Develpment (VEDP). State agencies such as the Virginia Calfield Ecnmic Develpment Authrity and the Virginia Prt Authrity are nly respnsible fr a few incentive prgrams. (See Figure 1.) The Department exclusively administers tax prgrams (primarily exemptins and ffsets), while VEDP and ther state agencies administer mainly nn-tax prgrams and a small number f tax prgrams. 4 The C2ER State Business Incentives Database definitin f business incentives may differ frm the definitin used by the Cmmnwealth f Virginia. Fr a current list f incentive prgrams as defined by the Cmmnwealth f Virginia, please see the Guide t Business Incentives, prduced by VEDP. 2 P a g e

3 Lan/Lan Participatin Figure 3: Virginia Business Incentives by Type Virginia Incentive Prgrams by Type (2014) Tax exemptin Lan guarantee Insurance Tax refund r rebate Tax deductin Tax deferral Preferential rate Number f Prgrams Surce: C2ER State Business Incentives Database ** Nte: Prgrams may appear mre than nce if they prvide multiple incentive types. Virginia s ecnmic develpment prgrams have fcused mainly n direct business financing with grant and lan prgrams. Over the past few decades, hwever, the state has develped a number f tax benefit prgrams, mainly prviding tax credits t businesses. Currently, abut 40 percent f the active Virginia incentive prgrams ffer sme kind f direct business financing benefit, while abut 40 percent f the prgrams prvide tax benefits. By cmparisn, tax incentives represent 45 percent f all state business incentive prgrams. (See Figure 2.) The mst cmmn business needs addressed by Virginia s current prtfli f prgrams are prduct and imprvement, capital access, and tax reductin. (See Figure 3.) Over half f Virginia s incentive prgrams target a specific industry r sectr, including agriculture; manufacturing; and prfessinal, scientific, and technical services. Figure 2: Virginia Business Incentives by Business Need Virginia Incentive Prgrams by Business Need (2014) imprvement r frmatin Tax/Regulatry reductin Infrastructure Imprvement Tech & prduct develpment Facility/site lcatin Wrkfrce prep r develpment Other business need Number f Prgrams Surce: C2ER State Business Incentives Database ** Nte: Prgrams may appear mre than nce if they are intended t fulfill multiple business needs. 3 P a g e

4 MILLIONS BILLIONS February 2015 Ecnmic Develpment Prgram Expenditures State Ecnmic Develpment Expenditures Functin Areas Examining Virginia s FY 2013 budget f $173 millin, nted earlier, fr ecnmic develpment prgram expenditures reveals hw varius state agencies utlay mney fr ecnmic develpment prgrams. Expenditures fall int 15 functinal areas fr ecnmic develpment defined by the C2ER State Ecnmic Develpment Expenditures Database. 5 Business Finance Strategic Business Attractin Fund Business Assistance Internatinal Trade and Investment Dmestic Recruitment/Out-f-State Wrkfrce Preparatin & Develpment Technlgy Transfer Entrepreneurial Develpment Minrity business develpment Cmmunity Assistance Accrding t the FY 2013 Virginia Budget Apprpriatins Bill, the state apprpriated $173 millin fr ecnmic develpment prgram expenditures in FY (See Figure 4.) This level f spending represents an average f $729 per business, which puts Turism/Film Special Industry Assistance Prgram Supprt Administratin Other Prgram Areas Virginia belw the natinal median level f $923 in spending per business establishment. All f Virginia s apprpriated ecnmic develpment expenditures in FY 2013 went t the Office f Cmmerce and Trade (which includes VEDP), Department f Agriculture and Cnsumer Services, Office f Administratin, and Office f Technlgy. The Office f Cmmerce and Trade received the bulk f funding, with arund 95 percent f funding. Figure 4: Ttal State Ecnmic Develpment Funding** Ttal State Ecnmic Develpment Funding in Virginia, FY07-15 $200 Virginia U.S. $14 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 $12 $10 $8 $6 $4 $2 $0 Surce: C2ER State Ecnmic Develpment Expenditures Database ** Nte: All years depict apprpriated spending. 5 See Glssary definitins here P a g e

5 Millins February 2015 $80 Figure 5: State Ecnmic Develpment Funding by Functin VA State Ecnmic Develpment Funding by Functin, FY13-15 $70 $60 FY13 FY14 FY15 $50 $40 $30 $20 $10 $0 Business Finance Turism/Film Business Assistance Special Industry Assistance Surce: C2ER State Ecnmic Develpment Expenditures Database ** Nte: All years depict apprpriated spending. Cmmunity assistance Technlgy Transfer Minrity Business Develpment Virginia has increased ecnmic develpment spending by arund 7 percent since the lw f $166 millin set in FY Despite recent increases, apprpriated FY 2015 ecnmic develpment spending by the state is 6 percent lwer than the high f $188 millin set in FY This is cnsistent with natinal trends in ecnmic develpment spending fllwing the Great Recessin. Hwever, Virginia s lwest pint fr ecnmic develpment spending was actually FY 2008, suggesting that spending decisins by the state were influenced by additinal factrs. Cmpared t ther states in FY 2013, the state allcated a higher prprtin f its ecnmic develpment budget than average in the functinal areas f business assistance, business finance, minrity and small business develpment, and special industry assistance. Virginia allcated a lwer prprtin f its ecnmic develpment budget than the average fr ther states n wrkfrce preparatin and develpment, cmmunity assistance, technlgy transfer, and turism and film. Ecnmic Develpment Tax Expenditures The publishes an annual reprt that includes a summary listing f individual and crprate incme tax credits and sales and use tax exemptins. The summary reprts depict the type f credit r exemptin, the number f ttal returns and the aggregate dllar amunts fr these specific tax preferences. The reprt des nt include detailed infrmatin n tax revenue lsses frm sales and use tax exemptins, which frm the bulk f ecnmic develpment tax revenue lsses fr mst states. Additinally, any lcal tax revenue lsses, such as thrugh the Technlgy Znes prgram administered by Virginia lcalities, are nt included in the reprt. The Department als prvides reprts t the state s Jint Subcmmittee t Evaluate Tax Preferences n a number f tax preferences, including sales tax exemptins and incme tax credits and deductins. T date, the cmmittee s wrk has fcused n tax preferences that are nt related t 5 P a g e

6 ecnmic develpment. As f 2013, the Department is als required t prvide the General Assembly with a reprt n the Mtin Picture Prductin Tax Credit. Tax expenditures can be defined as revenue lsses attributable t tax prvisins that ften result frm the use f the tax system t prmte scial gals withut incurring direct expenditures. 6 Ecnmic develpment tax expenditures in this cntext represent thse tax prvisins that use the state tax system t prmte business investments that prmte state ecnmic pririties. The Virginia Department Annual Reprt fr FY13 7 was used fr the analysis in this sectin. Data was cllected by reviewing and recrding all line items in the reprt related t ecnmic develpment. In FY 2013, the Virginia expended a ttal f apprximately $120 millin in tax expenditures related t ecnmic develpment. All such expenditures were administered thrugh the f Taxatin. Fr FY 2013, all tax expenditures included in the reprt were individual incme, crprate incme, r bank franchise tax credits. The primary ecnmic develpment functins fr these tax expenditures were business assistance, cmmunity assistance, dmestic recruitment, internatinal trade and investment, special industry assistance, technlgy transfer, turism and film, and wrkfrce preparatin and develpment. The majrity f Virginia s tax expenditures went twards cmmunity assistance (24 percent) and special industry assistance (70 percent). Virginia used tax incentives t assist many different industries in the state, with ver tw-thirds f expenditures ging tward specific industries. The large majrity f FY 2013 incentives went tward mining, with the remainder f expenditures distributed between the manufacturing; agricultural; and prfessinal, scientific, and technical services industry sectrs. Analysis f Available Outcme Data VEDP uses a range f tls t analyze the impact f Virginia s incentive prgrams. Underlying VEDP s incentive prgram management and reprting is a frnt-end Return n Investment (ROI) analysis. This ROI allws VEDP t estimate the new state revenue fr every prject cnsidered fr discretinary incentives. This analysis takes int accunt all state-level incentives frm all agencies participating in the prject. Cmpanies are required t execute perfrmance agreements befre receiving incentive grants administered by VEDP, and are surveyed by VEDP t mnitr cmpliance with agreements. As needed, funds may be recaptured ( clawed back ) r future grant payments suspended. VEDP has als develped a Lcal ROI Mdel that is available nline as a tl t assist lcalities with incentive evaluatin and decisin-making. Thrugh its Return n Invested Capital (ROIC), VEDP cnducts a financial review f its prtfli f cmpanies that have received discretinary incentives t determine what revenues the state has actually received frm these prjects ver time, in cmparisn with what was anticipated at the time the agreements were struck. VEDP uses a cmbinatin f cmpany survey respnses and data frm the Virginia Emplyment Cmmissin t validate emplyment levels which then becme inputs t estimating state persnal incme and sales tax generated. A summary f the findings is regularly shared with the Executive Branch and the General Assembly. 6 Tax Expenditures: What are they and hw are they structured? Tax Plicy Center. Accessed Nvember 25, 2014 at: 7 Reprt can be accessed at: 6 P a g e

7 In 2012, the Jint Legislative Audit and Review Cmmissin (JLARC) published Review f State Ecnmic Develpment Incentive s, an extensive evaluatin f 18 incentive grant prgrams administered by 8 state agencies. The reprt fllwed a previus JLARC reprt n tax preferences, which led t the creatin f the Jint Subcmmittee n Evaluating Tax Preferences. The reprt nted that plicymakers did nt have access t cmprehensive infrmatin cncerning the use r effectiveness f all prgrams, in part due t inadequate data cllectin fr sme prgrams. The reprt s recmmendatin led t the passage f HB1191 in 2014, which requires an annual reprt by VEDP t the Secretary f Cmmerce and Trade fr the three mst recent years n the effectiveness f key Virginia ecnmic develpment incentive grant prgrams in meeting perfrmance gals and stimulating ecnmic activity. This reprt supplanted the previus VEDP annual reprts, which the agency had published at the end f every fiscal year between FY 2002 and FY Cnclusin Virginia s current ecnmic develpment structure is ntable fr having many state agencies administer incentives. Therefre, there may be efficiency gains and cst savings t be had by reviewing the number f state agencies respnsible fr state incentives. The state s ecnmic develpment incentive prtfli favrs nn-tax prgrams ver tax prgrams. Virginia spends belw the natinal average n ecnmic develpment expenditures per business establishment. With increased transparency and effective reprting f these data, thrugh means like the HB1191 annual reprt, Virginia will be better able t fcus n analyzing the relative impacts f varius state incentives t help guide plicymakers n the mst effective ways t encurage ecnmic develpment. 7 P a g e

8 Appendix A: Full List f Virginia State Business Incentives (2014) Prgram Name Prgram Prvider Type Business need CIT Entrepreneur: Access t Capital CIT R&D: Strategic Investments in Research Cmmercializatin CIT Bradband: New Infrastructure fr the New Innvatin Ecnmy CIT Cnnect: Finding and Assimilating Innvatin VCEDA Revlving Lan Fund Calfield Reginal Opprtunity Fund Gvernr's Agriculture and Frestry Industries Develpment Fund (AFID) Recyclable Materials Prcessing Equipment And Alternative Recycling Credit Virginia Enterprise Zne (VEZ) Prgram Rail Industrial Access Prgram Day Care Facility Investment Tax Credit Center fr Innvative Technlgy Center fr Innvative Technlgy Center fr Innvative Technlgy Center fr Innvative Technlgy Virginia Calfield Ecnmic Develpment Authrity Virginia Calfield Ecnmic Develpment Authrity f Agriculture and Cnsumer Services f Envirnmental Quality f Husing and Cmmunity Develpment f Rail and Public Transprtatin Equity investment Other Other Other Lan/Lan Participatin Lan/Lan Participatin; Tax exemptin r frmatin Tech & prduct develpment Infrastructure Imprvement Prfessinal netwrking r frmatin r frmatin imprvement imprvement Facility/site lcatin; imprvement; Wrkfrce prep r develpment Infrastructure Imprvement imprvement; Tech & prduct develpment 8 P a g e

9 Majr Business Facility Jb Tax Credit Wrker Retraining Tax Credit Clean Energy Manufacturing Incentive Prgram Prt Vlume Increase Tax Credit Telewrk Expenses Tax Credit Green Jb Creatin Tax Credit Refundable Research and Develpment Expenses Tax Credit Internatinal Trade Facility Tax Credit Barge and Rail Usage Tax Credit Sales and Use Tax Exemptins Bidiesel Fuels Credit Farm Wineries and Vineyards Tax Credit Single Sales Factr Electin fr Manufacturers Calfield Emplyment Enhancement Credit Cal Emplyment and Prductin Incentive Tax Credit Tax exemptin Preferential rate imprvement imprvement imprvement imprvement Infrastructure Imprvement; Tax/Regulatry reductin Tech & prduct develpment Tech & prduct develpment imprvement imprvement Tax/Regulatry reductin Tech & prduct develpment r frmatin Tax/Regulatry reductin Tax/Regulatry reductin Tax/Regulatry reductin 9 P a g e

10 Cnservatin Tillage Equipment Credit Fertilizer and Pesticide Applicatin Equipment Credit Qualified Equity And Subrdinated Debt Investments Credit Vehicle Emissins Testing Equipment, Clean Fuel Vehicle and Certain Refueling Prperty Credit Waste Mtr Oil Burning Equipment Credit Ecnmic Develpment Access Prgram Transprtatin Opprtunity Fund Gvernr's Opprtunity Fund (GOF) Virginia Investment Fund Virginia Leaders in Exprt Trade (VALET) Wrkfrce Retraining Prgram Virginia Jbs Investment Prgram Majr Eligible Emplyer (MEE) Virginia Ecnmic Develpment Incentive Defense Prductin Znes f Transprtatin f Transprtatin Virginia Ecnmic Develpment Virginia Ecnmic Develpment Virginia Ecnmic Develpment Virginia Ecnmic Develpment Virginia Ecnmic Develpment Virginia Ecnmic Develpment Virginia Ecnmic Develpment Virginia Ecnmic Develpment ; Lan/Lan Participatin Tax exemptin; Other Tax/Regulatry reductin Tax/Regulatry reductin Tax/Regulatry reductin Tax/Regulatry reductin Tax/Regulatry reductin Infrastructure Imprvement r frmatin; Infrastructure Imprvement Facility/site lcatin r frmatin Marketing & sales assistance Wrkfrce prep r develpment Wrkfrce prep r develpment imprvement imprvement Tax/Regulatry reductin 10 P a g e

11 Mtin Picture Prductin Tax Credit Virginia Film Office imprvement Gvernr's Mtin Picture Opprtunity Virginia Film Office Fund Technlgy Znes Virginia Lcalities ; Tax exemptin; Tax refund r rebate Prt f Virginia Develpment Zne 501(c)3 Tax Exempt Bnd Prgram Lan Guaranty Prgram Small Business Envirnmental Cmpliance Assistance Fund Ecnmic Develpment Lan Fund (EDLF) Virginia Capital Access Prgram (VCAP) Industrial Develpment Bnd Prgram Child Care Financing Prgram (CCFP) Small Business Micr-Lan Prgram Virginia Prt Authrity Authrity Authrity Authrity Authrity Authrity Authrity Authrity Authrity Other Lan guarantee Lan/Lan Participatin Lan/Lan Participatin Lan guarantee Other Lan/Lan Participatin Lan/Lan Participatin r frmatin Tax/Regulatry reductin r frmatin; Infrastructure Imprvement r frmatin r frmatin imprvement imprvement; Tech & prduct develpment; Facility/site lcatin r frmatin; imprvement r frmatin; Facility/site lcatin imprvement; Facility/site lcatin r frmatin 11 P a g e

12 Cash Cllateral Prgram Lan Purchase Participatin Prgram Tbacc Regin Opprtunity Fund (TROF) Suthside Regin Tbacc Capital Access Prgram (TCAP) Surce: C2ER State Business Incentives Database Authrity Authrity Virginia Tbacc Indemnificatin and Cmmunity Revitalizatin Cmmissin Virginia Tbacc Indemnificatin and Cmmunity Revitalizatin Cmmissin Insurance Lan/Lan Participatin Insurance r frmatin r frmatin Infrastructure Imprvement; Facility/site lcatin imprvement 12 P a g e

13 Appendix B: VA Ecnmic Develpment Prgram Expenditures (2013) Functin Activity Ttal State Funding Business Assistance Business retentin/expansin $18,849,466 Business Assistance Other Business Assistance $13,329,505 Business Finance s t businesses $14,423,354 Business Finance Other Business Finance $54,986,745 Cmmunity assistance Cmmunity develpment $18,733,173 Minrity Business Develpment Other Minrity business $2,096,312 develpment Prgram Supprt Ecnmic research $3,487,809 Prgram Supprt Secretary/Directr's Office $631,721 Special Industry Assistance Agriculture/agribusiness $17,570,983 Special Industry Assistance Other Special Industry Assistance $1,500,000 Technlgy Transfer Cmpany quality enhancement $4,237,811 Technlgy Transfer Other Technlgy Transfer $898,650 Technlgy Transfer Research & develpment $790,416 Turism/Film Turism prmtin (exc. Advertising) $19,385,930 Wrkfrce Preparatin & Dev. Apprenticeships $894,546 Wrkfrce Preparatin & Dev. Other Wrkfrce Preparatin & Dev. $1,500,623 Surce: C2ER State Ecnmic Develpment Expenditures Database 13 P a g e

14 Appendix C: Virginia Ecnmic Develpment Tax Expenditures (2013) Descriptin Ttal Funds Advanced Technlgy Pesticide and Fertilizer Applicatin Equipment Credit $224,791 Agricultural Best Management Practices Tax Credit $858,504 Barge and Rail Usage Tax Credit $0 Bidiesel and Green Diesel Fuels Prducers Tax Credit $0 Clean Fuel Vehicle and Advanced Cellulsic Bifuels Jb Creatin Tax Credit $229,573 Calfield Emplyment Enhancement Tax Credit (Refundable) $21,841,032 Cnservatin Tillage Equipment Credit $428,839 Day-Care Facility Investment Credit $0 Enterprise Zne Business Tax Credit $10,200 Enterprise Zne Real Prperty Investment Tax Credit (Refundable) $0 Farm Wineries and Vineyards Tax Credit $100,787 Green Jb Creatin Tax Credit $0 Histric Rehabilitatin Tax Credit $28,488,714 Internatinal Trade Facility Tax Credit $0 Majr Business Facility Jb Tax Credit $2,773,843 Mtin Picture Prductin Tax Credit (refundable) $0 Qualified Equity and Subrdinated Debt Investments Tax Credit $1,932,017 Recyclable Materials Prcessing Equipment Credit $2,705,672 Research and Develpment Expenses Tax Credit (refundable) $1,481,282 Tax Credit fr Vehicle Emissins Testing Equipment and Clean-Fuel Vehicles and $6,084 Certain Refueling Prperty Telewrk Expenses Tax Credit $0 Virginia Cal Emplyment and Prductin Incentive Tax Credit $59,449,214 Virginia Prt Vlume Increase Tax Credit $0 Waste Mtr Oil Burning Equipment Credit $0 Wrker Retraining Tax Credit $0 Surce: FY2013 Annual Reprt 14 P a g e