Putting Your Best Foot Forward

Make sure the media gets it right when reporting on your company’s incentives.

By Scott J. Ziance, Partner; and Jonathan K. Stock, Of Counsel; Vorys, Sater, Seymour and Pease LLP

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Companies receiving economic development incentives often have a great story to tell. The projects championed by those companies bring much needed jobs and investment to a local community. In exchange, the companies may receive various forms of economic development incentives, such as grants, tax credits, or loans. However, these incentives are not giveaways. Instead, the incentives are typically awarded on the condition that companies receiving them achieve certain metric commitments (i.e., jobs, payroll, and investment) to benefit the local community.

For the media, the coverage of an economic development incentive should make for an easy “win-win” story since both the company and local community are benefiting. But what happens when the media gets it wrong?

Media members regularly report on the values of incentives that are provided at the state and local level to facilitate economic development. Frequently, articles are well-researched, well-written, and balanced. Sometimes, however, media members make mistakes — whether because of tight deadlines, the complexity of transactions, or bias. These stories may even contribute to projects being withdrawn.

You may recall the portion of the Amazon HQ2 project that was planned for New York. In 2018, Amazon announced that it would be constructing a new 25,000-employee corporate campus in the Long Island City neighborhood of Queens, N.Y. Shortly after the announcement, negative news stories started appearing. Some of these stories emphasized the amount of the proposed tax incentives without mentioning the corresponding benefits to the local community. Others included embellishments and caricatures, such as the famous New York Post cover, which read “Queen’s Ransom: Amazon gets 2.5B tax break — and the right to a helipad — to move to New York.”1 While it is difficult to measure the impact of such stories, the same cannot be said of the ultimate outcome. Amazon pulled the plug on the New York portion of the HQ2 project.

The purpose of this article is to help companies identify, and hopefully avoid, the types of media mistakes that commonly undermine economic development projects. We have described below five of the most common media mistakes related to incentives. At the end of the article, we have also offered a prescription to help companies avoid these common pitfalls.

• • Mistake #1 — Not Understanding the Types of Economic Development Incentives

At a high-level, there are five common types of incentives provided to companies at the state and local level — tax exemptions, tax credits, grants, loans, and in-kind assistance. One significant mistake reporters make is in not considering the types of incentives being provided. When a story does not correctly distinguish among the types of incentives awarded, it can be misleading.

For example, a $10 million grant and $10 million loan are not alike, and do not provide the same benefit to a company. Another example involves infrastructure. It may cost a community $5 million to widen a road and

complete other traffic improvements to make a site suitable for a prospect, but if that capital improvement is part of the government’s long-term plan for the area and there are multiple beneficiaries, is it really fair to describe it as being a $5 million incentive to the company?

• • Mistake #2 — Not Considering Present Value

The media loves to report big numbers for incentives — but sometimes those numbers can be misleading. The majority of tax exemptions and tax credits are provided over a period of years, often 10 years, 15 years, or even more. In offer letters, governments nearly always express the value of incentives by referring to their nominal value. In other words, they describe a 15-year incentive that is estimated to be worth $10 million per year as having a value of $150 million. Anyone who has ever dreamed about winning the lottery and contemplated whether they would choose a one-time payment or the long-term revenue stream, however, knows that the present value of a future stream of payments is worth less than the sum of those future payments. Nevertheless, news stories commonly fail to distinguish between the nominal value of an incentive and its net present value, which results in such stories overstating the true value of the incentive.

• • Mistake #3 — Not Distinguishing Between

Entitlements and Incentives

Media stories often confuse entitlements with incentives. For example, a state may have a particular exemption within its existing tax code, which any business qualifying for the exemption is entitled to receive. That is not an incentive, but an entitlement.

Any business qualifying for the exemption can receive it. Government offer letters sometimes tout the benefit of existing tax exemptions under current law. And the media can latch onto this information in a story. When that happens, the media may mistakenly suggest that a company has received an “incentive” when, in fact, the company is only eligible to receive the same tax exemption that any other similarly situated company is already entitled to receive under existing law. This type of mistake can either create the false impression that a company has received an incentive, when it has not, or significantly overstate the total value of any actual incentives received by the company.

• • Mistake #4 — Not Considering Real Value vs. Face Value

Many states provide tax credits based on new jobs created, new investments made, or other metrics. Those credits often have a high face value (i.e., maximum amount), but the real value to the company is often just a small fraction of the face value. This is because such credits often can be used only to eliminate all or a portion of one type of tax a company pays in a state, and the company’s tax liability may only be a fraction of the face value of the credit. In such circumstances, if a news story mistakes the face value of an incentive for the real value, it will significantly overstate the value of the incentive to the company.

• • Mistake #5 — Inaccurate Reporting

The first four mistakes listed above are often understandable, particularly given the complexity of the subject matter. The fifth mistake — inaccurate reporting — is more difficult to excuse. Some reporters and publications are generally opposed to economic development incentives and may use pejorative language to describe those incentives.

A good example is incorrectly referring to an incentive as a “tax giveaway.” That description is simply inaccurate. Incentives nearly always have associated performance requirements, and often have extensive remedies and reporting requirements. These remedies commonly include a clawback provision where if a company fails to perform its metric commitments (e.g., jobs, payroll, and investment), the company may be required to repay some or all of the incentive. These are not “taxgiveaways” in any sense of the word when the company is also obliged to perform.

The Solution: Stopping the Mistakes Before They Happen

The best way to avoid the most common media mistakes is to be proactive:

•Share good news. Any company receiving an incentive should have a positive story to tell. It will likely have a project, which will bring new jobs, payroll, and investment to the local community. These types of facts should be front and center in any discussion with the media once the project becomes public.

•Educate reporters. Many of the most common media mistakes come from a misunderstanding of incentives. Take advantage of opportunities to educate reporters on incentives and encourage reporters to avoid the abovementioned mistakes.

•Media strategy. Every business receiving an incentive should have a media strategy in place. While such a strategy is most critical for companies with larger projects and heightened media attention, it can benefit all companies receiving incentives.

In our experience, many reporters do a terrific job, and there are a number of sophisticated business reporters who understand the issues addressed in this article. However, when media mistakes arise, it pays for companies receiving incentives and their representatives to be prepared. n