Using Rebates as Development Incentives

Using Rebates as Development Incentives

By Bill R. Shelton, CEcD

Innovative civic leaders in cash-starved cities have started to explore ways to provide short-term and creative fixes without turning to unpopular tax hikes.

A development tool used aggressively by many municipalities that has faced serious funding cuts is development incentives. These incentives were the lifeblood of most economic development strategies to attract and retain businesses or provide infrastructure improvements for a development project.

Sales Tax Rebates

To overcome the incentive reductions, many communities and states adopted gainsharing partnerships between the private sector and public sector as a creative fix. This type of partnership is not new and is simple in concept. It is an agreement that makes the municipality and the company/developer partners who share in the sales tax revenues generated by the development. These incentives are known as sales tax rebates and are sometimes called refunds or reimbursements.

Sales Tax Increment Financing

Another gainsharing program is called STIF and occurs when the municipality diverts a portion of the sales tax revenue generated by a new project to finance tax-free, low-interest bonds that directly incentivize the retailer or developer to make infrastructure improvements that are initially funded by the retailer or developer. This is known as sales tax increment financing (STIF), which is the basic theory of tax increment financing (TIF) used in forty-nine states.

These types of partnerships are favored by municipalities because:

  1. Initially, it is the developer, and not the municipality, who funds the upfront costs of making improvements.
  2. The municipality later reimburses the developer for qualified expenditures paid from revenues generated by the project.
  3. The developer, not the municipality, carries the risks if revenues are not sufficient to offset the costs.

Using rebates to partially fund or totally fund incentives at both state and local municipal levels has increased significantly in recent years. In a review of randomly selected local and state governments, these examples of rebates were found listed in websites and other sources.

Examples: State Uses of Rebates

  • 5% rebate of wages paid to crews for filming in state
  • Refunds of up to 50% of workforce training costs
  • $3,000 rebate for new hires in security or defense industries
  • $6,000 rebate for new hires in qualified rural counties
  • Cash refunds of sales and use taxes on furniture, fixtures and equipment
  • Rebate of state and local sales taxes used to build and upgrade tourist lodgings

Examples: Municipal Uses of Rebates

  • Partial reductions of impact fees
  • Rebates of sales taxes on construction materials
  • Rebates of sales taxes on furniture, equipment, and fixtures
  • Rebates of building permit fees
  • Rebates of fees associated with job training
  • Rebates for exterior building improvements

For a development partnership to be successful, the project must be mutually beneficial to both the public and private sector participants. For the public sector, the desired outcome of the project must be realized while the risk is minimized. For the private sector, an appropriate return on investment should be realized based on the level of capital and risk involved. By sharing financial gains and clearly defined revenues, both partners can achieve their respective goals.