National Association of Manufacturers
733 10th Street NW
Suite 700
Washington, DC 20001

Phone: (202) 637-3000

The first laboratory-confirmed case of COVID-19 was reported in the U.S. to the CDC on January 22, 2020. At that time, we could not have predicted that the world was headed towards a global pandemic event. Along with disruptions to commerce and everyday life, COVID-19 has had widespread consequences to U.S. manufacturing. The lasting effects of COVID-19 have severely disrupted supply chain and logistics planning for many manufacturers in the U.S. who have for years been dependent on just in time inventory models and foreign based suppliers of raw materials and inputs. Manufacturers rethinking their supply chain strategies have generated an increase in investment activity, creating opportunities for state and local communities to support those projects with economic incentives.


Supply Chain Disruptions Create Opportunities
Complete production disruptions have forced many domestic manufacturers to take a closer look at enterprise wide supply chain planning. These evaluations have included overall reviews of suppliers, distribution models and transportation hubs to ensure that manufacturing operations can remain resilient even with unexpected disruptions to key raw material suppliers or transportation channels. It is important to note that while manufacturers are rethinking their supply chain strategies to be less dependent on global supply chains, since consumers will continue to demand competitive pricing, manufacturers will not likely be able to abandon foreign suppliers altogether. Companies are working to identify high risk suppliers that are most susceptible to disruption in order to build redundancy into the system, so that large scale stoppages in production can be avoided.


In the last decade, manufacturing has evolved to a “just in time” inventory and manufacturing model in order to drive efficiency and cut overhead and costs by reducing the amount of overall inventory in the supply chain. Just in time inventory and manufacturing share a similar principle – produce or receive product only at the time when it is needed. One of the ways that companies may build resiliency into the supply chain is to hold intermediate inventory and/or “safety stock” to lessen a company’s dependence on global suppliers who may be susceptible to supply related interruptions due to economic, political or transportation related disruptions. In times of industry and economic distress, manufacturers may choose to ask major supplies to relocate or expand near a major domestic production facility or may even bring raw material production in house.


Economic incentives can also be used to encourage growth and innovation – and production resiliency in these supply chain models – even in challenging economic times.
 
Economic Incentives Mitigate Risk and Encourage Innovation and Growth
The strategic use of economic incentives is used to encourage innovation and growth in domestic based manufacturing. Economic incentives should be viewed through the lens of mitigating business operational risk, supporting growth and innovation. Increasingly, manufacturers have made certain that site selection decisions for new or expanded production facilities also factor in economic incentives. In today’s economic environment, along with changing supply chain and production models, the incentive tools that are most meaningful are those that can readily adapt to fit the usefulness and flexibility needed by businesses.
 
Incentives for Business Inventory Tax
Almost every state in the U.S. has already shifted their corporate income tax structure to the more business-friendly single sales tax apportionment methodology. If companies begin to shift towards safeguarding their supply chain structure through intermediate inventory or “safety stock”, states and communities can take tax reform one step further in eliminating the local ad valorem tax on business inventories that do not qualify for Freeport exemptions. A handful of states, concentrated in the Southeast in communities steeped in the manufacturing tradition, still utilize a three-base tax system whereby a local property tax is imposed on real property, business personal property and business inventories. Many states allow for an exemption from the business inventory tax if inventory is ultimately transported outside of the state within a certain timeframe (typically six months or less). The “just in time” model of manufacturing lessens the burden of an inventory-based tax; however, if manufacturing inventories become more robust with longer lead times, states and communities who impose a business inventory taxes may struggle to remain cost competitive.


While many companies look towards states and communities with an existing talent pool of skilled manufacturing labor, manufacturers should remain cognizant of those states who impose business inventory taxes and ensure that the overall project’s cost analysis of a market includes an analysis of the total local tax burden. Incentive negotiation that eliminates the business inventory tax or provides a mechanism for tax abatement of the business inventory tax will ensure that communities rich in manufacturing tradition and talent remain cost competitive and attractive for re-shoring or expansion of manufacturing operations.
 
Incentives Opportunities for Small-to-Midsized Manufacturers
Incentive opportunities are not just targeted to large-scale manufacturing operations; opportunities also exist for small and mid-sized operations. Many local incentives such as tax exemptions, tax sharing, or tax abatements are perfectly targeted for smaller-scale operations and new projects that involve either the retention of existing headcount or minimal job creation. In robust economic times, many states and communities become focused solely on projects that present large job creation numbers and high average wages; however, in these challenging economic times, many communities have shifted their focus to help attract a wider variety of project types and sizes.
 
Incentives for Retention of Existing Facilities
As states react to new realities due to the Pandemic, we may begin to see the return of “retention-only” incentives – incentives that specifically encourage companies to remain and operate in place. COVID-19 has presented a repositioning of economic development opportunities such that many communities are willing to participate in local incentives to encourage the retention of existing operations. These incentives are often based on a percentage of the tax revenue that a facility generates and can offer companies cost-effective solutions to reduce risk and assist with maintaining existing operations.
 
Incentives for Technology Upgrades
Many companies are also looking to increase efficiency by upgrading technology in existing facilities. Technology or process upgrades typically require employee skills upgrades or re-training. A variety of training incentives are available at both the state and the local level for manufacturers that have new or ongoing employee training needs. Training benefits can range from direct cash grants, in-kind services or cost rebate mechanisms. States and local communities tend to have varied approaches to employer training benefits. It can be helpful to have a site selection and incentive consultant do an initial review of your company’s training plans to determine how best to capture the benefits associated with the various training programs.
 
Incentives for Capital Intensive Process Innovation Projects

Manufacturers constantly seek ways to reduce operational risk. This is often accomplished through process innovation and by adding automation. COVID-19 has changed the way that employers look at human capital, with increased automation becoming a priority for many manufacturers. Automation projects often represent large capital expenditures; however, the net new job creation is typically minimal. Since many state incentive programs are focused on net new job creation and payroll, automation projects should consider focusing their incentive negotiation efforts at the local level where the capital investment aspect of a project’s scoping is typically given more weight. Manufacturing facilities often have very large economic impacts to the local community; therefore, companies that prepare and present metrics that demonstrate return on investment throughout the negotiation process will be better positioned to secure incentive packages. A consultant that is skilled in incentive negotiation will be able to provide insight into states who may have greater flexibility in their existing programs to incent lower headcount, capital intensive projects.
 
Key Takeaways
We are finding that states and local communities have increasingly become more creative with their existing incentive programs. As is the case after any economic disruption, COVID-19 has raised the importance of economic development organizations supporting existing industry – keeping and nurturing existing businesses is just as important as attracting new projects. While we expect there to be new opportunities driven by the need to diversify and bring supply chains closer to home, we also expect smaller projects (e.g. retention-only projects, technology implementation projects, and projects without significant headcount, etc.) to be given careful and renewed consideration.

Economic Incentive Opportunities for Evolving Supply Chains

By : Ann MW Petersen, Director, and Kathy Mussio, Managing Partner, Atlas Insight LLC

Want to learn more about specific incentives in your area that may be available? Connect with an expert from NAM Incentives Locator!