Playing the tax incentive game

Competitive environment adds to challenge of attracting economic development

It may seem a business with $2 billion in sales and a parent company with more than double that could afford to pay for the expansion of its own corporate headquarters. But for Jim Paetsch, the 200,000-square-foot expansion of Milwaukee Tool’s Brookfield headquarters is a deal that almost got away.

“Our competing state had an offer significantly better than ours on the table. I was worried, at the number that we were at, that we were going to lose that deal,” said Paetsch, vice president of corporate relocation, expansion and attraction at the Milwaukee 7 regional economic development partnership.

1) Idea phase – It’s time to expand. 2) Research phase – Let’s look at the options. Narrow down the top prospects. 3) Negotiations phase – Work with the top prospects. Start gathering offers and negotiate terms. 4) Deal phase – Final deal gets penned. 5) Expansion begins

Milwaukee Tool was eventually awarded $18 million in tax credits from the Wisconsin Economic Development Corp. and the City of Brookfield approved $6 million in tax increment financing to support the $35 million project.

Speaking about the TIF district in February, Ty Staviski, Milwaukee Tool’s chief financial officer, noted Techtronic Industries Co. Ltd., Milwaukee Tool’s Hong Kong-based parent company, has facilities around the country, including in Cleveland, Charlotte and Anderson, South Carolina. He said the company looked at northern Illinois and other markets in the area when it planned its expansion.

The expansion planning process generated questions within the company about which locations make the most financial sense, Staviski said.

“There’s a lot of pressure, because we’ve got open capacity in some of our buildings as we’ve built other buildings and they say, ‘Hey, we can house 300 employees down here,’” he said.

But he also pointed out Milwaukee Tool liked its current location and wanted to keep all of its operations on one campus to foster collaboration.

Some are critical when economic incentives are handed out by local or state governments to attract or retain businesses. But the reality is, attracting or retaining companies to a state or region is a competitive process with other states, regions or countries, Paetsch said.

“I’ve been on the wrong end of enough of these where people thought somebody was bluffing and they weren’t and then off they go and they go someplace else,” he said.

Milwaukee Tool is certainly not alone in receiving tax incentives from state and local agencies. WEDC and its predecessor, the state Department of Commerce, have made 615 awards in the fiscal years between 2008 and 2016. Those awards are worth nearly $750 million in tax credits and almost $319 million of them have been verified (job creation confirmed by WEDC and tax credits approved).

The Department of Commerce made an average of roughly 50 awards per year during its last four years as an agency. Since WEDC was created and took on tax credit duties in 2011, the average has increased to slightly more than 83 per year. Barb LaMue, vice president of economic and community development at WEDC, said part of the increase is intentional as the agency seeks to attract businesses. But she and Paetsch also said it could just be a function of an improving economy.

“I can speak personally: This was a lousy business to be in, 2008 to 2011; nobody was doing anything,” Paetsch said.

But he also said the Department of Commerce could often be too bureaucratic and it was difficult, at times, for companies to get calls or emails returned.

“I was always hesitant to even put them in front of a company, just because of the vibe that they would give off,” he said.

WEDC hasn’t been without its faults, either. The agency has been the subject of three Legislative Audit Bureau reports that have made a host of recommendations for changes and uncovered problems. Within the tax credit program, the most recent audit found the agency had not established required policies for all the programs, did not always evaluate if a business met eligibility requirements and allocated tax credits in ways that didn’t comply with statutes and policies.

Finding the key piece

The Milwaukee Tool deal highlights two elements Paetsch said are key to attracting and retaining companies. The deals are competitive and often turn on something more than just incentives.

Understanding what factors will drive a deal is an important part of ultimately convincing a company to locate or expand in the area, Paetsch said. In Milwaukee Tool’s case, having everyone on one campus was a big factor. For another company, it might be proximity to an important customer or easy access to an international airport. It could be as specific as needing a 200,000-square-foot building with 40-foot clearance and 20-ton cranes installed.

Construction progresses at the Milwaukee Tool headquarters.
Construction progresses at the Milwaukee Tool headquarters.

“My job is to find those buildings,” Paetsch said. “My job isn’t to talk to them about all kinds of other things, because if I can’t get the real estate right, the rest of it doesn’t matter.”

That’s not to say companies aren’t considering incentives, but factors like available workforce, access to markets for both raw and finished goods, infrastructure, quality of life and institutions also are important, said Mark Hogan and Barb LaMue of WEDC.

“They have their checklist of things that they want to go through,” said Hogan, the WEDC’s secretary and chief executive officer.

Availability of skilled labor tops the list of needs during site selection, according to an Area Development magazine survey released earlier this year, with 100 percent of consultants and 93 percent of executives describing it as important or very important.

The consultants listed labor costs, proximity to major markets, state and local incentives and available buildings as the other needs in the top five, all with more than 94 percent saying each was important or very important.

The company executives had a slightly different take. Highway accessibility, quality of life, occupancy or construction costs and available buildings rounded out their top five.

Almost 76 percent of executives said state and local incentives were important or very important, compared to just less than 95 percent for consultants.

Paetsch said he doesn’t place a high priority on a deal if a company is more interested in hearing about available incentives before discussing its needs or the region’s assets.

“That’s not a serious company, that’s not a company that’s worth talking to, because any company that leads with that, I question the decision-making process used by any executive who goes at it like that,” he said.

At the same time, incentives do play an important role in attracting companies.

“You can be guaranteed that when you get down to the final three, they could do business in all three of those places. They are convinced that they could be successful; each of them has the assets,” Paetsch said.

He noted the states Wisconsin competes against for manufacturing jobs – Indiana, Ohio, Michigan – have many of the same advantages.

“The incentives become important as it relates to, in a sense like a tiebreaker, so if we aren’t willing to play in that space, then we’re going to lose that deal,” Paetsch said.

A February report by the Urban Institute indicated 36 states have tax incentives available for job creation. Half that total had incentives in place for agriculture and 21 had manufacturing tax incentives in place. In addition to Wisconsin, 10 others had all three. Wisconsin’s manufacturing and agriculture tax credit will be fully phased in next year.

Measuring the results

Whether the incentives actually make the creation of jobs possible or just help in attracting or keeping the jobs in the state, they are part of the economic development puzzle. The 615 awards made in programs directly focused on job creation and retention by the two agencies have resulted in 36,199 jobs being created, of a planned 51,923.

Nearly one-third of the jobs created have been from just 19 awards made in the WEDC’s Enterprise Zone program, a refundable tax credit program for companies increasing employment by at least 10 percent or making significant capital investments. Just three companies – Quad/Graphics Inc., Uline and Inc. – account for more than half of the jobs created in the Enterprise Zones.

LaMue, vice president of economic and community development for the WEDC, said the agency conducts economic modeling on all the projects to which it makes awards. The model takes into account the number and quality of jobs a project will create, both direct and indirect. Hogan noted the jobs create state income tax revenue and new buildings improve the local property tax base.

“There truly is a return on investment in that company,” he said.

WEDC’s awards generally give companies a three-year period to create jobs and then require the jobs be retained for a set amount of time.

Excluding the Enterprise Zone awards that can easily skew the data with large awards and big job figures, there had been 365 awards made between July 2007 and June 2013. The agency has verified two-thirds of the $176.9 million in tax credits awarded during that period and 18,510 jobs have been created – about 90 percent of the planned total. The companies that are awarded tax credits must meet job creation goals (that are verified by the WEDC) in order to actually get them.

Milwaukee Tool is one of those awards. The company received a roughly $2 million award in 2012 to expand its research and development center in Brookfield. At the time, the company planned to create 103 jobs and retain 284. The jobs were retained and the company also eventually created 657 jobs.

Companies like Quad/Graphics, Uline and Amazon also have created jobs at levels similar to or exceeding Milwaukee Tool’s performance.

Quad/Graphics was awarded $46 million in tax credits in 2010. The company planned to create 1,300 jobs and ended up adding 2,086 as it consolidated operations to its Wisconsin facilities. Through 2016, WEDC verified $29 million in tax credits for Quad.

Uline received $18.6 million in tax credits, planning for 1,000 jobs and eventually adding 1,474, with plans for more. The result is $9.3 million in verified credits.

Amazon has topped both companies, creating 3,041 jobs, nearly two-and-a-half times the planned 1,250 jobs when the company was awarded $10.3 million in tax credits.

If Amazon is the example of a company receiving tax credits and exceeding its targets, Menomonee Falls-based Kohl’s Corp. is the opposite. The company was awarded $62.5 million in tax credits in 2012 and $18.3 million has been verified. The company retained 3,783 jobs as planned, but created just 473 of the 3,000 it was to add.

Kohl’s, like many retailers, has struggled as consumers shift their shopping to online retailers or opt to spend it on experiences instead. The company announced earlier this year it would be closing 18 stores and eliminated three executive positions in an effort to streamline operations.

A changing economy cut into the job performance of South Milwaukee-based Bucyrus International Inc. and then the company that bought it, Caterpillar Inc.

Bucyrus was awarded $20 million in tax credits in 2010. The company retained more than 900 jobs at the facility, but created just 109 of the 500 planned and had more than $9 million in tax credits verified.

The mining industry was riding high when the award was made, but the collapse of coal prices and slow global growth slowed demand for mining products.

When Caterpillar decided this year to consolidate its mining engineering operations, Wisconsin didn’t have what the company was looking for. Like Milwaukee Tool, the company wanted to improve collaboration but also wanted to be close to its proving and demonstration grounds.

The end result is 200 jobs will move from South Milwaukee to Arizona over the next few years. The company is receiving millions in incentives from Arizona entities, and while Caterpillar considered Wisconsin in its review of mining operations, it never contacted WEDC about possibly receiving incentives to locate here instead.

Paetsch said there typically is a good explanation that relates to a company’s needs when the state loses out on a deal.

“From our perspective, it doesn’t mean we shouldn’t be in the game,” he said, noting there have been cases where he thought a company would have a strong desire to go elsewhere and Milwaukee 7 was able to convince them to locate in Wisconsin.

For Paetsch, being in the competition is an important starting point. Roughly 85 percent of Milwaukee 7’s funding comes from private companies and his performance is measured on the number of deals the region wins, not on just getting in the door. But he also acknowledged the competitive dynamics mean there is a lot of losing in his line of work.

“It’s a low batting average business, I’ll tell you that,” he said. “I’ve got a whole chest of silver medals at the office.”

LaMue said the agency is fairly successful if deals make it to the state level. In most cases, a deal starts with a local organization like Milwaukee 7 or a local chamber. Those groups have the local connections to quickly act on an opportunity or a potential challenge, she said.

“It needs to be the feet on the ground,” Hogan said.

The WEDC approaches deals with the idea that “in virtually every situation” the companies are looking at other alternatives, he said. The agency could decide the company doesn’t really need assistance “and then the jobs end up going someplace else because we sat on the sidelines,” Hogan said.

Paetsch said the older way of looking at economic development often focused on the gaps in funding. If a company could fund a certain portion of a project, the economic development entity would bridge the difference to reach the level needed for the project. But the problem with that approach is that if another state or community isn’t paying attention to the gap and just makes a better offer, the company will end up going with the other location.

“You just have to accept the rules of the game,” he said. “You can stand on principle that we’re not going to give out incentives, (and) then you’ll just lose.”

Changing the environment

In addition to incentives, measures passed by Gov. Scott Walker and Republicans in the Legislature also have been aimed at making the state look more attractive to businesses. Those include the manufacturing and agriculture tax credit and right-to-work legislation.

Paetsch said those measures help the state make it further into the site selection process in many cases.

“I think what the manufacturing and ag credit has done, what right-to-work has done, is given us, along with the incentives, along with the quality workforce, along with all of the other advantages that are here, it’s given us that much more compelling of a case that we can make,” he said.

But Tamarine Cornelius, a research analyst with the Wisconsin Budget Project, says the problem with the manufacturing and ag tax credit is that unlike the WEDC awards, it’s not tied directly to job creation.

“There was nothing in the way of job creation requirements,” she said. “We want to grow manufacturing jobs, but this doesn’t do anything to grow manufacturing jobs.”

Her organization produced a report earlier this year showing jobs in the state’s manufacturing sector grew at the same rate before the tax credit as they did after the state began phasing it in. Other data from the U.S. Bureau of Labor Statistics shows the manufacturing sector outpaced industry growth nationally in 2012, but has lagged behind since then.

Cornelius also takes issue with how the tax credit has impacted Wisconsin’s revenue. When it is fully phased in in 2017, giving a 7.5 percent credit on income from production activities, the credit will have reduced state revenue by an estimated $736 million over five years, more than double the original estimate.

“I mean, it’s really an enormous tax credit,” she said, citing the report’s finding that the money could have covered fees and tuition for all the state’s technical college students or added 4,000 teachers to classrooms. “It’s just a lot of money.”

Cornelius acknowledged the importance of manufacturing to the state’s economy, but also questioned why the industry should be singled out for a tax break, particularly as employment levels aren’t likely to return to their previous high points.

“It’s a way of sort of picking winners or losers,” she said.

Cornelius said she sees the individual tax credit awards as less problematic, especially since they are tied to job creation. But she also said it can create challenging situations for the state and it might be better to focus investments to help businesses on workforce or transportation.

Paetsch agreed those areas are important for attracting companies, but said that’s a classic challenge of balancing public policies.

“I’m the here and now guy,” he said, adding the competitive nature of economic development gives companies a distinct advantage. “It’s a leveraged relationship, without a doubt.”

While he has heard the argument that specific incentives aren’t necessary if the state has the manufacturing and ag tax credit, Paetsch feels the state is in a better position having both.

“It’s about winning and losing, and you want to be on the winning side. The more advantages you can line up, the more arrows that are in that quiver, the more you’re going to win,” he said.

He also said companies are in the business of maximizing every possible outcome and just because they are getting incentives or a tax break doesn’t mean they won’t look for opportunities elsewhere.

“I know for a fact, when they’re building their cost model, every cell in that spreadsheet is going to get tortured. They are going to look hard at every single line item,” he said.

Looking to the south

Two or three times a month, Paetsch and his team will put together an analysis for companies, laying out the difference in taxes between two states.

“We’ve had a lot of success pulling companies out of Illinois,” Paetsch said, noting there were two deals announced in the second half of October. “I’ve got plenty more. We are this close on a number of really big deals.”

One of the recently announced deals was for Colbert Packaging Corp. to move its flexographic division from Lake Forest, Illinois to Kenosha, potentially bringing 100 jobs with it. The company was offered $1.6 million in incentives, including the potential for $850,000 in WEDC tax credits.

Jim Hamilton, president of Colbert Packaging, said the company went through an 18-month process as it sought a replacement for a leased facility. In addition to Wisconsin, the company also considered Indiana and Illinois.

“Your state is very welcoming,” he said. “It’s nice to be wanted as opposed to not wanted in this state here.”

Colbert chief financial officer Kraig Lang said a number of things went into the decision, but the Illinois budget situation has a number of programs on hold and the company was told there weren’t any incentives available to help Colbert stay.

“When everything is said and done, the incentives that were offered and we received from Wisconsin tipped it over the edge,” Lang said.

WEDC Enterprise Zone Awards

Tax credits awarded, job creation and actual tax credits verified (granted) by the Wisconsin Economic Development Corp. over the past six years. The companies that are awarded tax     credits must meet job creation goals (that are verified by the WEDC) in order to actually get them.

October 2010

W Solar Group Inc.
Award: $28 million
Job creation: 0 (actual)/
525 (promised)
Tax credits: $320,000 (verified)

Bucyrus International Inc.
Award: $20 million
Job retention: 946
Job creation: 109/500
Tax credits: $9.3 million

Quad/Graphics Inc.
Award: $46 million
Job retention: 4,820/4,820
Job creation: 2,086/1,300
Tax credits: $29.2 million

November 2010

Mercury Marine
Fond du Lac
Award: $65 million
Job retention: 1,878
Job creation: 916/1,311
Tax credits: $43.7 million

Oshkosh Corp.
Award: $35 million
Job retention: 3,566/3,566
Job creation: 674/1,000
Tax credits: $26.7 million

December 2010

Uline Inc.
Pleasant Prairie
Award: $18.6 million
Job creation: 1,474/1,000
Tax credits: $9.3 million

Shine Medical
Technologies Inc.
Award: $11.2 million
WEDC lists no jobs created and no tax credits

Northstar Medical
Radioisotopes LLC
Award: $14 million
Job creation: 56/189
Tax credits: $0

August 2011

Fincantieri Marine
Group LLC
Award: $28 million
Job retention: 757/757
Job creation: 742/800
Capital investment: $87.6 million
Tax credits: $15.9 million

January 2012

Kestrel Aircraft Co. Inc.
Award: $18 million
Job creation: 24/665
Capital investment:
$1.1 million
Tax credits: $717,500

June 2012

Plexus Corp.
Award: $15 million
Job retention: 1,704/1,704
Job creation: 43/350
Capital investment: $70.3 million
Tax credits: $7 million

July 2012

Kohl’s Corp.
Award: $62.5 million
Job retention: 3,783/3,783
Job creation: 473/3,000
Capital investment: $137.2 million
Tax credits: $18.3 million

October 2013

Award: $10.3 million
Job creation: 3,041/1,250
Capital investment: $332 million
Tax credits: $1.7 million

Weather Shield Mfg. Inc.
Award: $8 million
Job retention: 798/798
Capital investment: $3 million
Tax credits: $2.5 million

August 2014

Trane US Inc.
La Crosse
Award: $5.5 million
Planned job retention: 496/496
Capital investment:
$53.9 million
Tax credits: $2.8 million

October 2014

Award: $15.5 million
Job retention: 897/897
Job creation: 226/165
Capital investment: $21 million
Tax credits: $6.8 million

Exact Sciences Corp.
Award: $9 million
Job retention: 185/185
Job creation: 289/606
Capital investment:
$14.9 million
Tax credits: $200,000

January 2016

Dollar General Corp.
Award: $5.5 million
Planned job creation: 552
Planned capital investment: $69 million

April 2016

Milwaukee Electric Tool Corp.
Award: $18 million
Planned job retention: 820
Planned job creation: 592

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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