The Impact of Tax Incentives on the Location of Manufacturing Facilities

ABSTRACTThis paper illustrates the factors considered by U.S. manufacturing corporations in determining where to locate a new manufacturing facility. The U.S. government, state government, local governing bodies, and foreign governments offer a variety of incentives to persuade companies to locate manufacturing facilities within their borders. The American Jobs Creation Act is an example of an incentive at the federal level that was put in place to trigger investment within the U.S. Many states have their own incentives, such as California's Manufacturer's Investment Credit (MIC), which offers a credit against California income tax based on the purchase and use of property in a manufacturing process in California. Foreign countries are also involved in similar practices. They negotiate specific incentive packages in the form of tax breaks or government grants in order to attract multinational manufacturers and the multitude of jobs that a manufacturing facility can bring. Contrary to the expectations, this paper shows that taxes and government incentives appear to be only one of the factors considered by U.S. manufacturers in deciding where they will locate their manufacturing operations. The choice of location appears to be driven by a variety of business factors, and taxes are only one such factor. Taxes and incentives definitely appear to be contributing factors but they are not the most important factors in the decision making process.INTRODUCTIONMany governing jurisdictions including the U.S. federal government, state governments, and foreign governments have recognized the benefits of having manufacturing facilities within their borders. Manufacturing facilities offer a variety of benefits to the government and its constituents. These benefits include additional income tax revenue, property tax revenue, sales tax revenue, jobs for a wide range of constituents from the highly educated to the unskilled or semi-skilled, and personal income tax revenue for the additional jobs created within the government's borders. Governments have been faced with the tax version of the chicken or egg question. In order to increase tax revenue, more businesses need to be attracted into the area. However, in order to attract new businesses, the government needs to reduce taxes. Different governments have chosen to answer this question in very different ways. The U.S. has a different situation compared to other countries because only in the last few decades has the U.S. chosen to consider that its constituents may choose to invest outside its borders. This is due to the fact that U.S. has the benefit of owning the single largest industrial capital base along with the world's largest single consumer market. As a result, the tax history of the U.S. has been based on internal politics rather than reacting to or anticipating external forces. Current U.S. tax legislation still mirrors this focus on internal politics and the use of incentives to deliver on the wants and desires of certain interests.In a global economy that is shrinking on a daily basis, manufacturers have a wide array of factors to consider in determining where to locate a manufacturing facility. Some factors will definitely be more important than others depending on industry. For instance, a steel manufacturer will need to be closer to customers than a semiconductor manufacturer. Another factor to be considered is the cost of labor. Though low labor rates are considered universally important, they are much more important in low technology industries which rely on manual labor than they are to high technology industries which rely on automated labor (robot assembly lines).Given the wide variety of factors which impact a corporation's manufacturing costs, taxes and government incentives may or may not be an important enough factor to alter a company's decision making in determining where to put a manufacturing facility. Manufacturers may consider more direct costs such as labor rates or availability of labor to be more important in considering where to make the large investment of building a factory. …