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Closing the Deal: Effective Incentives during Fiscal Challenges Transcript

January 13, 2010

Moderator: Welcome to the Federal Reserve Bank of Atlanta's Economic Development podcast series. I'm Todd Greene, with the Federal Reserve Bank of Atlanta. Today, we're talking with Reagan Farr, commissioner of Tennessee's Department of Revenue.

With key incentives, Tennessee has managed to land large projects in the midst of the nation's worst recession in decades. Today, we're going to talk about how Tennessee has managed its economic development strategy in a down economy. Welcome, Commissioner Farr.

Reagan Farr: Thank you, Todd. I appreciate the opportunity to speak to you today.

Moderator: Let's get right to it. The use of economic development incentives has been hotly debated for decades, really among the academic and practitioner communities. Do you have a guiding philosophy about the use of incentives to create jobs and promote capital investment in Tennessee?

Farr: Todd, the governor laid out the parameters that he wanted Commissioner Kisber, our commissioner of economic and community development, and myself to follow when we developed incentive packages for the state. And, our guiding principle is, we want to create sustainable, high-paying jobs that provide good benefits and increase the skill set of our Tennessee work force.

Moderator: Tennessee has had over $3 billion in investments just over the last year period. What incentives have been most successful, and what projects have resulted from these incentives?

Farr: Todd, the $3 billion-plus investments that you referenced were Volkswagen, Hemlock Semiconductor, and Wacker Chemical, and each of the companies we took a unique approach with.

In the case of Volkswagen, one thing that was obvious to us as we interfaced with the company was this was going to be where they planted their North American flag. And they needed to get up in a short timeframe and have a successful launch of a new vehicle. And in order to do that within their given timeframe, they needed suppliers that they could count on, and that they had done business with before, to co-locate at or near their facility. So we worked with VW to structure a supplier tax credit, which would offer suppliers enhanced job tax credit, so they co-located within a certain distance specified by Volkswagen to their primary manufacturing facility. That was very well received, and it was an incentive that was different from anything offered by the other states.

On the flip side of that, in dealing with Wacker Chemical and Hemlock Semiconductor, they make the core component, polysilicon, that's found in all semiconductors and all photovoltaic solar cells. They actually make the base material, so a supplier credit didn't make sense for them. But what Tennessee wanted to capture was the rest of the value chain in the solar industry, so we created an integrated customer tax credit so that the customers of Hemlock and Wacker would locate close to those facilities, and Tennessee could build a cluster of expertise around the solar industry, and we feel that that's been very well received so far.

Moderator: Given the economic crisis, has Tennessee adjusted its thinking around economic development incentives, and how so?

Farr: Gov. Bredesen has been very clear that decisions made in a down economy can have a significant impact on where you land and come out when the economy picks back up. So, if anything, we have redoubled our efforts on the economic development front. We have to be very strategic about the incentives that we offer, especially cash incentives, to make sure that we're spending the taxpayers' money wisely, but we think if we do that in a very strategic and focused manner that we'll position Tennessee to come out of this national recession in a very strong position.

Moderator: You've mentioned tax credits a few times. What is a tax credit, and how do companies use tax credits?

Farr: Tax credits are a statutory incentive, and they can be used in a variety of ways to offset a company's tax liability. So there are tax credits for job creation that can be used to offset a company's corporate tax liability. There's tax credits for capital investment that can be used to offset sales tax liability. So tax credits are very flexible tools, and they play an important role in any economic development toolkit.

Moderator: While much of the talk about economic development incentives have centered on business recruitment, how is Tennessee using incentives for new and existing businesses?

Farr: Tennessee, basically, approaches economic development from a holistic approach, but we really have three tranches where we bring value to the customer. One is, we invest in infrastructure that ultimately benefits both the community and the client. The second is, we invest in Tennessee citizens through training money that goes directly to the client or the taxpayer for use of training their employees. And the third tool, and the one that you just asked about, is tax-policy driven. We have a variety of tax credits, or tax incentives, that we use to incentivize certain behavior. The main credits incentivize job creation and capital investment within the state of Tennessee. And what we found is, we can use tax credits creatively to incentivize certain behavior in different industry types.

Moderator: I understand Tennessee has a new venture capital program. Can you tell me a little bit about that?

Farr: Sure. This past legislative session the legislature passed, and Gov. Bredesen signed, legislation that created the TN Investco Act. And what that act does is address a concern that small business owners have raised with Commissioner Kisber and myself across the entire state of Tennessee, and that is the lack of access to capital for small and start-up ventures within our state. So what we did is try to structure a program that would encourage the formation and deployment of capital within our state that could assist small businesses in commercializing ideas and growing those small businesses into vibrant, taxpaying corporations.

The program works by providing a tax incentive to insurance companies who commit to invest some of their reserves in venture capital funds that are selected by the state of Tennessee to participate in the program. The six participating funds take the cash proceeds from the insurance company and invest that in seed and early-stage companies within the state of Tennessee. It's a great way to get capital to those companies, but importantly, what these funds are also committing to is providing support both from a business-advisory standpoint, a mentoring standpoint, an access-to-market standpoint that's really going to increase the odds for success among these small seed and start-up companies. So we're very excited about it and want to encourage anyone who's interested about it to go to the Department of Economic and Community Development's Web site and type in "TN Investco"; we have a lot more information about the program on the Web site.

Moderator: You've talked a good bit about incentives. How do you know when incentives are successful and produce the outcomes you anticipate?

Farr: There's a lot of ways to answer that question, Todd. One of my favorite ways is to just let the numbers speak for themselves. During the past six legislative sessions, Tennessee has adopted more new tax incentives than they had in the previous 25 years. During that same time period our per capita corporate tax collections increased to the highest rate in the Southeast and the 15th highest rate in the country. We've also recruited 47 new national, international, or regional headquarters to Tennessee during that period and incentivized over $26 billion in new investment in the state of Tennessee. So we feel that building your economic development toolkit is always a work in progress, and you need to analyze and determine if you're doing what's working, that the steps that we've taken are moving us in the direction that the governor outlined for us seven years ago.

Moderator: Commissioner Farr, thank you for joining us today.

Farr: Thanks, Todd.

Moderator: We've been speaking with Reagan Farr, commissioner of Tennessee's Department of Revenue. This concludes our podcast. For more podcasts on this topic and others, visit the Atlanta Fed's Web site at www.frbatlanta.org. Thanks for listening. If you have comments or questions, please e-mail podcast@frbatlanta.org.