Virginia provides nine incentives to encourage businesses to locate and expand in the state. Spending on these incentives totaled $35 million in FY21 and $274 million between FY12 and FY21. Nearly all of the spending was for three grants administered by the Virginia Economic Development Partnership (VEDP), the largest being the Commonwealth’s Development Opportunity Fund (COF). The location and expansion incentives comprised about 9 percent of total spending on state economic development incentives in FY21.

WHAT WE FOUND

COF may sway some business decisions and has higher economic benefits than other Virginia incentives  

The COF grant is Virginia’s “deal-closing" fund. The COF’s estimated level of influence on business location and expansion decisions depends on how it is assessed. However, COF grant recipients rated its influence as higher than the average Virginia incentive, according to a recent survey. Local economic development staff also ranked the COF grant as the state’s third most useful incentive. Because the incentive is well designed and requires a local match, it generates high economic benefits for the state compared with other economic development incentives.

COF met its job creation and capital investment goals collectively across projects from FY12 to FY21, which is a key performance measure for the overall program. However, only about 35 percent of projects met their individual job creation goals because of project cancelations or projects failing to meet performance targets. Some of these projects failed before VEDP adopted a more in-depth due diligence and committee review process.

VEDP’s other location and expansion grants have varying usefulness and economic benefits by businesses

VEDP offers four other location and expansion incentives. The usefulness and economic benefits of these grants vary.

The Virginia Investment Performance Grant (VIP), VEDP’s second-largest location and expansion incentive, encourages the retention and expansion of the state’s manufacturers. Incentive recipients report VIP’s ability to sway business decisions is less than the average incentive, but local economic development staff rated the VIP grant favorably. The VIP grant generates low economic benefits compared with other incentives because it does not require job creation, only job retention.

The Virginia Economic Development Incentive Grant (VEDIG) encourages the location of company headquarters and service-based companies creating significant numbers of high-wage jobs. The grant generated high economic benefits compared with other state incentives, but its performance could not be fully assessed because only one project was completed during the 10-year study period.

The Major Eligible Employer (MEE) Grant is designed to attract new or expanding large employers to the state. However, VEDP has not made any MEE program awards since FY06 because the grant has been replaced by custom grants, which offer more flexible eligibility requirements and payouts.

The New Company Incentive Program encourages companies to locate in distressed areas of the state and create jobs. Only two grant awards have been made since the state created the program, and both were to low-paying call centers in Southwest Virginia. A particularly problematic feature of the program is that COF money funds the grants, which allows projects that do not qualify for the better-designed COF to access COF funds.

Major Business Facility Job Tax Credit is not well designed and unlikely to influence business decisions

Virginia offers the Major Business Facility Job Tax Credit to encourage businesses to locate or expand in Virginia and create jobs. However, the tax credit is not well designed because, for example, it does not require businesses to pay a certain wage level as do most other Virginia incentives with job creation requirements. It also lacks either a program cap or per taxpayer cap. Lack of a per taxpayer cap, in particular, has allowed a few businesses to receive substantial awards representing the vast majority (70 percent) of tax credits awarded during the 10-year study period. The tax credit also is unlikely to influence many business decisions because of its low value ($1,000 per job compared with nearly $4,000 per job for the average grant program in Virginia).

Despite its design flaws, the Major Business Facility Job Tax Credit generates moderate economic benefits. This is because the tax credit requires businesses to create jobs (a main driver of economic benefits), and it has a very low cost to the state. In addition, even though it does not target businesses in high impact industries, over half of the awards were to companies in industries with high employment multipliers.  

Agriculture and Forestry Industries Development Facility Grant has a limited impact on location and expansion decisions but has other benefits

Virginia offers the Agriculture and Forestry Industries Development (AFID) Facility Grant to attract and expand agricultural and forestry businesses that use raw commodities grown and harvested in Virginia. The AFID facility grant has limited ability to influence location and expansion decisions likely because of its low value relative to the cost of the businesses’ new or expanded operations. In addition, the commodity purchase threshold is too low (recipients are required to purchase at least 30 percent of raw commodities from Virginia sources), but most Virginia businesses purchasing raw commodities buy more than 30 percent from state sources.

Still, the grant was rated as the state’s second most useful incentive by local economic development staff, and AFID facility grant recipients collectively met their job creation goals. In addition, the grant may be useful for bolstering Virginia commodities that have seen a decline in purchases from Virginia-based buyers (such as forestry products) and helping grant recipients purchase machinery and equipment. AFID is estimated to generate moderate economic benefits and returns in state revenue.

Factors other than the Farm Wineries and Vineyards Tax Credit have likely led to the rapid growth of Virginia’s wine industry

Virginia offers the Farm Wineries and Vineyards Tax Credit to promote growth of the state’s wine industry. Virginia’s wine industry has grown substantially over the past two decades, but this growth is likely not due to the farm wineries and vineyards tax credit. The tax credit does not reduce wine production costs by much because it is over subscribed and heavily prorated, limiting its impact on location and expansion decisions. Other state policies and programs, such as the state wine distribution program and programs targeting wine tourism, likely promote the state’s wine industry growth more than the tax credit. The farm wineries and vineyards tax credit also generates negligible economic benefits and returns in state revenue.

WHAT WE RECOMMEND

Legislative action

• Eliminate the Major Eligible Employer Grant program.

• Allow the New Company Incentive Program to expire.

• Improve the Major Business Facility Job Tax Credit by targeting it only to export-base employers, adopting a wage requirement, and adopting an annual program cap or taxpayer cap. The tax credit should be allowed to expire if these changes are not adopted.

• Require a wage threshold for the AFID Facility Grant.

• Eliminate the Farm Wineries and Vineyards Tax Credit.

Executive action

• Revise the commodity purchase requirements for the AFID Facility Grant.