A war is being waged between states, counties, and even some cities with businesses coming out the big winners.

The weapons are tax breaks, which states have traditionally offered to lure new businesses and retain existing ones. Now, counties and municipalities are becoming more prominent players in the economic dating game.

Robust state and local economies are leading to the generous incentive packages. Last year alone, the state of California granted nearly $9 billion in corporate, sales and other tax exemptions in an effort to promote economic growth, according to the state controller's office.

That's more than the annual budget of many states.

However, nearly half of all businesses eligible for tax exemptions don't take advantage of them. The No. 1 reason cited by those firms is that they weren't aware such credits existed.

That's not too surprising when you consider there are now more than 100 business-related credits and incentives on the books in California, and lawmakers are adding new ones every year.

Business owners also say they don't pursue tax credits because they believe their company is too small to qualify, or that the paperwork is too cumbersome to make it worthwhile. Both of those assumptions are generally false and can cost companies millions of dollars in tax savings.

For example, a food processing company in Southern California recently invested a substantial amount of capital in new machinery and equipment but failed to apply for any tax credits. An analysis of the fixed-asset additions and possible amendment of prior California tax returns reflected potential cumulative tax savings of $52,000.

Another local business that manufactures solar paneling also failed to take credit for equipment placed into service during 1997. After a thorough assessment, the company was able to claim tax credits exceeding $700,000.

Most tax incentives offered by the state fall under the following categories:

- Tax profile. These are probably the most well-known credits and take into account corporate income and franchise taxes, apportionment and allocation of income, and property taxes.

- Targeted tax incentives. These include manufacturers' investment credits, research and development credits, net operating loss carryover, child-care credits, and enterprise zone considerations.

- Employee training. Covered here are such things as job-referral and placement programs, and employment training panels.

- Financing assistance. The state offers a variety of business financing opportunities, including industrial development bonds, pollution-control financing, environmental loans, community development block grants and infrastructure financing.

In addition to state credits, there are county and municipal exemptions and incentives available that are even less publicized. Virtually every city in Southern California has a community development department more than willing to assist new and existing local businesses with growth and economic development.

Companies that qualify can take advantage of myriad incentives, ranging from land grants to redevelopment funding.

An ideal time to negotiate for local credits and incentives is when a company anticipates a major "life event," such as a move, renewing an existing lease, or planning an expansion. The larger the company, the lengthier the negotiation process can take.

A good rule of thumb is to start preparing for negotiations about two years prior to this life event. There are several steps businesses can take to secure special tax incentives. The single most important is simply making sure to ask government agencies what is available. The following are some simple topics to keep in mind when seeking tax credits:

- Eligibility. Just about any business that contributes to the economic health and well being of the state and local economy qualifies for credits and incentives. Typically, these companies will have 100 or more employees; however, smaller firms that are prestigious or have a number of executives with high salaries are also attractive and could be eligible for incentives.

- Preparing for negotiations. Keep an open mind as you enter this process. If relocation is your goal, select two or three comparable sites that would be suitable for your firm. In approaching government entities, prepare a comprehensive assessment of your business, paying special attention to what your company has to offer the community and the state. Things you'll want to include are the number of local people you employ, their combined annual salaries, and total revenue of your firm.

Don't forget special attributes, such as the notoriety and exposure you will give the city, along with community-based charitable work.

- Desired business tax incentives. You'll want to develop a list of tax credits and special waivers that you are seeking. Don't be afraid to ask for the moon; you may not get it but it doesn't hurt to ask.

You'll want to include such things as reductions in utility-user fees, relaxed permits, and accelerated depreciation for certain equipment.

- Agencies offering assistance. You'll want to talk with representatives from the state, county and city in your selected locale. A good place to start is often with the local chamber of commerce and the community development center in your targeted city.

Once you know what you want and have built your case, get ready for the dating ritual to begin.

Ernie Dronenburg is a partner at Deloitte & Touche and past chairman of both the California Franchise Tax Board and the State Board of Equalization. He can be reached via edronenburg@dttus.com.

Entrepreneur's Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.

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