As the ongoing budget stalemate continues in the General Assembly, the Senate offered up this morning its latest version of the “NC Competes” bill, the mis-named economic development package that will likely do very little to make North Carolina genuinely competitive for private investment and job creation in the global economy. Like previous renditions of the package, today’s proposal just doubles down on tax cuts and corporate subsidy programs that have proven time and again to be ineffective at meaningfully growing our state’s economy. But it largely goes from bad to worse in terms of the state’s discretionary incentive programs.
In general, economic development incentives are not the most effective tool to promote meaningful job creation or widely shared economic prosperity. They tend to influence only a small number of firm location decisions and frequently end up going to the urban, wealthier areas that need incentive dollars the least in order to attract investment. And in North Carolina, the Job Development Investment Grant program—the state’s flagship incentive program—has failed to live up to its promises of job creation and investment in 60 percent of its projects.
The truth is that incentives just don’t play a major role in making our state competitive for business investment. While JDIG may play a role in luring a small number of businesses to the state, the program only accounts for a vanishingly small amount of the total number of businesses, jobs, and investment that come to North Carolina. Since the end of the recession, 95% of the jobs created, 92% of the growth in the number of businesses in the state, and 99% of the state’s GDP growth have occurred *without* investment from JDIG.
So it’s unfortunate that the Senate doubles down on this ineffective approach. Here are few of the most problematic provisions:
- Unlike previous versions, the new proposal drops a key provision that would have reduced the amount of incentive dollars flowing to the wealthiest areas of the state at the expense of the more distressed rural regions. Previous versions created a new Major Market Community designation that would have applied to the state’s three wealthiest counties and reduced the size and number of incentive grants available to those counties, in effect leaving more available for other regions.
- Unlike previous versions, the new proposal does not include a statutory wage minimum for JDIG projects. Although JDIG typically pays wages above a county’s median wage, putting such a standard in statute would ensure that better-than-average wages will always be supported by public dollars and in the long run improve a county’s median wage, even in low-wage areas.
- The new proposal maintains a special program for designated “high-yield projects,” defined as a company investing $750m and creating at least 2,000 new jobs. This was included by the Senate to ensure special incentives are available for recruiting a major auto manufacturer. While incentives have proven effective in attracting these kinds of large-scale, economically transformative projects in other states, the newly proposed carve-out goes too far—it allows the recipient company to receive grants equal to 100% of its employee’s personal income tax withholdings for up to 20 years—almost double the standard grant period available to other JDIG projects. As a result, these “high-yield” grants may effectively wipe out the corporate tax liability these companies owe for up to two decades—a critical loss of revenue at a time of growing revenue shortfalls.
Additional provisions include:
- The new bill creates a huge one-time bump in the cap on JDIG liabilities for the rest of 2015—to $30 million and $50 million if there’s a high-yield project. For the years after 2015, the total amount of money JDIG can spend will drop back down to $20 million ($35 million if there’s a high-yield project).
- In a more positive move, the new proposal changes the local match requirements for OneNC grants to provide more generous state matches in Tier 1 and 2 counties, and requires local governments to be more involved in JDIG projects.
- The bill includes also requires more disclosure on the state’s incentive projects, including the number of applications that are denied because they don’t meet various provisions in the accountability standards.
- There are also special tax breaks given to individual industries, including a sales tax break on jet fuel for all aircraft companies and an expanded carve-out for datacenters that allows smaller datacenters to benefit. In a troubling sign, the General Assembly’s Fiscal Research Division has been unable to estimate the budgetary cost of this provision.
- The bill would also adopt single sales factor, an arcane tax provision that determines the amount of state income taxes paid by corporations and which would provide no benefit to North Carolina business with little or no out of state sales.It would also seek to shift the allocation of sales tax revenue, a move that is unlikely to address the overall challenges facing rural North Carolina or support the overall growth of the state’s economy as the availability of state revenue declines as a result of tax cuts.
The bottom line of this bill is that it relies on a flawed approach to improving the state’s economic competitiveness by relying solely on lowering business’s tax costs that have proven ineffective in the past.
Alexandra Sirota contributed to this post.