After months of controversy, Governor McCrory yesterday signed a controversial economic development package ostensibly aimed at giving the state the tools it needs to compete for business investment in the global economy. Unfortunately, the latest version of the bill—HB 117, the misnamed NC Competes Act—doubles down on an outdated vision for economic competitiveness that relies on lowering business tax costs rather than investing in strategic development that boosts business productivity and encourages growth in those industry sectors most likely to thrive.
Although there are some positive steps taken in the legislation—notably requiring wealthier communities to pitch in more for certain incentive projects—on balance, it is unlikely to deliver on the promises that “competitiveness” is supposed to provide, namely jobs and economic prosperity that benefits everyone.
The final legislation contains many of the problematic provisions seen in earlier versions. Here are just five issues that make this a bad deal for North Carolina:
- The bill increases the funding available for the flagship Job Development Investment Grant (JDIG) program without first addressing the surprisingly high rate of projects that fail to create the jobs and investment they promise. As a Justice Center report revealed earlier this year, more than 60 percent of the firms that received a JDIG award since 2002 failed to deliver on their promises and were cancelled by the Department of Commerce. And since 2007 (the only years for which this data is available), these cancelled projects created just 20 percent of the jobs that were promised, suggesting that the program is better at producing press releases about new jobs than actually creating those new jobs. And while it’s true that the program’s nationally recognized accountability safeguards ensure that failed projects don’t receive a dime of taxpayer dollars (an undoubtedly positive outcome), these protections don’t do anything to make sure that jobs promised are actually created—they just protect taxpayers when those jobs are not created. Ultimately, if the state is going to continue supporting incentive programs, we need to make sure they can actually deliver the jobs that are promised—and increasing funding for JDIG without fixing these problems does nothing to improve the program’s ability to deliver on its promises.
- The bill’s proposed special carve-out for designated “high-yield projects”— which both the Governor and bill sponsors argued was necessary for recruiting a large-scale auto manufacturing plant to the state—doesn’t set a high enough standard for private sector commitment to North Carolina. Previous versions of the bill set the minimum threshold that a private company would need to invest to qualify for this high-yield project at $1 billion and 2,000 new jobs created in order to ensure that this special fund would indeed be used for the kind of transformative economic development project that an auto plant represents. Unfortunately, the final version of the bill waters down this threshold to just $500 million and 1,750 new jobs, making it easier for smaller, potentially less transformative projects to qualify and this undermining the point of the program.
- Additionally, the high-yield carve-out gives far too much away. While incentives have proven effective in attracting these kinds of large-scale, economically transformative projects in other states, the high-yield JDIG program proposed in the bill just 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. This is 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.
- While the bill takes a couple small steps forward in addressing the imbalance in incentive granting between urban and rural counties, it just doesn’t go far enough—and drops a number of provisions from previous drafts that would have reduced these disparities in significant ways. On the positive front, the new legislation changes the local match requirements for OneNC grants to provide more generous state matches in Tier 1 and 2 counties (most of which are rural), and requires local governments to be more involved in JDIG projects. Additionally, the new bill increases the minimum number of jobs created in each JDIG project from 20 to 50. But beyond the OneNC changes, these JDIG modifications are unlikely to address the geographic imbalance in incentive awards—the minimum job creation threshold for Tier 3 counties is largely symbolic, as almost all projects supported by JDIG in recent years already create more than 50 jobs.
- The bill continues to pick winners and losers among industries. While the state budget passed last week refused to extend tax credits for two industries out of favor with the legislative majority—film and solar—this bill provides increased tax cuts for firms purchasing jet fuel and building data centers. In an especially surprising development, the legislature’s own fiscal analysts were unable to even put a price tag on the data center provision, because no one is precisely certain how many datacenters will qualify under the new rules.
As a whole, the new version repeats many of the same problems as the previous versions and essentially doubles down on the failed idea that the best way to stimulate economic competitiveness is through reducing firms’ tax costs, when it’s long been clear that this approach just doesn’t deliver on its promises.