New tax incentive would actually discourage job creation!

SB 575, “Modify Corporate Apportionment Formula”, appears to be in the legislative equivalent of the HOV lane. The Senate quickly passed the bill out of the Finance Committee last week and has placed the bill on the calendar for full consideration this evening. The bill would allow companies that are designated as “capital intensive” to have their corporate profits tax bill based solely on in-state sales rather than the current formula that considers a company’s in-state property, payroll and sales in determining their tax bill. The companies that will qualify for the new tax break have a much higher portion of their property in-state than they do either payroll or sales. Speculation in town is that this fast-tracked special tax break is part of a larger deal to accommodate an Apple computer server facility in the western part of the state. According to the department of revenue potentially three companies currently operating in the state would qualify as “capital intensive” and the program would cost up to $1.5 million annually.

Here’s the kicker. If a company receiving this special tax break wanted to actually expand their work force in North Carolina (at a faster pace than they expand their property/capital value) they would no longer be considered “capital intensive” and therefore would no longer qualify for the program and their tax bill would rise substantially (e.g. a company housing a server farm in NC considering a headquarters relocation or a call center). So the new tax break designed to grow the economy could actually create an incentive for companies with a presence in NC to grow jobs in other states rather than here at home! Moreover, companies considered “capital intensive” would also have a disincentive to make a larger share of their sales in-state because that too could cost them their special status and they would lose their tax breaks. This is a clear example of why making permanent changes to the tax code to appease one or a handful of specific corpoations is not the best economic development strategy in the long-term. If Apple wants cash to locate a facility in our state let them come fight for it through the appropriations process. Let them compete fair and square with other economic development strategies like investments in community colleges and building affordable housing. Let’s hope the House of Representatives moves this bill from the HOV lane to the slow lane so that the future ramifications for the state’s economy and workforce can be fully considered.

On a related note tonight in Winston-Salem Dell Computers will be presenting to the town board about plans for layoffs at its NC facility. Guess that special tax credit for “computer manufacturers” that we put in place to lure Dell isn’t working out so well. So much for learning from past mistakes.


  1. it takes a village

    May 11, 2009 at 9:40 pm

    Excellent analysis. Why is it so alluring to some legislators to give money away without strings to large corporations?

  2. Rotten Apple in Raleigh | theCLog

    May 12, 2009 at 2:52 pm

    […] sales plus a company’s property and payroll. The big, big downside, though, as pointed out by The Progressive Pulse, is that if a company receiving such a tax break wanted to expand its work force in North Carolina, […]

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