Carolina Journal News Reports
CHARLOTTE — When is good news the cause of bad news for local government and civic leaders? When it comes to the state’s yearly William S. Lee Act tier designations, in which a stronger local economy can reduce incentives for business investing in and state aid to a county.
“If you want to continue to qualify, your incentive is to keep your tier designation,” said Chad Adams, director of the Center for Local Innovation at the John Locke Foundation and a Lee County commissioner. “This is always a quandary for counties.”
Since its creation in 1995, the Lee Act has been one of North Carolina’s major economic development programs. Under the act, businesses can quality for tax credits by creating jobs, engaging in research and development, purchasing new machinery and equipment, or making certain other types of investments. For Lee Act purposes, the state places counties into one of five categories, labeled tier 1 (worst) to tier 5 (best), based upon how well they are doing economically. The higher the classification, the smaller the amount of state tax credits available for creating new jobs or investing in a given county.
The tax credits associated with the different tiers currently are:
• Tier 1: $12,500 tax credit per new job created and a 7 percent tax credit on new machinery and equipment.
• Tier 2: $4,000 tax credit per new job and a 7 percent tax credit for machinery and equipment expenditures more than $100,000.
• Tier 3: $3,000 tax credit per new job created and a 6 percent credit for machinery and equipment investments over $200,000.
• Tier 4: $1,000 tax credit per new job created and a 5 percent credit for machinery and equipment purchases over $1 million.
• Tier 5: $500 tax credit per new job created and a 4 percent investment tax credit for machinery and equipment investments over $2 million.
The state adjusts tier rankings yearly based upon population growth, per-capita income, and unemployment rates. In 2005, 25 of the state’s 100 counties changed tiers. Ten counties improved by one level, while 14 went down a level. Hertford County went down two levels.
Myth and reality
“The tier designations help ensure that our less-prosperous counties have the tools they need to attract economic development to their communities,” said N.C. Commerce Secretary Jim Fain in releasing the tiers for 2005. “At a time when our state’s economy is challenged by an ongoing restructuring in the global marketplace, it is more important than ever that we give every community in our state the resources it needs to succeed.”
The reality of the Lee Act is rather different, however, from Fain’s statement. The act has proven ineffective in aiding poorer counties, with most of credits generated in better off counties and for things besides job creation.
In the first year of the Lee Act, 10 counties were categorized as tier 1. In the program’s 10th year of existence, eight of the counties — Bertie, Graham, Hertford, Hyde, Northampton, Richmond, Tyrell, and Warren — again find themselves placed in the most economically depressed category. Mitchell and Swain counties have improved somewhat; in 2005 they are classified in tier 2.
The department’s own review of the program found that most of the tax credits were generated in richer, not poorer counties.
“Although the WSL Act’s five-tier system apportions substantially higher incentives to businesses in economically distressed counties, firms in larger and wealthier Tier 4 and 5 counties have earned a large majority of the credits in absolute terms,” the report states. “Business in the Charlotte, Piedmont Triad and Research Triangle regions generated between 73 and 94 percent of the total WSL Act job creation, worker training, M&E and R&D credits reported between 1996 and 2001.”
The report also notes that the 25 largest users of the program claimed $59 million in Lee Act credits in 1999, 2000, and 2001, 37 percent of all credits generated during the period.
Just because a company is eligible for a tax credit does not necessarily mean it can actually make use of it. State tax regulations impose restrictions on when and how the credits can be taken, limiting both the actual cost to taxpayers and the usefulness of the credits to businesses.
Credits may be used only to offset up to half of a business’ franchise and corporate incomes tax liabilities. The credits can be carried forward only a limited number of years — five to 15 depending upon the category — and require that the investment or jobs be maintained.
The N.C. Department of Revenue reports that on the tax returns it processed in 2003, 616 taxpayers generated $175,543,475 Lee Act tax credits. In the same year, taxpayers used only $79,334,636 in credits, most of which where generated in previous years.
In that year, 56 percent of all Lee Act credits generated were for machinery and equipment purchases. The other significant credit-generating activities were research and development (24 percent of total credits) and job creation (18 percent). The percentages were similar for credits claimed.
State policymakers, meanwhile, are increasingly using the Lee Act tiers as a means tests to determine local communities ability to fund projects. For example, the 2000 state community college bonds require that counties in tier 5 match state construction funds. Counties in the lower tiers did not have to match state dollars.
“Obviously counties want to be successful economically, but success is not rewarded by the Lee Act, it is punished,” Adams said. “Thus if a county finally climbs up to a tier 5 designation its ability to continue that climb is punished, kind of like adding weight to a marathon runner at the end of a race.”
Lowrey is associate editor of Carolina Journal.