Even a generous package of economic incentives from North Carolina taxpayers could not prevent Dell from announcing the closure of its Forsyth County desktop computer production facility last week.
And yet another economic incentives bill, eligible for consideration in the General Assembly’s short session next year, has some lawmakers and legal experts crying foul. They say it would waste taxpayer dollars on risky investments and potentially violate the state constitution. Even some legislators who normally support economic incentives to businesses are leery of the proposal.
The measure, known as the Life Sciences Development Act, would establish a private company to make taxpayer-funded loans of up to $30 million apiece to biotechnology and pharmacy startups in North Carolina. The N.C. Biotechnology Center has inquired about receiving startup money from the Golden LEAF foundation, a nonprofit created in 1999 to distrubute the proceeds of the state’s tobacco settlement, but Golden LEAF President Dan Gerlach told Carolina Journal the nonprofit has made no commitment to provide any funding.
To underwrite the loans, the Life Sciences Development company would sell equity certificates (similar to shares of ownership) to investors. The goal: spur economic growth and create jobs in a down economy.
But critics say the bill gives taxpayers the short end of the stick by using public money to offer wealthy venture capitalists a risk-free outlay with a hefty upside.
“I really think that this so-called public-private partnership is nothing but a giveaway to venture capitalists … and taxpayers are going to get stuck with the bill,” said Rep. George Cleveland, an Onslow County Republican, during debate Aug. 10 on the House floor.
“The bottom line is we’d be better off spending that money on other things, such as reducing taxes for businesses and individuals as opposed to giving breaks to various sundry industries,” said Sen. Neal Hunt, R-Wake, in a telephone interview. Hunt was one of only six lawmakers to vote against the measure in the Senate.
The provision that has stoked the ire of opponents would give private investors a taxpayer-funded credit if their investment in a biotech startup didn’t perform as well as expected. Foes of the proposal say the credits would have taxpayers assume at least part of the venture capitalists’ risk.
“We’re pretending to be the credit default swap agency, and it’s bad business,” said House Minority Leader Paul Stam, a Wake County Republican. He compared the legislation to federal bailouts of the auto industry.
Supporters, however, say biotech incentives are a good way to stimulate North Carolina’s economy, create new employment, and expand the tax base — and that the bill would do all three.
“This bill is exactly what we need to be doing in this time when we so badly need jobs across this state,” said House Majority Leader Hugh Holliman, a Davidson County Democrat.
Sponsors saw any chance of passing the bill this year evaporate in the waning hours of the General Assembly’s session. The House passed an earlier version of the measure in April overwhelmingly; the Senate altered the bill and followed suit in early August.
But lawmakers, washed out from six weeks of tough budget negotiations and tense back-and-forth with Gov. Beverly Perdue over spending priorities, couldn’t reach a compromise on the House and Senate versions, and opted to put off a vote until next year.
A recurring theme during a half-hour of debate in the House Aug. 10 was whether the bill infringed on the state constitution. That question has drawn scrutiny from legal experts.
“The problem with the bill from a constitutional perspective is the very point of the bill,” said Jason Kay, a senior staff attorney with the N.C. Institute for Constitutional Law, in a telephone interview. “It’s not like they’ve chosen to do something constitutional in an unconstitutional way. What they are trying to do is itself unconstitutional.”
The bill goes too far even for some long-time supporters of economic incentives. Rep. Rick Glazier, D-Cumberland, told CJ that he had “real concerns” with the measure’s constitutionality, particularly “the lack of oversight” and the delegation of authority for issuing tax credits to a private entity.
Constitutional hurdles
The system authorized by the legislation would pose “glaring problems” and violate several provisions of the constitution, Kay wrote in a memo requested by a bipartisan group of legislators.
“It says explicitly in the constitution that the power of taxation will never be contracted away, but they’ve empowered this company to issue tax credits in a way that’s binding on the state,” Kay told CJ.
Kay also said the constitution “flatly prohibits” lawmakers from granting legislative power to a private entity, and that it requires a vote of the people if the General Assembly tries to grant its credit to private entities.
Sponsors tried to bypass that snag by inserting a provision specifying that neither the private company nor a qualifying biotech startup “has any power to pledge the credit or taxing power” of the state. But that addition is meaningless since it contradicts “the whole purpose of the bill,” which is to lend the credit of the state, Kay said.
Transparency is another problem for critics. The private company authorized by the legislature would have disclosure requirements not “quite as robust or expansive as the disclosure requirements would be if it were government,” Kay said.
Attempts to reach supporters of the measure for comment were unsuccessful, but several lawmakers defended the bill during debate on the House floor.
“This is indeed new territory for North Carolina … but it’s time for us to do some bold, innovative things,” said Rep. Pryor Gibson, an Anson County Democrat.
Rep. Earl Jones, D-Guilford, said the bill would increase North Carolina’s competitiveness and help move the state into the 21st century, while Holliman argued that supporting the incentives would be beneficial over time.
“Yes, it’s a new idea. Yes, it does require a public-private partnership,” he said. “But the life sciences industry is a big industry in this state — it requires some out-of-the-box thinking.”
Biotech performance
During debate, several legislators touted the track record of biotech incentives, pointing to the Biotechnology Center, which is headquartered in Durham but has offices across the state, as evidence of state funding paying off.
“I think the track record of our Biotechnology Center is one that we should be proud of,” Holliman said.
The Biotechnology Center, created in 1984, is a nonprofit organization that’s received more than $200 million from taxpayers to fund biotech projects in the state.
The center claims to have created 55,000 jobs at 500 companies, but Triangle Business Journal reported in 2005 that the center’s biotech investment portfolio had lost 41 percent of its value over the previous two years. The value of its investments had fallen by $11.23 million since 2002, the newspaper reported.
In 2007, the Journal also reported that a $10 million investment by the Biotechnology Center in a venture capital fund was worth only $1.3 million when the fund closed down.
Regardless of the center’s track record, though, some see incentives as a distortion of the marketplace.
“The government should not be engaged in the business of financing or operating entrepreneurial endeavors,” said Bob Luddy, a Raleigh businessman.
Even some legislators who have traditionally supported incentives, such as Glazier, don’t see them as a long-term solution.
“In the short term, for economically hard hit regions and until we’re able to do a more comprehensive recovery in this state, I have been in favor of targeted incentives,” the Fayetteville Democrat said, “but I think it’s time to seriously examine whether they are producing what we said they would.”
David N. Bass is an associate editor of Carolina Journal.