Despite some heavy lobbying in the final days of this year’s legislative session, state lawmakers left Raleigh without taking final action on the Life Sciences Development Act. That is good news to Jason Kay, senior staff attorney at the N.C. Institute for Constitutional Law. He discussed the LSD Act with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: First of all, the Life Sciences Development Act — which has been abbreviated by some as the LSD Act — what is that?
Kay: Well, it is an act that the General Assembly contemplated in this last session that is designed to give money away to what would be biotech development. The structure of the act is a little bit unusual. What it does is, it empowers the General Assembly to create an investment company, and that investment company goes out like any other investment company would. It is a private company, and it solicits investment dollars. “Give us money, and we’ll give you a return on your investment.” Well, it takes those invested dollars, and then it gives them over to qualifying biotech firms that want to do a capital expansion, or there is something they want to do that they need some cash, maybe even startup cash.
And those investors, however, have a peculiar relationship with the investment company. Normally, if you and I were asked to invest in a company, we’d say, “Well, we’ll give you money. You give us a return with interest over time.” But there is a certain amount of risk that we are not going to get our money back. That is not the case with the LSD Act. What it does is, if for some reason the investment company is not able to pay its investors back, it is authorized by this particular legislation to give them tax credits instead, which can be used at the end of the year to pay for income taxes or other tax liabilities that they might have. And more than that, it is a refundable tax credit. So, if their tax liability is, say only $1,000, and they have a $1,500 credit, well, the government writes them a check for $500 worth of difference. It doesn’t just zero out their taxes; it is a refundable tax credit. That was the LSD Act that was proposed this last session in the legislature.
Kokai: Supporters have said this is a way to help boost the biotech industry, bring in some more jobs. But there are some serious constitutional issues that you took a look at. What’s the major problem with something like this?
Kay: Well, the major problem is, you are empowering a private company to be able to do governmental things like issue a tax credit. We have some specific provisions in the constitution, one of which says the state shall not loan its credit unless it submits that idea to the vote of the people. In this case, the state was in the very real position of being a credit backer of these invested dollars. If they couldn’t make their payments, the state would step in and give tax credits. It was a win-win situation for the investors. And the state, the constitution says, is allowed to do that, but it just has to ask the voters first. That wasn’t happening in this case.
The other thing is, there is a provision in the constitution that says that the taxing power of the state shall never be, among other things, contracted away. In this instance it was peculiar because you have the legislature kind of deputizing a private company to be able to give away the taxing power, in effect. It gave taxing power to that authority to make decisions [for] that particular company. It would make the final binding determination as to whether or not a tax credit would be issued. And then the state had to issue the tax credits. So in other words, it sounds an awful lot like the taxing power has been subcontracted away to this private company. That was the second issue.
The third issue is a delegation of authority issue. I’ll take a minute to explain this. You are aware that we have three branches of government. We have legislative, executive, [and] judicial branch. The constitution provides that those three branches shall be forever separate and distinct. Well, over time, that “forever separate and distinct” has gotten not quite so clear. But the legislature is allowed to delegate some of its lawmaking authority to executive agencies, for example. The Department of Health and Human Services is allowed to make rules that have the effect of law, but it can do that, it can delegate that authority, only in instances where it gives clear enough guidance so that the delegation is not just a discretionless grant of power, which only the legislature can have. So, if they are our guiding standards, the legislature can give power away to another branch of the government, but what it can never do is give it away to a private company.
You think about that for a second. You are giving away the authority to make law to somebody who is not elected, not accountable to the people, not subject to any of the governmental rules and disclosure of openness, all of that. It is not government. The whole idea of a representative government system means that you can only exercise the power of government when you are in the government, not when you are outside the government. So that sort of a grant of power to make law in the forms of tax credits or to make rules that have the force of law binding upon those people — that just cannot be done. That is void right out of the gate. It is not allowed.
Kokai: Jason, I want to turn back to a point that you made just a little while ago. You mentioned that the power that’s invested is in a private group, a group that is not accountable. I would think that for normal taxpayers and voters, that would be one of the big red flags about this — that they may have to pay more taxes, or part of the taxes they are already paying, might go to something they don’t support. And the decision to do that would be from a group that they’ve never had a chance to elect.
Kay: Yes, that’s exactly right. It is a private — it is proposed to be an LLC [limited liability corporation]. It is as private as private gets. And the board is not subject to all of the body of law that has developed around governmental institutions. Now, there were some provisions in there respecting disclosure requirements and things like that. So there was a degree of openness that was intended to be inserted, but it is not the same openness that would be in a standard governmental office. Citizens can’t get in the same way they can there.
Kokai: Now, I mentioned at the outset that this issue was not finalized before legislators left town. So, some people may say, well, why are we talking about it? They didn’t finalize this. This could come back in 2010, couldn’t it?
Kay: Yes, it could. This was pulled from consideration when it looked like a lot of the legislators on the floor — this was the last night of the session, it was between 10:30 and 11 [when] they were debating this bill. At about 11 they voted to adjourn for the year the following day, and everybody went home. So we are talking about the last minutes of the legislative session on that evening.
And what they decided to do, the sponsor of the bill simply pulled the bill off the table for discussion and vote. There was not a vote that came down against it, although that was a growing sense, it appeared from the legislators who were on the floor. A number of them were echoing the constitutional concerns that we had specifically addressed and asked them to look at it more. I think a lot of them were coming to the same conclusion that we came to — that there were just really serious, if not fatal, constitutional problems. But there was not a vote. So, they could take this back over the winter, try to retool it, put some new parts, shine some things up, and bring it back in the spring.