In today’s Friday interview, the John Locke Foundation’s Donna Martinez discusses the effectiveness of the William S. Lee Act with Triangle Business Journal reporter Mandy Jones. The act was passed 10 years ago to attract business and jobs to North Carolina by providing tax credits to companies that would come to the state and create jobs. The interview aired on Carolina Journal Radio (click here to find the station near you).
Martinez: First of all, just give us a real quick refresher course on what the Lee Act was intended to do.
Jones: The Lee Act, in 1996, was passed. Its intention at the time was to attract more companies to invest and bring jobs to all across the state, but particularly in rural areas, because the way that the system is set up in a tier system, a tier-five county would be like Wake County or Mecklenburg County, the wealthier counties. You have tier-one counties that are poor, like Vance County or Halifax County. They are eligible for — companies that are in those counties are eligible for — more credits for creating jobs, for investing in machinery and equipment, worker training, and there’s about eight different categories which they can get credits for.
Martinez: And a company gets a larger credit if they go to a rural county, is that right?
Jones: Correct, correct. For example, right now with the way the law is set up, if a company created a job in a tier-one county, a poorer county, they would get about a $1,000 per job tax credit over the course of about five years, versus a company that created a job in Wake County or in Mecklenburg County or in the Triad — the wealthier counties — they would only get $500 per job. So, it’s set up on a tier system.
Martinez: Okay, now, tell us about 2005. You wrote a story essentially recapping what happened in ’05.
Jones: Well, we’ve kind of been tracking the credits that the companies have been claiming since 1997. It’s been on a pretty steady increase. In ’97, the first year that the numbers were available, all the companies that claimed the credits was about $25 million. Last year, in 2005, it had risen to $90 million. That is also versus companies that, because they take the credits over a period of five years to 15 years, they are kind of cut up into pieces. But each year, companies that generate new tax credits that they can use in future years — they spend about $200 million a year. So, that’s future liability that the state will be responsible for.
Martinez: Now, there was a big jump between ’04 and ’05, correct?
Jones: Correct.
Martinez: So, is it fair to say, then, that as the economy rebounds, and it is booming along right now — we just had reports, in fact the Triangle Business Journal was one of the papers that reported this, that 99 out of 100 North Carolina counties reported a drop in unemployment. So, the economy is moving along. Does that mean that more credits will be claimed? What’s that relationship?
Jones: The way that it does work, a company is only taxed on their profits. If a company is not bringing in profits, they don’t have to pay any taxes. Therefore there is no point in using the credits because there is nothing to use them towards.
Martinez: Right.
Jones: So, the more money that a company is — the more profit that a company is making — the more credits they will be able to use. Now, the state does set it where the company is only able to claim credits on 50 percent of the taxes that are due, and they only go towards certain kinds of credits that they are having to pay. But, you know, if a company is making money, they are able to claim the credits, because they are actually having to pay taxes again.
Martinez: Mandy, one of the criticisms of the William S. Lee Act is that there’s not much monitoring going on, and it brings up a really important question, and that is: how do we police this? Is the state policing what jobs are created and if those jobs are sticking around? Or, are companies, for example, maybe creating jobs but then laying people off down the road? You know, this question of net jobs created. How do we do that?
Jones: That is a really good question. The Department of Revenue does put out a report every year, usually at the end of March, end of April, that lists out every company. And then they have their own team that goes back and audits questionable type credits. We have done stories about companies in the past, like Collins & Aikman, who had claimed exorbitant amounts of credits. Come to find out…it was an accounting glitch, a problem that they made on their filing form. And so, that was caught. The Department of Revenue did go back and catch that, and so as far as we know, they are somewhat policing it. You know, we’re not really sure. I haven’t gotten any recent reports on any numbers that have changed, so I don’t know how much is actually policed.
Martinez: Is there an official sanction? Or, would the credits just be rescinded if it found — if Commerce found — that they were using them improperly or the numbers weren’t right, that type of thing?
Jones: That’s a good question. I’m not real sure what would happen if they were using credits improperly. Most of the companies, because they are spread out over time, supposedly part of the law does say that if a company creates a new job, it generates a new credit, and then they lay off those employees, they’re not eligible for the credits anymore. But Commerce Department and the Department of Revenue, between the two of them, are supposed to be policing that.
Martinez: There are some criticisms as well from the business community, particularly existing businesses who feel like, hey, a new company is getting credits, and they say, hey, I’ve been here. I’m employing people. I’m a part of this community. They end up feeling like they’re subsidizing their competition. What do you hear when you talk to business people about this?
Jones: Well, actually, if you look at the credits that are claimed, the majority of the credits are going to existing companies who have been here for decades. They’re going to IBM. They’re going to Phillip-Morris. They’re going to Bank of America and GlaxoSmithKline. The majority of the credits are going to companies that have been here. And so, the new companies are eligible for them, but it’s the older companies who have been here for awhile who are actually benefiting from this the most.
Martinez: It sounds like the big ones as well. And so, there might be a potential rift there too — kind of the big-versus-small business, and who is getting this.
Jones: There are certain regulations in the legislation that certain kinds of companies are more eligible for certain kinds of credits than others…
Martinez: You mentioned changes. The General Assembly is back in session in Raleigh, and there is a potential revamp of the William S. Lee Act going on. Tell us about that.
Jones: We have seen a draft proposal that’s going through the House Select Committee on Economic Development, and it proposes many, several changes — a complete revamp of the Lee Act: a change to the tier system, a change in the amount of credits that companies will be eligible for. And it even eliminates some of the credit areas like for worker training and central office, and it changes up the R & D credit — the research and development credit. There will be some — a lot of changes proposed this year. They were first proposed last year in the legislature, ran out of time, decided to just extend the Lee Act through — I believe, 2009 is when it’s supposed to sunset again if I’m not mistaken. And then, come back this year and completely revamp it.
Martinez: And why a revamp?
Jones: Because it is awfully complicated. It is hard to police, because there are so many different kinds of credits and so many different ways that you can, you know, claim the credits on your tax forms and such. This is supposed to make it less complicated…but it’s not supposed to have much fiscal affect. It’s still supposed to be about the same amounts that companies will be able to claim or generate in future years.
Martinez: Do you think this will have bipartisan support?
Jones: I believe it will. I believe it will, just because I’m hearing both — on both sides of the aisle…it’s pretty split down the middle. I’ve heard from different sides. Everyone seems to be in support of changing it. Not everyone is in support of having the program at all, but they say that it’s needed and it’s been around, companies expect it now.