A second Commerce Department report on the William S. Lee Act released in as many weeks indicates that 95 percent of the time targeted tax credits are not a “deciding factor” for companies when they make investments or hire workers.
The department’s newest report was based on a survey of North Carolina manufacturers.
“This report indicates for the majority of firms the Lee Act is not effective. We are simply wasting taxpayer dollars. This points to the necessity of major reform sooner rather than later,” said Rep. Paul Luebke, D-Durham, a frequent critic of the Lee Act.
In December 2002, the department surveyed 4,471 North Carolina manufacturers in an effort to gather information for its Existing Industry Program. The survey asked questions about job creation plans, knowledge of existing industry programs, and about the types of support programs they would find useful. Included in the survey were two questions about the Lee Act.
Responses were received from 977 employers, and 896 answered the Lee Act questions. The first question was: “When your business decides to expand, to what degree will or have North Carolina’s Williams S. Lee tax credits be a consideration in your decision to do any of the following tax-credit-supported activities — modernize machinery and equipment, create new jobs, undertake research and development, train workers, invest in central office administrative office property?
The second question was: “In the past, have you used the credits?” A total of 154 companies responded yes. Combining the responses, the report said that only 5 percent of the respondents that used the credits reported that the tax breaks were a deciding factor. Another 25 percent responded that the tax credits were a “key consideration,” but not a “deciding factor.” Thirty-two percent said the credits were a “minor consideration,” and 38 percent said the credits were “not relevant” to their decision regarding expansion.
An earlier report, released Aug. 11 by the Department of Commerce, yielded similar results. Michael I. Luger, director of the Office of Economic Development for the Kenan Institute of Private Enterprise at UNC-Chapel Hill, prepared the report. Based on his own research, Luger said, “Only 4 percent of the jobs claimed to be created with Lee Act incentives actually were induced.” In other words, 96 percent of the employment associated with the tax-credit program would have occurred without it.
Under the Lee Act, companies can claim tax credits for adding new jobs. The state’s 100 counties are divided into five groups or “tiers.” The amount of the credit varies between $500 in tier five counties, the wealthier counties such as Wake and Mecklenburg; to $12,500 in tier one counties, poorer counties such as Halifax and Swain.
The Lee Act also allows credits for investing in machinery and equipment, for research and development, and worker training. It allows special credits for investment in central offices and aircraft facilities as well as additional credits for investments in state-designated business development zones. The machinery- and equipment-credit component is by far the most costly. It accounted for 74 percent of the credits generated and 56 percent of the credits used during the study period.
From 1996 to 2001 about $1.16 billion in tax credits have been generated, $208 million have been used, and $947 million can still be claimed. The amount is significant when compared to actual net corporate state income taxes collected in North Carolina, which total about $800 million annually.
Commerce Department spokeswoman Cooper Bratton told Carolina Journal that even though the survey was conducted in December the report was not released until recently because the “analysis was not completed until August. Prior to that time, it was an internal work-in-progress. It was provided to [Carolina Journal] because you requested a copy. The survey was part of the department’s on-going efforts to improve programs and services to existing industries.”
When asked when the results were shared with the General Assembly and Gov. Mike Easley, Bratton said, ”The survey was intended for internal use.” She also cautioned that the survey analysis listed several caveats concerning the methodology. A copy of the report is available from the Commerce Department, telephone (919) 733-3449.