News: CJ Exclusives

Price Tag For State Economic Incentives: $800 Million

McCrory won't rule out special session to add more

While Gov. Pat McCrory says he won’t call the General Assembly back into session to push through an economic incentives package, he left the door open for calling lawmakers back to Raleigh if a big deal breaks.

“If a major job recruitment effort develops and it requires legislative support, I will bring lawmakers back to Raleigh,” McCrory said in a video statement.

Commerce Secretary Sharon Decker recently pursued such a deal, spending four days in Tokyo on a trade mission attempting to recruit an automobile manufacturing facility to North Carolina. Decker, McCrory, and a host of key lawmakers remain convinced that tax-funded incentives remain an essential tool for job creation in North Carolina.

Meanwhile, a legislative analysis shows that the state’s liability for such programs could already top $800 million, offering ammunition to those who argue against the incentives on fiscal and philosophical grounds.

The analysis finds the state’s three top recruitment programs have promised as much as $831.6 million for contracts already signed and commitments already made through 2027. The money represents potential payouts or tax credits by the state for the Job Development Incentive Grant, the One North Carolina Fund, and the Job Maintenance and Capital Development Fund.

The analysis was prepared by the General Assembly’s Fiscal Research Division for Rep. Chris Millis, R-Pender, who questions whether the state should place such heavy obligations on future lawmakers and taxpayers.

“These are awards that have been distributed that require future appropriations by the General Assembly,” Millis said. “That award is a binding document to the General Assembly, signed by the secretary of commerce and the attorney general.”

The $831.6 million represents the maximum amount obligated to companies that have taken advantage of the state economic incentives program. Often, the amounts are based on requirements that the companies meet certain performance goals, such as job creation numbers and the amount of money invested in North Carolina. Payouts could be lower if benchmarks aren’t met.

Millis has both structural and philosophical objections to increasing tax funding for economic development incentives. Millis said the state should encourage economic development by creating an environment where jobs and business can grow, not by taking tax dollars and giving them to specific private businesses.

“I’m talking about it in a way of uniform taxation, of regulatory reform, education, and infrastructure,” Millis said. He said for tax money to go toward constructing buildings for companies “crosses the line between public money into private.” Millis added that a firewall is needed so that public and private money don’t get mixed up.

When government offers tax breaks for certain businesses as an incentive, it shifts the tax burden to others that don’t get the incentives, Millis said. “You have all taxpayers paying money to subsidize the tax burden of that individual business,” he said.

Sen. Bill Rabon, R-Brunswick, who co-chairs the Senate Finance Committee, said a lot of people agree with Millis’ position philosophically. But he said that’s far different from achieving economic development accomplishments.

“In the real world, if we’re going to cut unemployment and attract real jobs, we’re going to have to be competitive,” Rabon said. He said North Carolina is transitioning its tax code to make it more competitive.

“Until we become competitive, we’re going to have to swallow our philosophy a little bit,” Rabon said.

Rabon said the General Assembly missed an opportunity at the end of the legislative session when the House refused to approve an economic incentives package that would have given the governor and commerce secretary a “closing fund” to help secure more industrial recruitment.

“Very rarely do you have a piece of legislation that was as comprehensive as it was,” Rabon said. “I think that was a mistake for the legislature, and I think I’ll be proven right in the coming months.”

Rabon said companies are looking to come into the state and not have their cash flow affected by taxes. “They’re going to take the best deal,” he said. “We’re sending our secretary of commerce to the table with no chips. The other states have a stack of chips.”

The legislative fiscal research analysis on economic incentives was prepared in late August. It shows most of the $831.6 million obligations rest in the JDIG program.

JDIG provides grants to businesses that vary based on a percentage of withholding taxes paid by new employees. The report shows that if all companies performed at maximum levels, the state could be obligated to pay $753 million in JDIG incentives through 2027.

The state’s maximum obligation for the One NC fund through 2018 is $44 million. Companies receiving One NC grants can use the money to install or purchase equipment, make structural improvements to existing buildings or renovate them for expansion, or build or improve new or existing water, sewer, gas, or electric utility lines at existing buildings. The law requires local governments to match state grant amounts equally.

The state has a $34.5 million obligation for the JMAC fund through 2018. The JMAC program is a discretionary incentive program offering annual grants to businesses in the state’s less-prosperous counties. The grants are designed to encourage retention of high-paying, high-quality jobs and large-scale capital investment, and enlarge the overall tax base.

Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.