This year’s legislative short session passed quickly in Raleigh, and legislators scrambled to revive, rewrite, and pass a raft of tax incentives legislation for selected industries in North Carolina.

House Bill 1973, the “Keep North Carolina Competitive Act,” began as a short list of extensions for small tax credits or refunds set to sunset this year. Lawmakers added several amendments to it, however, and it quickly grew into a 20-page behemoth — an expansion of the state’s system of industry tax favors which could cost North Carolina hundreds of millions of dollars over the next four years.

The final bill, which passed the Senate and House and is now awaiting Gov. Bev Perdue’s signature, extends credits or refunds for the construction of renewable fuel facilities, biodiesel fuel production, and motorsports teams’ aviation fuel purchases. It also creates new credits and exemptions for wood-chipper manufacturers, “eco-industrial park” facilities, and companies producing “interactive digital media” like video games.

The majority of the legislature’s tax favors, however — potentially more than $160 million, according to the General Assembly’s Fiscal Research Division — was directed at the film industry.

One fourth of “qualified expenses” — up to $20 million — can be claimed by a movie production against its tax liability. Also removed was a cap of $1 million on the amount of individual compensation that could be claimed as a “qualified expense” for the purposes of the tax credit; this raised questions about the propriety of using taxpayer money to fund the gold-plated contracts of high profile actors and actresses.

Rep. Bill Owens, a primary sponsor of H.B. 1973 and a Democrat from Pasquotank, portrayed the legislation as a necessity to bring job-creating industry to North Carolina. “I would love for the federal government to pass legislation outlawing all incentives,” he told Carolina Journal in a phone interview. “I hate them. But to be competitive with other states, you have to do it.”

Broad-based tax cuts not sufficient

Owens argued that a broad-based cut to the corporate tax rate was insufficient to bring businesses to North Carolina. “By itself it would not be [enough of an incentive]. It would certainly be a help … It’s certainly a benefit. But we do a lot of other things.”

John Peterson, the executive director of the North Carolina Economic Developers Association, agreed. “These tools are necessary to remain competitive regionally, nationally and globally,” he said. “Nearly all other states and countries use these types of incentives to encourage economic development. Without our economic development tools, North Carolina would be severely handicapped in the global competition for jobs.”

“I’m not sure [H.R. 1973 is] going to do what they want it to do,” said Rep. Ruth Samuelson, R-Mecklenburg. “And it seems a little bit like window dressing. Maybe even campaign window-dressing.”

Rep. Mitch Gillespie, R-McDowell, was concerned by the way the bill combined several separate pieces of economic development legislation covering unrelated industries. “We set a precedent [with this bill], grouping them together, which I think is wrong,” Gillespie said. “If you support jobs, it’s sort of like they blackmail you, they can throw in a bad [incentive] into a group and force you … into voting for the whole group.”

Legislators also attempted to include in the bill a proposal to create a trust that could manage the dams and hydroelectric facilities along the Yadkin River now owned by Alcoa Power Generating, Inc. The company has operated the facilities without a license from the Federal Energy Regulatory Commission since 2008, when Alcoa’s 50-year license expired. FERC has yet to issue a new license. Perdue, like Gov. Mike Easley before her, wants the state to take over the operation of the facilities.

The Yadkin River Trust provision proved too controversial, however, and was removed at the insistence of the House Democratic leadership. The Yadkin River Trust was renamed the Uwharrie Regional Resources Commission, some of its powers were reduced, and the measure creating the commission passed both houses on the session’s final day.

Life Sciences Development Act

While the Keep North Carolina Competitive Act had little significant opposition, another expansion of targeted favors to a specific industry did not succeed. Last year, the two chambers failed to reconcile separate versions of H.B. 530, the “Life Sciences Development Act.” As reported last month by CJ, the bill would have created a private, limited-liability company capable of making taxpayer-funded loans of up to $30 million in venture capital to biotech companies. The loans would be backed by equity certificates sold to other investors. If the biotech ventures failed to return a profit, the company that arranged the loan could offer tax credits to holders of the equity, offsetting their losses.

Last year, state Sen. Neal Hunt, R-Wake, lamented the misguided fiscal priorities that bills like the Life Sciences Development Act represent. “We could spend that money on infrastructure,” he suggested. “Our highways are not in great shape. There have been some questions about our education system and the dropout rate, our training at community colleges for employment opportunities. … How about spending money on those kinds of things?”

The Life Sciences Development Act also raised constitutional questions over whether the General Assembly could surrender its taxing power to a private body. Jason Kay, senior staff attorney at the North Carolina Institute for Constitutional Law, told CJ that “in its present form, [the bill] appears to be unconstitutional in a number of different respects.” For example, Kay said, the bill delegates “rule-making authority — specifically with respect to the taxing power — to a private entity, which the constitution says that the legislature has to legislate, and not some private body that the legislature would prefer make rules.”

Kay also said that the bill forces the state to back the debts of a private entity, and grants the power of taxation to the corporation — two more ways he said a Life Sciences Development company, as envisioned in H.B. 530, would violate the state constitution.

“If this bill, or one like it, passed, the gravity of the constitutional problems involved in it I think would motivate a number of citizens to want to challenge its constitutionality,” Kay says. “And if they called us and asked us for our assistance in challenging that bill, it certainly would be something we can consider.”

A joint conference committee was appointed in June to revise the legislation, but the session ended without a vote. Instead, the General Assembly recast the life sciences development proposal into a study commission that will conduct hearings and deliver a final report to the 2011 session by Feb. 1 of next year.

Bill Flanigen is a Carolina Journal editorial intern.