Like a recovering addict on the verge of a major binge, some North Carolina lawmakers are on the brink of falling back into the black hole of tax credits. Rather than serving as a national model for tax and regulatory reform, North Carolina risks becoming, again, a national leader in crony capitalism.
Senate Bill 826, which remains alive even though the legislative short session is winding down, would create a new state-level credit mirroring the federal New Markets Tax Credit. The state version would have given insurance companies and affiliates a credit to filter money to private entities making investments in distressed communities. Even if S.B. 826 is not enacted into law this year, the NMTC concept won’t go away any time soon.
Established in 2000, NMTC was designed to provide capital, spurring the revitalization of low-income and impoverished communities. To date, 14 states have adopted NMTC programs. Texas and Georgia have joined North Carolina in introducing state-level legislation.
Targeted incentives never live up to their promises, benefit a few at the expense of many, and are not a good investment of taxpayer money. When credits, grants, and carve-outs are piled on, success for “investors” comes almost entirely at the expense of taxpayers.
The proposed North Carolina New Markets Tax Credit would offer a 25-percent state tax credit for private investments over seven years, so long as 75 percent of the investment is made in the economically disadvantaged Tier 1 and Tier 2 counties. This would be on top of a convoluted federal program that already offers a 39-percent credit over seven years.
Before a project can qualify, supporters must provide government overseers a revenue impact assessment using “a nationally recognized third-party independent economic forecasting method that projects state and local tax revenue to be generated by the project.” You can bet the forecast will claim large increases in state revenues, economic outputs, and jobs, because the reports often use a flawed economic analysis model called IMPLAN, which ignores opportunity costs and frequently conflates business costs with societal benefits.
A July 2014 U.S. Government Accountability Office report on the federal NMTC called the program complex, nontransparent, and unnecessarily duplicative. The GAO also found “the data on equity remaining in businesses after the credit period were unreliable,” and “data on NMTC project failure rates were unavailable.”
The NMTC isn’t the only subsidy available to the politically connected. At the federal level, about 16 additional tax credits, breaks, and carve-outs also are used in conjunction with NMTC. Duplication of tax credits is likely in North Carolina as well. Historic restoration credits, solar and renewable energy credits, Job Development Investment Grants, OneNC Fund grants, and local incentives are just a few of the other programs an investor might qualify for in addition to NMTC.
The only projects prohibited from the North Carolina credit are real-estate investments. Although the stated intent is to generate economic activity in Tier 1 and Tier 2 counties, of the 95 federal NMTC projects currently underway in North Carolina, 60 are located in Charlotte, Durham, Greensboro, Raleigh, and Winston-Salem. There are hundreds of projects in North Carolina already identified as eligible for the NMTC. Most are clustered around the same areas.
Long-term evidence and academic research tells us that investment credits don’t work. They benefit a few at the risk and expense of all other taxpayers.
North Carolina lawmakers have fought hard to roll back special tax carve-outs and set the state on the right road to economic prosperity. To turn in the opposite direction, adopt a state New Markets Tax Credit, and set the state back is foolish, irresponsible, and ill-advised.
North Carolina has become a national model in tax reform, focusing on low rates and fair tax treatment rather than picking winners and losers through targeted incentives. We’ve come too far to return to bad habits, poor choices, and destructive decisions.
Becki Gray is vice president for outreach at the John Locke Foundation.