Publisher's note: This post, by Brian Balfour, was originally published in the Economy section of Civitas's online edition.
Earlier this month, the NC House introduced the "NC Competes Act," a bill that would expand the state's Job Development Investment Grant program (JDIG), and extend targeted tax breaks for datacenters and a major passenger airline. Yesterday, the Senate introduced two bills designed as an alternative. Based on the details of the two bills along with comments in a press conference to announce the bills, there is little doubt the Senate legislation is motivated in no small part by the urgent pleas of Commerce Secretary John Skvarla claiming as many as three potential major manufacturing deals hang in the balance over the next week. Additional JDIG funding would help secure the deal, Skvarla indicated to legislators on Tuesday.
"We have three opportunities right now that are looking for JDIG awards in the next seven days, maybe sooner,"
said Skvarla to a Senate finance committee. "I am convinced that they will not come to North Carolina if we don't make the award."
SB 326 would increase the immediate availability of JDIG grant funding by $5 million. JDIG funds for this fiscal year have all been previously committed, so a legislative expansion is required to award more grants. JDIG funds come from state taxpayer dollars. Additionally, SB 338 would make permanent changes to the state's corporate tax code as well as to the JDIG program. The main proposals in this bill include:
- Changing the formula for the state corporate tax to a single sales factor for all corporations.
- Dropping the corporate tax from 5 percent to 4 and 3 percent, respectively, over the next two years — regardless of state revenue collections. The 2013 tax reform package called for this corporate tax reduction, but only if certain revenue targets were met. Initial reports estimate this would amount to a $500 million tax cut by 2017-18.
- Voiding the annual cap on JDIG grant awards in the event a "high yield" project wins a grant. A high yield project is defined as one that involves at least $1 billion in private investment and the creation of at least 2,500 jobs. In a year in which a "high yield" project is awarded a grant, the annual JDIG cap of $15 million doubles to $30 million.
- Other changes to JDIG include alterations to prevent a large majority of grants going to the three highest-income counties in the state (Wake, Mecklenburg and Durham). Research showed that historically these three counties received roughly 80 percent of JDIG grant money.
While the corporate tax changes would be broad based, the JDIG changes are clearly designed to accommodate the recruitment of a major manufacturer, such as an automobile plant.
The Senate and the House have both come forward with their "economic development" plans. Disappointingly, but unsurprisingly, both chambers continue to pursue a policy of bribing corporations with taxpayer dollars.
A side-by-side comparison is included below, and the comparison shows that the Senate plan would be the lesser of two evils. The Senate's proposal to convert to a single sales factor for the corporate tax would on net result in a tax reduction on businesses, and be less punitive to home-grown companies investing heavily in property and jobs, while making NC more competitive with its neighbors. The guaranteed lowering of the corporate tax would also encourage more job growth and investment.
The Senate plan also sunsets the JDIG Committee's authority to extend grants two years sooner than the House bill, while avoiding the additional targeted tax carve-outs included in the House proposal.
Ideally, the Senate would separate the corporate tax changes and the JDIG provisions into separate bills, with the tax changes representing positive, growth-oriented reforms and the JDIG expansion representing a continued pursuit of top-down, crony capitalism. That would allow the passage of long-term, pro-growth tax reductions, while making lawmakers clearly accountable for crony capitalist handouts to giant corporations.
Below is a detailed, side-by-side breakdown of Senate Bill 338 and House Bill 117, the NC Competes Act:
||SENATE BILL 338
||HOUSE BILL 177, "NC COMPETES ACT"
|Corporate Tax Changes
||Changes corporate tax formula to single sales factor for all NC corporations
||Maintains current law stating single sales factor can be used to calculate corporate taxes only for "capital intensive" industries that invest $1 billion or more over 9 years to construct a facility in NC. Does eliminate, however, the established threshold for property investment and for the facility to be in a Tier 1 or 2 area in order to be eligible for the single sales factor.
|Lowers the corporate tax rate to 4% in 2016 and 3% in 2017, regardless of state revenue amounts. The 2013 tax reform plan dropped the corporate tax from 6.9% to 6% in 2014, and to 5% in 2015, and allowed for the 4% and 3% drops only if certain revenue targets were met.
||Preserves the current $15 million annual cap on grants, but creates an excemption for years in which a "high yield" project receives a grant. A high yield project is defined as one involving at least $1 billion of private investment and 2,500 new jobs. In years including a "high-yield" grantee, the cap expands to $30 mil.
||Increases the cap for JDIG grants for the period of July 1, 2013 to Dec. 31, 2015 from $22.5 mil to $45 mil. The 2013 budget temporarily increased the annual cap from $15 mil to $22.5 mil for the biennium.
|Places limits on the share of JDIG grants that can be awarded in the state's 3 highest income counties (Wake, Mecklenburg, Durham), except in cases of a high-yield project.
||Extends the authority for the JDIG Committee to award grants to 2020. This authority is currently scheduled to expire at the end of 2015.
|Increases the new job creation eligibility requirements for grants. For instance, eligibility for Tier 1 projects would increase from 10 jobs to 125.
|Allows for more generous (calculated as a percentage of withholding taxes of new positions) grants in low-income counties; but the most generous is reserved for "high yield" projects.
|Waives the requirement to pay a share of the grant to the Utility Account (which helps fund infrastructure in rural counties) for grants awarded to "high yield" projects.
|Extends the authority for the JDIG Committee to award grants to 2018. This authority is currently scheduled to expire at the end of 2015.
||Transfers $20 million from the Commerce Dep't to the Site Infrastructure Fund. This fund provides money to localities to make additions or improvement to local infrastructure such as water or sewer facilities with the intent of making the area more accommodating for potential new businesses. This fund was depleted several years ago and never replenished.
||Extends the sales tax refund for airplane fuel until 2020, from the current expiration date at the end of 2015. This refund caps the amount of sales tax a company must pay at $2.5 mil. Reportedly, only American Airlines is eligible for this tax break.
||Expansion of eligibility for "qualifying datacenters" and "datacenter support equipment" that would enable more tech companies to qualify for generous tax breaks.