Senate Plan Would Cut Corporate Taxes, Cap Incentives | Eastern North Carolina Now

    Publisher's note: The author of this post is Dan E. Way, who is an associate editor for the Carolina Journal, John Hood Publisher.

Governor slams proposal limiting taxpayer grants to businesses

    RALEIGH — Senate Republicans are pushing bills to reduce the state corporate income tax rate from 5 percent this year to 3 percent in 2017, and restructure the manner in which corporate taxes are calculated. The intent behind the legislation is to make the state more business-friendly and better able to compete with its neighbors in job recruitment.

    Senate leader Phil Berger, R-Rockingham, with several leading Senate Republicans at his side, discussed a pair of proposals at a Wednesday afternoon press conference.

    Berger said the Senate is proposing an alternative and less costly economic development package than the NC Competes plan advanced by Gov. McCrory and passed by the House as House Bill 117.

    Senate Bill 338, sponsored by Berger, Senate Majority Leader Harry Brown, R-Onslow, and Majority Whip Jerry Tillman, R-Randolph, lowers the corporate tax rate to 4 percent in 2016 and 3 percent in 2017.

    Tax reform legislation passed in 2013 required state revenue targets to be met before triggering corporate tax reductions to ensure there was sufficient money to pay for government costs. Berger said those triggers would be removed under his bill.

    "As you know, the tax revenues on a year-over-year basis are growing by a half a billion dollars, $500 million or more. So it is my belief, and it is the belief of many of us, that there will be adequate revenues" available to allow the tax cuts, Berger said.

    The Senate plan overhauls the corporate tax structure with a "single sales" factor mechanism already in place or being phased in by 26 states, including Virginia, South Carolina, and Georgia.

    "The folks around us are all going to it, and it creates a real problem for us. That's a problem we can solve that doesn't pick a particular winner or loser," Berger said. "It basically applies evenly across the spectrum of C corporations."

    States traditionally have apportioned corporate taxes based on a mix of property, payroll, and sales taxes. A single sales factor focuses tax calculations on sales revenue, excluding property and payroll taxes.

    The Senate bill would eliminate the jet fuel tax break American Airlines receives at Charlotte Douglas International Airport that amounts to about $15 million a year. It is scheduled to expire at the end of the year. The House legislation would extend it four years.

    "We will have to make a decision as to where we go with that," Berger said.

    The Senate bill extends the Jobs Development Investment Grant incentive grant program for two years, at $15 million per year, after which it would expire. Whatever portion of the $15 million is not used in that fiscal year would be returned to the state treasury, not rolled over to the next year.

    The bill shifts a much larger percentage of JDIG money to smaller counties that traditionally have been cut out of the bulk of the incentive funds. It also includes a major JDIG-style incentive provision aimed at luring a major industrial employer such as an auto manufacturer.

    Sen. Rick Gunn, R-Alamance, introduced a complementary bill, Senate Bill 326, replenishing the JDIG account for the current fiscal year with a $5 million infusion.

    That is a bow to McCrory and Commerce Secretary John Skvarla, who say they need immediate incentive funds to offer to prospective corporations whose location decisions are imminent.

    McCrory denounced the Senate moves.

    "It breaks the bank. It breaks the promises of last year's tax reform," McCrory was quoted as saying during a presentation to members of the North Carolina League of Municipalities. "I also think it divides North Carolina, which is the last thing we want to do."

    "I'm trying to comprehend how the governor wants to spend $1 billion on new incentives, but considers it 'breaking the bank' to allow North Carolina taxpayers and job creators to keep about $500 million of their own money," Berger said. "The math does not add up."

    According to Berger's office, the latest estimates show the change to a single sales factor would cost about $75 million, and the reductions in the corporate income tax rate would cost about $500 million when fully implemented in 2017-2018.

    "The governor needs to accept responsibility for rapidly draining his jobs incentive fund and directing close to 90 percent of the state's incentive money to its richest three counties, including his own," Brown said.

    "These counties already receive a disproportionate share of sales tax and transportation funds, and it's time for the 97 other counties in this state to be treated with respect. In fact, Mecklenburg County receives more in sales tax revenue than 50 of our least prosperous counties combined," Brown said.

    Berger said there has been an imbalance in how JDIG funds are distributed, creating tension among smaller counties. Over the past two years more than 80 percent of the JDIG grants were awarded to Wake, Durham, and Mecklenburg counties, where median income is $56,796. The other 97 counties, with a median income of $40,475, split the other 20 percent.

    His bill would limit the total awards to Wake, Mecklenburg, and Durham counties. JDIG grants awarded in Tier 1 counties (low population and/or high poverty rate) would rebate companies as much as 80 percent of the state taxes withheld from new hires, Tier 2 counties would get a 70-percent rebate, and Tier 3 counties (high population/low poverty rate) would get 60 percent. They would cover up to 50 percent of withholding taxes in Wake, Mecklenburg, and Durham counties.

    With speculation that a yet-to-be-identified automobile manufacturing plant might be considering North Carolina, the bill provides that any company investing $1 billion in new capital investment in North Carolina and creating at least 2,500 jobs would be eligible for a JDIG grant of up to 100 percent of the state level taxes, Berger said.

    Donald Bryson, state director of Americans for Prosperity, said the Senate plan is "much better than what the House has put forth as far as economic development."

    With a single sales factor and lower corporate tax rates, "we've sort of changed the game" in how to make North Carolina more attractive without having to rely on the tax-fueled incentives bidding wars with other states, Bryson said.

    The Senate plan "gives us two years to wean the state of North Carolina off the drug that is corporate welfare," Bryson said. "Hopefully, we'll get past that in two years."

    Gunn said he was not worried about defending the Senate bills against those who might condemn them as corporate giveaways.

    "We need to put together the best economic development package for the state of North Carolina that does two things — allows us to attract the best jobs and the best corporations, and at the same time be a good steward with the taxpayers' money as far as clawbacks and return on investment," Gunn said.

    "This dialogue obviously will continue, which is why I was pretty adamant about my particular bill being filed because [Skvarla] has been pretty adamant that he has a handful of opportunities" that demand urgent attention, Gunn said. His bill would allow that incentive funding to be put in place rather than entangling it in the broader policy debate.