N.C. General Assembly lawmakers have authorized the drafting of legislation that would cut the state's corporate income tax rate and make fundamental changes to the incentives the state uses to lure companies to North Carolina.
A 13-year-old system of tax credits - the William S. Lee program, which was revised into Article 3J in 2007 - essentially would be gutted. In its place, the state would pump more money into its largest cash-for-jobs grant program and shave the corporate income tax rate to 6.5 percent from 6.9 percent.
The bill will be offered by the Joint House/Senate Incentives Committee, which has been meeting over recent months to determine the efficacy of state incentives in corporate recruiting.
On Tuesday, committee members were briefed by consultants from the UNC Chapel Hill who were hired to study the performance of the state's incentives package since the early 2000s. The consultants concluded that the incentives failed to produce enough jobs.
"We've provided a lot of incentives over the past 10 years to firms that didn't grow much," says Brent Lane of UNC's Center for Competitive Economies.
In a sample of 1,213 companies, Lane found that firms receiving Lee credits added jobs at a faster clip than the overall rise in statewide employment between 1996 and early 2001. Over the ensuing five years, however, companies getting tax credits added jobs at, or more often below, the statewide rate.
Under the Lee and 3J programs, companies could claim tax credits on their state corporate or franchise tax bills for any of three reasons: adding jobs, investing in new machinery and spending funds on research and development.
Lane says the only credit program that consistently added jobs was the one for research and development. It is one of the few Lee/Article 3J incentives that Lane and his UNC colleagues recommend keeping as the state revamps its incentives arsenal.
One of the changes committee members will consider drafting into their bill would double the size of the state Jobs Development Industrial Grant, or JDIG, program, which pumps cash directly into firms for meeting hiring goals.
Between 2003 and 2007, the state spent about $380 million on JDIG awards. Lane says any expansion of the program should also include a provision calling for JDIG to target the state's poorest counties. To date, more than 80 percent of JDIG grants have gone to projects in North Carolina's wealthiest counties.
The corporate tax reduction would happen in phases. But moving in that direction, researchers say, would not only make the state more competitive in the region but also would benefit a greater number of North Carolina companies than the current mix of taxes and incentives does.
N.C. Sen. David Hoyle (D-Gaston) an incentives committee co-chair, gave the overall plan his endorsement.
"A bill that looks similar to that, I wouldn't be ashamed to put my name on something that looks like that," he says.
Other committee members pointed to the fact that 2009, with the promise of a budget shortfall approaching $2 billion, will be a difficult year to make any sort of significant tax changes.
Even so, the committee directed its staff to begin drafting legislation.
"And I think any decisions we make should be based on good research, not on what we might want to happen," says Rep. Jennifer Weiss (D-Wake), a committee co-chairwoman. Any bill the committee offers, she added, could be revised over what promises to be a long legislative session.
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