Task Force on Incentives
North Carolina Economic Development Board
November 8, 1995
Part I. The North Carolina Economy: Overview
Significant Location Projects - Selecting
Part II. Use of Incentives in Economic Development
A. Incentives: North Carolina's Application
B. Incentives and Location Decisions
Part III. Major Task Force Findings and Recommendations
Principles for Strategic Use of Incentives
A. Major Findings: The Economy
B. Major Findings: Incentives
Part I. The North Carolina Economy: Overview
Overall, North Carolina's economy has remained relatively healthy despite
the significant restructuring as the state and national economy responds
to the forces of international competition. North Carolina continues to
add jobs at a strong pace, about 100,000 net new jobs per year over the
past several years, according to employer reports to the Employment Security
Commission. Unemployment remains low, below the national average, and labor
shortages are reported in some areas. Growth in wages and per capita income
has outpaced the national growth rates.
The nation's economy as a whole is becoming service sector intensive, with
manufacturing employment declining as a percentage of overall employment.
North Carolina's economy reflects this trend in that in 1976 manufacturing
accounted for 35 percent of the state's total employment. While remaining
greater than the national average, this figure fell to 25 percent of the
workforce engaged in manufacturing in 1994. Nevertheless, in absolute terms,
North Carolina added 107,000 net new manufacturing jobs over the last two
decades (1976-1994). North Carolina remains the nationís most ìindustrialî
state with a higher percentage of its work force employed in manufacturing
than any other state. North Carolinaís competitive position to other
states has remained secure over the last two decades. Chart 2 illustrates
manufacturing earnings per capita for North Carolina and its competitor
states. North Carolina continues to lead its competitors in the Southeast
and the gap has widened in recent years. Although North Carolina trails
Ohio, North Carolina's trend has remained more stable.
The importance of manufacturing to the economy has increased in terms of
gross state product. Manufacturing output has grown and manufacturing now
accounts for a larger share of the Gross State Product than in the 1970s.
While technological improvements have reduced overall manufacturing employment,
manufacturing earnings have continued to grow; most of that growth has been
in durable goods industries earnings. Earnings would have been flat overall
without the growth in durable goods output, and without growth in plastics
and chemicals in the non-durable goods sectors. Finance, Insurance, and
Real Estate has been the principal contributor to output and earnings growth
in the non-manufacturing sectors, followed by growth in the services sector.
The picture in employment growth was somewhat different than in output growth.
In 1994, retail trade accounted for 18 percent of total employment; services
22 percent; manufacturing 25 percent; government 16 percent; wholesale trade
five percent; transportation, communication, and public utilities five percent;
and all others nine percent. In terms of employment growth, retail trade
and services were the primary contributors to an overall employment growth
of 60 percent over the last two decades. These two sectors more than doubled,
while manufacturing employment grew by fourteen percent. Extremely high
rates of job growth were recorded in health services (211 percent) and in
eating and drinking establishments (201 percent). Fastest growth rates were
thus in the sectors with the highest and lowest increases in real wages
over the last two decades.
Within manufacturing, net employment increased 107,000 while various sectors
experienced widely varying fortunes. Machinery (including computer equipment)
had the highest growth rate, 86 percent, followed by electrical equipment
with a 46 percent increase. Textile and apparel combined lost nearly 78,000
jobs between 1976 and 1994, although most losses were prior to 1985. Other
growth sectors included electrical equipment (46 percent), food and kindred
products (32 percent), and all other manufacturing (50 percent). Despite
the losses in textiles and apparel, these two sectors accounted for nearly
a third of all manufacturing employment in 1994, compared to about 20 percent
of manufacturing employment for the Southeast as a whole.
In the last two decades, most of North Carolina's investment has come from
expanding industries (See Chart 3). Real investment from new manufacturing
locations has declined over the last few years, while that from expansions
has grown. However, new industry has created more jobs per dollar of investment
(see Chart 4). The absolute number of new locations and expansions has fluctuated
from year to year. Recent evidence indicates a slight downward trend in
new locations, and a tracking of "favored" industrial recruitment
prospects from economic developers in the NC Department of Commerce's Business
and Industry Division shows losses to Virginia and South Carolina.
Significant Location Projects
Selecting Other States
|PROJECT||YEAR||STATE OF LOCATION|
Koyo Bear ||1993||SC|
|Transamerica||1994||MO (Kansas City)|
|Black & Decker ||1994||SC|
The impact of the growing use of tax incentives by other states is too
recent to show in current data, however; its effects would be reflected
in reports from 1994 and following years.
The distribution of earnings and investment remains an economic development
concern. Appendix F shows that most investment has occurred in the urban
areas of the state (e.g., Raleigh-Durham, Greensboro-Winston Salem-High
Point). While investment has been more equitably dispersed when measured
on a per capita basis, unemployment tends to be higher, income lower, and
poverty higher in rural areas.
The state continues to do well in terms of job creation. Wages and income,
however, remain a central economic development issue. While wages and income
are growing faster than national averages, the restructuring of the national
economy in response to global competition has had mixed effects on real
wages. These effects can be seen in North Carolina. (See appendix A for
additional charts on NC's economy).
The state's average weekly manufacturing wage in 1993 was $461 compared
with South Carolina's at $5186. In addition, the average wage of $9.80 per
hour for North Carolina production workers ranks 44th out of the fifty states7.
Nevertheless, manufacturing continues to be a principal source of higher
wage employment in the state. Real wages in manufacturing grew by 18 percent
since the 1970s, more than twice as much as the 7.7 percent growth in overall
real wages. Only finance, insurance and real estate and selected services
sectors (Health Services, for example) had higher growth rates in real wages.
Real wages for retail trade, on the other hand, declined by nine percent
over the last two decades.
On the whole, North Carolina's 1994 per capita income ranked 34th in the
nation and was 90 percent of the national average9. Despite economic restructuring,
a high percentage of North Carolinaís workers remain employed in
relatively lower wage manufacturing sectors, with strong employment growth
in both higher end (health services) and lower wage (retail trade) sectors.
Increasing wages in the state relative to the US will require continued
change in the overall economic structure of the state through new investment
from high productivity, high wage industries and growing productivity in
dominant existing manufacturing sectors.
Part II. Use of Incentives in Economic Development
A. Incentives: North Carolina's Application
Like many words that are applied in public discussion, but rarely defined,
the word "incentives" means different things to different people.
In the current debate over "incentives", the term is generally
used to refer to cash payments or "tax breaks" from a public entity
to a private company in order to entice that company to locate new investment
in a particular state or community. Incentives are also considered to be
a relatively new phenomenon, a radical departure from the manner in which
local and state government typically engage in economic development.
Actually, incentives in some form or fashion have existed for a long time,
both in other states and in North Carolina. The birth of modern industrial
recruitment programs is generally traced back to Mississippi's Balance Industry
with Agriculture initiative in the 1930s, when Mississippi began enticing
Northern manufacturers to move facilities to Mississippi to reduce the state's
dependence on agriculture. Actually, in a broader sense, various kinds of
public sector incentives to induce specific private sector investments have
long been a part of federal and state development initiatives. In 1791,
New Jersey granted a tax exemption to a manufacturing company owned by Alexander
Attracting outside investment to NC has invariably been a public concern.
In 1828, Mr. Fisher issued his commissionís report to the North Carolina
House of Commons on attracting manufacturing investment to the state.
Are the circumstances of our State such as to render practicable
the introduction of this system (manufacturing) among us? We answer they
are. The hand of nature itself seems to point out North Carolina as a region
of country well adapted to manufactories.
As to capital, owing to the pursuits of our people, it is hard to be commanded
here. The wealth of our citizens consists in property that is not easily
converted into money. We can find among us but few persons who are able
to command either the whole, or a part of the funds necessary to put manufactories
into operation; and therefore, for capital as well as for skill, we must
be in some measure dependent on the Northern states; and it is certain,
when the monied and enterprising men of the North fully understand how profitably
the business may be pursued here, they will be the first to embark in it.
But if, from prejudice, or from a want of a knowledge of the superior advantages
enjoyed here, that should not be the case, then there is yet a way by which
capital in sufficient amounts may be collected, to move forward the system.
What one or two, or in a few individuals cannot effect, may be accomplished
by the union of many persons. Companies may be formed in every county of
the State, composed of individuals, each contributing a small amount, which
in the aggregate, will make sums sufficient to carry through the object.
The Committee have thus, at grater length than they could wish, presented
their view on the policy of introducing the Manufacturing System into North
Carolina. They firmly believe that it is the only course that will relieve
one people from the evils that now so heavily press on them. The policy
that resists the change is unwise and suicidal. Nothing else can restore
Let the Manufacturing System but take root among us, and it will soon flourish
like a vigorous plant in its native soil. It will become our greatest means
of wealth and prosperity.
(From "A Report on the Establishment of Manufactures," made to
the House of Commons of North Carolina, by Mr. Fisher, from Rowan, on Tuesday,
January 1, 1828.)
Mr. Fisher had great foresight. Outside capital did see the advantages of
investing in North Carolina, and it did flourish here. By the 1990's North
Carolina ranked first among all states in the percentage of its workforce
in manufacturing and ranked among the leaders in announced new manufacturing
investment. The native soil proved good for that investment; also by the
1990's, expansion of existing firms accounted for three-fourths of all new
The Fisher Committee was correct in understanding that some local investment
might be necessary until such time as the state's advantages were obvious.
Some of that investment was public investment to attract the outside capital
investment that was critical to building the manufacturing system in the
state. In the late 1890s, for example, the Statesville Record reported on
a local effort to provide land to attract investment by a textile company
to Iredell County.
North Carolina and the Fisher Committee were not alone. Southern states
have long recognized that a key to economic development was attracting new
capital investment. As Southern state economies have matured, these states
have been able to depend upon indigenous growth (from birth of new firms
and expansion of existing companies) for a greater percentage of growth
in new jobs and outputs.
Expansions of existing manufacturing firms in North Carolina accounted for
about three-fourths of all announced new manufacturing investment in the
1990s, compared to about half in the 1970s (Refer to chart 3). Beginning
in the 1980s, most states (including North Carolina) initiated a variety
of programs to stimulate small business development, spurred by David Birch's
research on the importance of small business to job growth. In the 1980s
and 1990s, most states (again including North Carolina) also enacted programs
to improve the competitiveness of existing companies -- through technology
transfer, technical and engineering assistance, and provision of capital
to finance new products and technologies. While northeastern and central
industrial states have acquired much of the publicity for these programs,
the oldest Industrial Extension Service is in North Carolina and the largest
is in Georgia.
In the process, states created an array of incentives to stimulate new investment,
provide direct services to business and industry, assist in developing new
markets, provide low cost debt financing, and increase access to seed and
venture capital. The North Carolina Economic Development Board estimates
that North Carolina spends about $160 million annually in direct state appropriations
for economic development. The Governor's Competitiveness Fund accounted
for five million dollars of this total in 1993, and only two million dollars
in 1995. Total state expenditures for industrial recruitment (including
economic development staff, marketing, the Governor's Competitiveness Fund,
highway site access funds, and new industry training) account for only about
ten percent of total economic development appropriations.
Approximate Annual Expenditures, 1994-95
|Governor's Competiveness Fund (State)||$7,000,000|
|Industrial Development Fund(State)||$2,000,000|
|CDBG Economic Development Loan Fund (Federal)||$4,500,000|
|CDBG Economic Development
Infrastructure Fund( Federal) ||$4,500,000|
Site Access Fund(State) ||$2,200,000|
College New and Expanding Industry Funds(State) ||$7,000,000|
Jobs Tax Credit (Tax Credits) ||$4,000,000|
In addition to direct state appropriations, states have used the tax
system to stimulate desired behavior in the private sector. A variety of
tax credits and exemptions were deployed to stimulate investment in plants
and equipment, in research and development, or to improve the availability
of capital to finance new companies and new technologies. North Carolina
has been generally less aggressive than other states in the use of tax credits
as incentives for industrial investment, although tax incentives have been
applied for a variety of purposes.The sole North Carolina tax credit directed
to industrial recruitment and expansion is the Targeted Jobs Tax Credit,
which allows qualifying manufacturing companies to take an income tax credit
of $700 per year for four years for each new job created in a distressed
county.13 The only other significant tax credit is the Qualified Business
Ventures Tax Credit, which permits an individual or business to take an
income tax credit equal to 25 percent of the investment in a qualifying
Historically, North Carolina's primary investment in incentives has been
financing for worker training, highways, and water and sewer. North Carolina
was a pioneer in developing a statewide network of community colleges oriented
to worker training. The Community College customized training programs,
which provide state funds to train workers for specific positions within
a particular company, have been widely copied. The Site Access Program in
the Department of Transportation provides funding for highway improvements
or access roads to serve transportation needs of industrial customers. Financing
for economic development related water and sewer projects has been episodic;
currently the principal state sources are the Industrial Development Fund,
which is limited to the fifty most distressed counties within the state,
and the Community Development Block Grant program, which is limited to projects
that will provide jobs principally for low and moderate income persons.
The Industrial Development Fund can also be applied to building improvements
and utility extensions. The Community Development Block Grant program also
provides low cost loans to private companies that create jobs principally
for low and moderate income persons. [See appendix C for a brief description
of these programs.] The Department of Commerce at one point operated a fund
to support the development of local shell buildings, which could be leased
or sold to industrial prospects at preferential terms, but that program
is no longer funded [Enacted 1973-1993].
The state has periodically funded a variety of mechanisms to provide low
cost financing or grants for product development to small and emerging companies.
These include grant programs operated by the Technology Development Authority
and the North Carolina Biotechnology Center; the legislature later directed
that these grant programs be converted to loan or investment funds. Low
cost financing was partially underwritten by state government through appropriations
to the Rural Economic Development Center for the Microenterprise Program
and the Capital Access Program. The principal low cost financing program
for industrial facilities is the state's revenue bond program, which indirectly
permits access by private enterprise to the lower interest rates for public
The Governor's Competitiveness Fund, introduced in 1993, incorporated many
of the features of these existing and earlier programs. The Fund provides
grants to support new investment (by expanding companies or new locations)
for industrial sites, infrastructure, facilities, and machinery and equipment.
The Fund received appropriations of five million dollars in 1993, seven
million dollars in 1994, and two million dollars in 1995. While some commentators
saw the Governor's Competitiveness Fund as a dramatic departure in the state's
development policy, the eligible uses have been contained in one or more
development programs offered by the state at some point in time.
The State of North Carolina has not had an explicit policy governing public
funding to stimulate private investment. A review of existing programs and
uses of funds suggests the following implicit policy that governs the state's
use of incentives.
North Carolina's Implicit Policy on Incentives
- North Carolina offers very modest incentives compared to most states.
- Existing state incentives are focused principally on infrastructure
and job training.
- Tax credits or direct financing are principally available in the state's
fifty most distressed counties or the projects that benefit low income people.
- Incentives are typically limited to manufacturing projects.
- New investment from expansion of existing industries and new locations
are given equal access to incentives.
- The state makes limited use of tax credits or other tax-based incentives.
- Most incentives are performance based (paid out as jobs are created,
or in fulfillment of contractual agreements).
A review of business and economic development programs in twenty other states
found a more aggressive policy toward incentives. This is particularly true
of recent legislation in the Southeastern states, but aggressive incentive
programs have also been adopted recently in Kansas, Oklahoma, Washington,
Indiana, Ohio, and other states. In general, these states have all of the
programs North Carolina offers plus more generous use of tax policies.
Competitor States' Implicit Incentives Policies
- Their programs are generally larger and offer higher levels of incentives.
- They offer infrastructure and job training incentives similar to North
- Incentives programs tend to be less geographically targeted and not
limited to distressed areas or persons.
- Incentives are principally for manufacturing but increasingly are
used for other "traded" sectors, that is non-manufacturing sectors
that sell most of their product outside the state.
- New and expanding industries both have access to programs.
- There is far greater use of statutory tax incentives as an inducement
- Most programs incorporate some performance elements in the design
of the incentive.
To better understand the practical effect of recent initiatives by other
states to provide greater tax incentives for new investment, the task force
examined the estimated dollar amount of statutory incentives in seven states
for four typical industrial projects. The industrial projects were ones
that considered North Carolina as a location; two selected North Carolina,
two did not. Two considered urban locations and two were interested in non-metropolitan
locations. The four industries were refrigeration and service industry machinery;
pumps and pumping equipment; hardware not elsewhere classified; and household
audio/video equipment. The projected number of jobs and amount of investment
were provided by the company during the site location process. Figures on
profits, net worth, assets, and business receipts (for tax calculations)
were provided from industry profiles in the KPMG Peat Marwick tax competitiveness
This analysis provided estimates of statutory, not negotiated incentives
or special incentives for major "trophy" projects. Thus these
are incentives generally available to any industry that meets qualifying
criteria. Excluded, therefore, are training incentives, most infrastructure
incentives, and discretionary funds; for practical reasons, local incentives
are also not included in the estimates. These should not be considered to
be actual incentive packages; rather, the numbers provide our best estimates
of the relative size of statutory incentive packages that a hypothetical
industrial project would receive. The important figure is the relative magnitude
of the totals, not the exact amounts. (See
appendix D for more detail on the components of the incentive packages and
the specifics on assumptions and methods for calculating incentive packages.)
Following the table of incentives, the second table estimates selected
major taxes for each industry.
Estimated Statutory Incentives, Case Study Industries
million||$32 million ||$35 million||$12.5
|Jobs: ||750||650 ||750||600|
million ||$8.52 million||$11.3 million||$3.6 million|
|Georgia||$11.5 million||$5.1 million||$11.5 million||$4.7 million|
| North Carolina||$2.4 million||$0||$2.4 million||$0|
million ||$7.0 million||$4.9 million|
|South Carolina||$4.4 million||$1.0 million||$4.4 million||$0.9 million|
|Tennessee||$3.3 million||$2.3 million||$3.3 million||$2.2 million|
||$1.8 million||$0.8 million|
Estimated Tax Liability For Selected Major Taxes,
Case Study Industries
|Industry:||Refrigeration ||Pumps ||Hardware||Audio/Video|
||$32 million ||$35 million||$12.5
|Corporate Income||$541,600||$541,600|| 0||$449,400|
|Ohio: Total |
|South Carolina: Total|
|Corporate Franchise||N/A||N/A||N/A||N/A |
Notes on Tax Chart: Hypothetical balance sheets and income
statements were used to calculate tax liability, based on models developed
in the KPMG Peat Marwick tax competitiveness study. Zero corporate income
tax liability results from no taxable income for the year. Property tax
abatement differentials within a single state for urban and rural locations
result from the assumption that rural locations are within designated enterprise
zones, where property taxes can be abated or negotiated. All numbers are
rounded to nearest hundred; numbers may not add due to rounding.
The case studies demonstrate the effect of the recent expansion of statutory
incentives -- those that companies qualify for automatically if they meet
applicable criteria, which typically specify eligible industries, geographic
locations, and minimum levels of jobs or investment. Potential incentive
packages for new and expanding industry have increased significantly in
the last several years as states have tapped the tax codes to provide tax
credits as a stimulus for new investment. While specific programs vary from
state to state, the larger numbers tend to come from three basic programs:
- corporate income and franchise tax credits for new job creation or
- authorization for companies to withhold a percentage of employees'
wages (job development fees), which employees reclaim as an individual income
- property tax reductions, abatement, or ceilings.
In Georgia, for example, a corporate income tax credit for job creation
offers up to $15,000 in tax credits over a five year period for each new
job created. In Alabama, a "job development assessment" equal
to five percent of employee wages can be withheld by the company to defray
the costs of debt service for facilities and equipment. Job development
assessments have also been adopted in South Carolina (through the new Enterprise
Zone Program) and in Kentucky. Job creation tax credits, in some cases limited
to certain geographic areas or graduated on the basis of distress, have
become widely used, although the amount of the credit varies significantly
To better understand the impact of these incentives, we need to first examine
the industrial location decision process.
B. Incentives and Location Decisions
What determines how a chief executive officer or board of directors selects
a site for a new facility or added capacity in existing facilities? The
array of factors includes overall business costs (taxes, utilities, regulatory
compliance), workforce quality, transportation requirements, site or facility
requirements, proximity to suppliers or customers, and the often stated
"quality of life" factors -- proximity to urban amenities or particular
recreational opportunities. Most economic developers can quote the example
of a location decision made on the basis of a nearby facility for the CEO
to berth his sailboat, or a similar anecdote. Indeed, evidence suggests
many location decisions, in the final stages, involve subjective as well
as objective factors. Surveys (such as the one presented in the boxes below)
offer conflicting information, depending upon the kind of firms interviewed,
how the question is asked, who in the company responds, and how the respondent
interprets the question.
What 203 Senior Executives Think About Incentives
From survey conducted by KPMG Peat Marwick of 203 senior tax or financial
executives. Qualifying companies for survey had gross annual revenues of
at least $300 million and were in manufacturing, retailing, or distribution.
Most companies had multiple locations in an average of 20 states. Median
number of employees was 4500, and median capital expenditures budget for
next 12-24 months was 25 million dollars. Business Incentives and Tax
Credits: A Boon for Business or Corporate Welfare? KPMG Peat Marwick,
- 73% felt state and local governments are more likely to offer incentives
now than five years ago.
- Income and franchise tax credits and property tax rebates were the
favored types of incentives, followed by preferred financing and sales tax
- 81% feel incentives don't give a company a competitive advantage,
because they assume everyone is getting them.
- 79% of the surveyed companies are currently receiving incentives
- More than half the companies had facilities in enterprise zones and
were receiving incentives -- principally tax credits or tax rebates.
- Two-thirds had expanded or relocated facilities within the past 12
months; nearly all the manufacturing firms reported receiving incentives.
- One third said they would expand or located within one year, and three
quarters within five years.
Top 20 Site Selection Factors, 1989-1993
Percent of Firms Rating "Very Important" or "Important"
availability and cost ||85.9||Downward|
|6||Low crime rate||85.0||Upward|
of schools ||78.9||Upward|
to markets ||76.4||Upward|
of suppliers ||64.1||Stable|
|18||Available unskilled labor ||62.7||Downward|
|20||Major airport access ||58.8||Stable|
Calculated from Area Development Magazine, 1989-1993, and reported in
Laughlin and Toft, "The New Art of War," Commentary, Spring
The Site Selection Process
Despite rankings, each location decision is individual, based on a companyís
determination of the best fit between its needs for profitability and the
characteristics a particular site offers that will affect that profitability.
In simplest terms, these are the initial investment costs and the ongoing
operating costs. Initial investment costs include land, any required site
preparation, building, equipment, and employee screening and training. Recurring
costs include wages, utilities, taxes, and continuing training needs. Specialized
needs may also affect costs and location decisions -- access to specialized
university resources, for example, or proximity to a deep-water port.
Global competition and on-going cost cutting have placed a premium on cost
analysis -- sites that offer necessary physical and human resources and
provide lower initial and recurring costs have a distinct competitive advantage.
The current trend toward greater incentives is driven by both push and pull
factors. States are pushed to offer more incentives in response to competitors
who lower costs through tax or other incentives. Companies place a higher
priority on incentives that can lower costs and thus make them more competitive
-- particularly if, as the KMPG Peat Marwick survey of corporate executives
indicated, companies believe their competitors are receiving incentives,
placing them at a competitive advantage if they don't demand and receive
Incentives, however, are only one part of the cost calculus. A location
can be more cost competitive if, by virtue of public investment or a favorable
tax structure, general business costs are lower in that location. Better
trained and more productive labor lowers the wage bill (as can lower wages
for the same quality labor). Widely available infrastructure, low utility
rates, good transportation systems, and favorable tax structures also lower
the overall cost of doing business, and thus lessens the need for compensatory
Many site selection consultants are applying more objective examination
of overall costs to determine the least cost site that meets all necessary
criteria for a particular company. Fluor Daniels, for example, screens sites
first on "must" and "want" criteria. "Must"
criteria include essential factors that would disqualify a location if they
are not available; these might include, for example, a minimum size site,
access to rail, proximity to a major airport, availability of water and
natural gas, or other criteria. "Want " criteria are those that,
while important, can be viewed as a whole with strengths in one area compensating
for weaknesses in another. These include labor quality, operating costs,
competitor locations, distance to suppliers, and incentives.
Once must and want criteria are identified, Fluor Daniels then applies a
"least cost analysis" to evaluate overall operating costs at competing
locations. Incentives and tax concessions are considered as one part of
the overall cost comparison, and overall costs are considered as an important
but not sole component of the overall decision matrix. Lower overall business
costs can compensate for higher levels of incentives offered by a competing
location, and particular "must" or "want" criteria can
outweigh the overall higher operating costs of a particular state or location.
As Southeastern states (as well as others) have invested over the last decade
to upgrade transportation, invest in education, develop customized worker
training programs, and provide water and sewer, many of these differences
among states have lessened. Manufacturers that are not driven by specialized
needs (proximity to a major airport or access to university research or
engineering resources, for example) thus become more highly sensitized to
cost differentials. For these companies, then, incentives rationally become
a significant component of the location decision if they lead to lower investment
or recurring costs.
If incentives lower investment costs, or lower operating costs during the
start-up period, lower costs mean faster profitability and greater cost
competitiveness for that company. Under existing programs in a number of
states, tax credits and abatement can lower 5-10 year operating costs for
a firm by several hundred thousand to a million or more dollars per year;
if costs become a principal component in the location decision, with other
wants more or less equal, then incentives are likely to drive the location
decision. In the following chart, adapted from an actual analysis conducted
by Fluor Daniels, statutory incentives routinely available to a qualifying
firm lower operating costs by $22 million over the ten year period. Although
incentives may have once functioned primarily to level the playing field
by compensating for cost or quality disadvantages for a particular location,
they have now become part of the playing field.
Top Business Climate States
|1. North Carolina || |
NC Ranks First as Relocation Spot
Small to midsize business owners have ranked NC as the most favorable
site for relocation, according to a survey by Inc. Magazine. Factors included
access to markets and customers, cost of site property, cost of living and
reasonable taxes, the magazine reported. The survey reported that the South
Atlantic region topped the country as the area most friendly to entrepreneurial
businesses over the Mountain and Pacific regions.
From News and Observer, October 18, 1995
Part III. Major Task Force Findings and Recommendations
The Economic Development Board, at the request of Governor Hunt, undertook
an initiative to review the stateís current competitive position
in attracting new investment. In particular, the Governor asked the Board
to examine the recent growth of industrial incentives in competitor states,
the likely effect on North Carolina, and any appropriate responses. Former
Economic Development Board Chairman Bob Jordan appointed a task force of
the Board, along with several knowledgeable outside members, to conduct
an analysis and report back to the full board.
The task force met four times - in June, August, September and October.
The task force heard expert presentations by economic developers, a site
location consultant, and a representative of the Governor's Task Force on
the Governor's Competitive Fund. The task force also examined a wealth of
background analysis on the North Carolina economy, historical patterns of
investment and job creation, incentive programs in North Carolina and other
states, and the effect of incentives on location decisions. The task force
also reviewed reports and position papers on the use of incentives, both
favorable and unfavorable.
The task force members wish to stress that while incentives now tend to
dominate discussions of economic development, they should appropriately
be viewed as only one tool. Like all tools, they are useful not in themselves
but in their utility and effectiveness in accomplishing economic development
goals. The North Carolina Economic Development Board, through its strategic
plan, previously adopted three broad economic development goals for the
The plan emphasizes that these goals are dependent on a strategy that encompasses
stimulating entrepreneurship, introducing new technologies, modernizing
existing industry, sustaining a quality environment, and sharing the benefits
of development among people and places. Incentives are one tool, not the
only tool, and they are useful and worthwhile only to the extent they are
successful in moving the state toward realizing these goals.
- high quality jobs;
- high performance enterprises;
- widely shared prosperity.
The task force also wishes to stress that "incentives" has become
a word taken largely out of context by both opponents and advocates. Economic
development has always been an undertaking in which both the public sector
and private sector have roles. Tax policy, regulatory policy, education
policy, training policy, transportation policy - all have to some extent
been applied throughout the history of this country to stimulate economic
activity. In truth, no one is fundamentally opposed to incentives. People
are for good incentives and opposed to bad incentives. Therein, of course,
lies the debate.
The task force avoided dogmatic positions on one side or the other and,
instead, has attempted to view the issue pragmatically. While the Governor's
Incentive Fund has tended to dominate the discussion of incentives, in truth
it is one small component of long standing incentive policies in North Carolina.
An analysis prepared for a special legislative study commission on incentives
examined uses of the Governor's Fund for nineteen projects from December,
1993 through April, 1994. That analysis found that the Governor's Fund represented
only eight percent of the total incentives used to attract that private
investment. State and local infrastructure financing accounted for 42 percent,
training subsidies accounted for almost ten percent, tax credits for distressed
counties accounted for thirteen percent, and other local government subsidies
accounted for the balance (See Chart 1). We expect similar results would
be found for subsequent industrial projects.
The heat of the current debate has been generated by several large scale
incentive packages for "trophy" projects over the last few years
(Mercedes, BMW, Toyota, Motorola), and by the growing use of tax related
incentives. North Carolina has largely avoided both categories. North Carolina
has a limited use of tax credits, and the Mercedes package of approximately
$110 million was the largest ever proposed by the state for an industrial
project. The result, of course, has been that North Carolina has not been
competitive for the large investment projects that attracted incentive packages
in excess of $150-$350 million. And unless there is a dramatic policy change,
North Carolina will not be competitive for these kinds of location decisions.
An issue that has attracted less attention, but that should generate greater
discussion, is the growing widespread use of tax related incentives that
are statutorily available to all firms that meet the particular criteria.
These incentives are routinely available to small and mid-sized industrial
projects, as well as the periodic mega-projects, and are likely to have
a greater impact on the future location decisions (and expansion in place)
for manufacturing and, increasingly, non-manufacturing industries. The task
force devoted greater time to understanding this issue than to the bidding
wars that have characterized several major projects.
The task force defines "incentives" as public expenditures directed
to induce a private company to invest in a particular location by reducing
the initial or recurring costs of that investment. Expenditures can be for
employee screening and training, transportation or water and wastewater
and other utility improvements to serve the site, tax reductions (abatements,
credits, or exemptions), subsidized financing (such as industrial revenue
bonds), or direct payments to reduce the cost of building, land, equipment,
employee relocation, or other costs. (Interestingly, some site location
companies expect the site to be "industry ready" and do not count
any public expenditures necessary to prepare the site as incentives.)
These expenditures for economic development should be viewed like other
expenditures for economic development, many of which provide free or reduced
costs services to business (such as technical and engineering assistance,
small business services, low cost laboratory services or access to equipment,
and so on). The test applied should be: Are these an effective and efficient
use of public funds that move North Carolina more rapidly toward the goals
and objectives identified in the strategic plan? If so, they are justified;
if not, no expenditure is justified no matter how familiar, long standing,
and non-controversial it has become.
North Carolina has taken a measured and cautious approach in the use of
incentives, and the task force recommends that that approach be continued.
The task force does recommend that North Carolina adopt several new incentives
that use tax policy to reduce the early costs of an expansion in place or
a new location, and thereby make North Carolina more cost competitive compared
to other states. We should not attempt to out-bid states for new investment
and adopt a dollar for dollar, quid pro quo approach. We must recognize
that the terms of competition have changed and react accordingly. Otherwise,
we are not honoring the commitment to our citizens to promote high quality
jobs, high performance enterprises, and widely shared prosperity.
Principles for Strategic Use of Incentives
Principle 1. Outcome Based Calibration. Base the level
of the incentive on the desired outcome. If the goal is to raise wages,
for example, establish a wage or payroll based tax credit.
Principle 2. Insure a Rate of Return. The level of the incentive
should not exceed what would be received in tax payments from an economic
Principle 3. Establish Performance Baselines. Reward behavior that
would not otherwise have occurred. A training credit, for example, should
stimulate training above that already provided, not subsidize current training.
Principle 4. Clawback. Revoke credits or recover payments if prescribed
conditions are not met.
Principle 5. Emphasize Capital Incentives Over Cash. Incentives that
stimulate investment in training, infrastructure, or capital facilities
provide permanent investments.
Principle 6. Use Incentives to Accomplish a Plan. Incentives should
be applied to accomplish a clear strategy or plan rather than applied on
a case by case or ad-hoc basis.
Paraphrased from Laughlin, James D. and Toft, Graham S. "The New Art
of War." Commentary, Spring 1995.
The task force also recommends that North Carolina continue its current
policies related to incentives. However, the task force recommends modifying
these policies to include standards that direct publicly subsidized private
investment toward the state goal of high wages for high quality jobs in
companies that are prepared to meet the growing competitive demands of a
global economy. The task force also recommends cautious expansion of incentives
to non-manufacturing industries that export goods and services outside the
state, thus stimulating the economic base.
Sections A and B summarize task force findings and recommendations. The
remaining sections provide more detail on the task force analysis and the
specifics of recommendations for new incentives. The appendices provide
greater detail on background information and analysis.
A. Major Findings: The Economy
The economy of North Carolina continues to grow faster than the national
average. Job growth is strong, with over 100,000 jobs created annually over
the last few years. Net job growth disguises substantial volatility, however,
as closings and downsizing displace some workers while new jobs are created.
Unemployment is below the national average, and labor shortages are apparent
in some areas.
Manufacturing is critical to the state's economic future. Manufacturing
as a percentage of total gross state product has increased in the last two
decades; most of that growth has been in durable goods industries. Finance,
Insurance, and Real Estate has been the second major contributor to growth
in the state's output, followed by the services sector. Wages and incomes
are rising, but North Carolina remains near the bottom in manufacturing
wage rates and per capita income remains below the national average.
Most areas of the state are exhibiting growth. Higher growth rates, and
higher levels of manufacturing investment, continue to be found in the urban
corridors. The distribution of growth and opportunity remains an important
economic development issue.
Overall, as noted in the state's Comprehensive Strategic Economic Development
Plan, the number of jobs is not a principal economic development issue for
the state as a whole (although unemployment remains high in some rural counties).
The principal economic development concern is increasing the number and
percentage of high quality jobs in high wage enterprises that are poised
to be competitive in the global economic environment. Those are most likely
companies that use technology and innovation to emphasize low cost, high
quality, and responsiveness to market demands.
North Carolina continues to entertain an excellent reputation as a place
to invest, ranking at or near the top in most lists that measure business
climate or preferred location for new investment. North Carolina also ranks
at or near the top in recent national rankings of states in amount of new
investment, both domestic and foreign.
B. Major Findings: Incentives
North Carolina's historical location advantages have included reasonable
taxes, relatively low cost but adequately skilled labor, major investments
in education and training, and major investments in infrastructure (highways
and water/wastewater). The Research Triangle Park, strong universities,
and investments in technology stimulated growth in research and technology
Investments and advances by other states have lessened some of North Carolina's
competitive advantages in education, infrastructure, and work force. Many
states, for example, have replicated North Carolina's efforts in technical
and customized industry training.
As companies invest in technology and downsize in order to reduce costs
and compete in international markets, investment and operating costs have
become an important location criteria. As other location criteria become
more balanced, cost have become the principal location determinant in some
Various forms of limited subsidy programs to attract new investment have
long been common. Over the last three years, however, states have enacted
new statutory programs to provide subsidies for new investment by reducing
initial and recurring costs. These programs began in a few Southeastern
states but have spread outside the Southeast.
These are not the "negotiated" incentives that are widely publicized
for a small number of high profile, "trophy" firms (e.g., Mercedes,
BMW, Saturn). Instead, these programs are generally available to any industry
that meets eligibility criteria; the criteria usually include some combination
of industry sector, number of jobs, amount of investment, and geographic
Rather than relying on cash transfers or grants, these programs use the
tax code through a variety of credits, exemptions, and abatement. Thus states
are routinely able to offer far larger levels of incentives, and to offer
continuing incentives that offset taxes and reduce recurring operating costs.
Use of these types of incentives is growing.
A favorable tax and regulatory climate, skilled and productive labor, good
transportation and other infrastructure, vital and livable communities,
and high quality technical and research resources can contribute to an overall
lower cost business environment and thus lessen the impact of incentives
offered by other states. As other states compete effectively in these areas,
however, incentives that effectively lower costs become a greater determinant
in the location decision.
North Carolina has a modest incentive policy that principally uses investments
in infrastructure and training. North Carolina has avoided extensive use
of major tax incentives.
North Carolina's competitiveness for new investment is at risk in the new
environment. Other states' initiatives lower operating costs for new investment
by hundreds of thousands of dollars to over a million dollars annually.
Where other location factors are relatively equal, North Carolina cannot
effectively compete for those industrial locations.
Ron Leatherwood, Task Force Chair
Mark Bernstein, Economic Development Board, Charlotte
Helen-Marie Berthold, Ehren-Haus Industries, Charlotte
Gary Carlton, Director of Business and Industry, Department of Commerce
Watts Carr, President of NC Partnership for Economic Development, Department
John Chaffee, Pitt County Economic Development, Greenville
Bud Cahoon, NC Electric Membership Corporation, Raleigh
Daphne Copeland, General Electric, Raleigh
Paul Fogelman, Catawba Valley Hosiery Association, Hickory
Wallace Green, Paragon Industries, Raleigh
Pete Hasty, Economic Development Board, Maxton
Ron Leatherwood, Economic Development Board, Waynesville
D.G. Martin, Economic Development Board, Chapel Hill
John McCracken, Economic Development Board, Greensboro
Norm Samet, Economic Development Board, High Point
Rebecca Smothers, Mayor, High Point
Bobby Suggs, Sprint, Fayetteville
Rick Webb, Western Regional Economic Development Commission, Arden
Arcelia Wicker, Assistant City Manager, Wilmington
| Case Home
| Out-Box |