Economic Development Board
Incentives Task Force
March 4, 1996
The North Carolina Economy
Use of Incentives in Economic Development
Recognizing the positive business climate North Carolina has to offer, the
task force recommends that North Carolina continue its policy of restraint
in the use of incentives for new investment. The task force has concluded,
however, that modest expansion of targeted incentives, as proposed, is necessary
in order to remain competitive in a rapidly changing environment.
The Economic Development Board, at the request of Governor Hunt, undertook
an initiative to review the state's 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 five times ­p; in June, August, September, October,
and January. Before making recommendations, 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 Competitiveness
Fund. Members 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 reviewed reports and position papers on the use
of incentives, both favorable and unfavorable.
The Incentives Task Force concluded that, properly applied, economic incentives
for private investment can be an appropriate tool to help the state meet
its strategic objectives of high quality jobs, high peformance enterprises,
and widely shared prosperity. Sound tax and regulatory policy, quality infrastructure,
skilled and educated workers, and a good quality of life remain the foundation
of the state's economic climate. The task force found that as North Carolina's
competitor states have improved their business climates, and have in recent
years used tax incentives to lower the cost of new investment, North Carolina's
historical competitive advantages have been threatened. The task force recommends
that North Carolina continue its policy of restraint in the use of business
incentives for new investment. The task force recognizes, however, that
modest expansion of the state's incentive programs, closely linked to the
state's strategic goals, is necessary in order to remain competitive in
a rapidly changing environment. In any case, incentives must be focused
on securing the kinds of private investment that will raise job quality
and wages and promote investment that will improve conditions for low income
workers and less advantaged people and places. Thus the task force recommends
a "Quality Job" requirement for all private investments that use
The task force endorses the following additions to North Carolina's incentives
tool kit. It also recommends that all tax related changes have a five year
sunset, which will require that tax expenditures be periodically reviewed
for performance in the same fashion that appropriations are reviewed.
The task force recommends the following to improve the overall business
- Reduce the corporate income tax rate to below seven percent.
- Identify a dedicated source of financing for an Infrastructure Trust
Fund that will provide ongoing financing for economic development related
and other important water and wastewater needs.
- Encourage additional employer investment in employee training and
retraining through increased resources for the New and Expanding Industry
Program and the Focused Industrial Training Program, or through a worker
training tax credit.
The task force also recommends the following specific modifications
to the state's incentives policy:
The task force recommends that all General Statutes authorizing the tax
credits expire, subject to renewal, on July 1 of the first full session
of the General Assembly five years following enactment and every six years
thereafter. Eligibility for the investment tax credit should be extended
to warehousing and distribution sectors and corporate headquarters in addition
to manufacturing and processing industries; and consideration should be
given to other industry sectors. Total authorized credits should be limited
to fifty percent of tax liability, with a five year carry forward. All companies
receiving credits should be required to meet a high quality jobs standard,
which includes paying wages above the county average; meeting appropriate
environmental and worker safety standards; and participating in an employee
health insurance plan.
- Create an investment tax credit to stimulate investment in machinery
and equipment by new and expanding industry;
- Create a worker training tax credit to stimulate greater investment
in human resources;
- Create a research and development tax credit to stimulate continued
innovation and product related research and investment;
- Expand the Targeted Jobs Tax Credit statewide while providing greater
credits in economically stressed areas and lesser credits in economically
The task force is not recommending a specific amount of cost or revenue
reductions associated with the proposed credits. The task force has developed
cost ranges for these proposals under varying assumptions. The task force
understands that the Governor will need to balance the cost of these proposals
against other important budgetary items. The Governor and the legislature
may choose to adopt one, several, or all of the task force's proposals.
In addition, eligibility requirements, dollars per job, thresholds, or size
of the investment tax credit can be modified to lessen revenue effects of
the credit(s). As a "fail-safe" procedure, a cap can be established
for the investment tax credit or other tax credits.
Part I: The North Carolina 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. Recent trends, however, demonstrate
increased competitiveness of other states for new jobs and investment.
Part II: Use of Incentives in Economic Development
- 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 stimulates 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 has become the principal location determinant in many
- 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 tax credits 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 location.
- 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 continuing incentives that offset taxes
and reduce recurring operating costs. Use of these types of incentives is
- 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 lower costs become a greater determinant in the
- 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
a 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.
North Carolina's Use of Incentives
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 widespread use of tax policies.
Competitor States' Implicit Policy on Incentives
- 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.
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.
Part III: Recommendations
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 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 tax
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. These recommendations 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. We should not attempt to out-bid
states for new investment by adopting 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.
Qualifiying for Tax-Based Incentives
Incentives must be focused on securing the kinds of private investment that
will raise job quality and wages, and promote investment that will improve
conditions for low income workers and less advantaged people and places.
Thus the task force recommends a "Quality Job" requirement for
all private investments that use public incentives.
Companies must be principally engaged in manufacturing or processing to
qualify for tax-based incentives. The task force also recommends extending
the Investment Tax Credit to corporate headquarters; and warehousing and
distribution, if 75% of sales are outside the state of North Carolina.
Summary of Eligibility Requirements
- Pay at least 110 percent of the average wage (overall) for the county
where the company locates.
- Have no major unresolved environmental violations and must acquire
all necessary permits.
- Have an effective worker safety program and have an illness and injury
rate (LWDCIR) that is less than the average for their industry sector.
- Provide basic medical coverage for all employees funded at least in
part by the company.
- The credits would be limited to an aggregate 50 percent of income
and franchise tax liability with a five year carry forward for unused credits.
- The General Statutes authorizing the credits would be designed to
all expire, subject to renewal, on July 1 of the first full session of the
General Assembly five years following enactment, and every six years thereafter.
If the company fails to remain in compliance, they forfeit the credit for
the year(s) they are not in compliance-including carry forward years. Companies
must file certification of compliance with the Departments of Commerce,
Labor, and Environment Health and Natural Resources. Companies must also
file certification of compliance with their NC tax returns.
Recommendation 1: Investment Tax Credit
Investment tax credits are typically used to encourage existing companies
to invest in new technologies and new machinery and equipment, thereby increasing
jobs and/or productivity, or to attract new investment into the state. The
credit is proposed for investment in new machinery and equipment placed
in service for the first time in North Carolina, whether through expansion
or new investment.
The proposal included in Recommendation 1 would provide a tax credit on
purchases of machinery and equipment for new or expanding investment. In
both cases, investment must exceed a threshold for each county in order
to qualify. The threshold is intended to target the credit to investments
that will have a significant impact on the local economy. The threshold
in the examples is one tenth of one percent of the assessed property valuation
in the county. Investment for threshold purposes is all investment in a
particular expansion or new location, including plant and equipment.
Recommendation 1 assumes a credit of seven percent on the value of machinery
and equipment. The credit would be taken in equal installments over seven
years. The credit would be a maximum of 50 percent of income tax liability,
with a five year carry-forward for unused credits.
Alternative A substitutes a "tiered" credit, similar to the Targeted
Jobs Tax Credit. Investment in the 25 most economically distressed counties
would be eligible for an 8% tax credit. Investment in the next 25 counties,
ranked by the distress formula for the TJTC, would receive a 6% credit,
the next 25 a 4% credit, and the top 25 a 2% credit.
Alternative B substitutes a 5% credit, using the assessed valuation threshold
Note: For revenue estimates, we assumed that two-thirds of the total
investment in a particular county was in machinery and equipment, based
on rules of thumb provided by KPMG Peat Marwick.
Recommendation 2: Worker Training Tax Credit
The purpose of the employer based worker training tax credit is to encourage
new and existing employers to invest in North Carolina by providing incentives
for necessary worker training. The credit can work in combination with other
existing or proposed tax credits to provide powerful incentives for job
creation, investment in new machinery and equipment, and providing quality
training to employees.
The tax credit would allow the employer to take a credit against income
tax for 50 percent of eligible out-of-pocket training expenses, up to $1000
in expenses per employee ($500 maximum credit per employee). Eligible expenses
include salary and wages and travel for instructors, rental of temporary
training facilities, and materials for curriculum and training. Expenses
may be for in-house training or training through vendors. Eligible vendors
include community colleges or other appropriate and qualified providers.
Eligible employees are permanent, full-time employees classified as non-exempt
under Wage and Hour regulations.
In addition to other eligibility requirements, businesses must add at least
nine new employees and invest a minimum of $10,000 per employee in machinery
Relationship to Community College New and Expanding Industry Program
Funds obtained for training provided by community colleges through the New
and Expanding Industry Program are not eligible for the tax credit. Expenses
for additional training beyond that provided through the program, or for
employees whose expenses are not covered by the program, are eligible for
All training designated as eligible under the New and Expanding Industry
Recommendation 3: Research And Development Tax Credit
Fifteen states now have some form of research and development (R&D)
tax credit, most patterned after the federal R&D credit. None of those
states are in the Southeast. Mississippi has a variation that allows a company
to take a tax credit of $500 for each new employee who requires research
and development skills as a condition of employment. West Virginia allows
a credit equal to 10 percent of research and development expenses deducted
for federal income tax purposes plus the cost of land and depreciable property
purchased for the project.
The federal R&D tax credit allows a company to deduct a percentage of
qualifying research and development related expenses that exceed average
expenses in a base period from their federal income tax liability. Legislation
before Congress would extend the credit, which is due to expire. A possible
House version would also give companies the option of using the existing
method of calculation or applying a formula against total spending on R&D
rather than the incremental spending above the base years.
Eligible expenses are typically qualifying wages, supplies, computer fees,
and contract research expenses. The definition of eligibility and qualifying
research is typically tied to definitions in federal law. Research generally
must be technological in nature and intended to result in a new or improved
business product. The research must also include a process of experimentation
which relates to a new or improved function of the component, its reliability
or its quality. "Technological" refers to research that relies
on the principles of physical or biological sciences, engineering or computer
science. State R&D tax credits typically can be taken against only those
in-house or contract expenses that are undertaken within the state.
Calculation of Base
Most state credits follow the current federal model in authorizing a tax
credit for R&D expenditures above the base amount. Under federal law,
the base amount is calculated as average annual gross receipts for the four
taxable years preceding the credit year, multiplied by the fixed base percentage.
The fixed base percentage is the aggregate gross receipts for the five years
beginning after December 31, 1983 and before January 1, 1989, divided by
qualifying research and development expenses during that time period. For
start-up companies, a fixed base percentage is assumed -- such as the three
percent used under the Massachusetts R&D credit. There may also be a
maximum fixed base amount, which lowers the base amount; Massachusetts,
for example, limits the fixed base percentage to 16 percent. States also
might cap the maximum amount of credit -- for example, 100 percent of the
first $25,000 in taxes and 50% of tax liability above $25,000. There is
typically some carry-forward period for unused credit allowances.
Adapting Federal Credit to North Carolina
If modeled on the federal tax credit, NC would allow a tax credit equal
to five percent of qualifying research and development expenditures incurred
within NC and above the base amount. Based on the federal model, a NC research
and development tax credit might work as follows.
NC adopts a tax credit with the same period and method for determining the
fixed based percentage as under federal law. NC also stipulates that the
base amount be calculated by applying the fixed base percentage against
average annual base receipts for the four years preceding the credit year.
Companies can elect on a one time basis to use federal gross receipts or
NC gross receipts in calculating the base amount. The fixed base percentage
for start-ups is assumed to be three percent, and the maximum allowed fixed
base percentage is sixteen percent. NC authorizes a five percent tax credit;
the credit can be used to defray 100 percent of tax liability up to $25,000
and 50 percent of tax liability over that amount. There is a five year carry
As an example, assume NEW Company started operations in 1990. Its average
annual gross receipts over the period were $600,000. The company's fixed
base percentage is three percent; thus its base amount is $18,000. The company
incurs $40,000 in eligible research and development expenses in 1995. The
company applies the five percent tax credit to $22,000 in expenses above
the base amount and receives a tax credit of $1,100. The company was not
profitable and had no tax liability in 1995, so the company is authorized
to carry this amount forward for a maximum of five years.
Recommendation 4: Expanded Jobs Tax Credit
The existing Targeted Jobs Tax Credit would be extended statewide with greater
credits for more distressed counties. The task force's primary recommendation
for expanding the Targeted Jobs Tax Credit uses a sliding scale by county
that would modify the amount of credit depending upon an individual county's
economic ranking. The scale would range from a minimum of $300 (Wake County)
to a maximum of $4000 (Graham County). Thus, the least distressed county
would receive a tax credit of $300 per job, the next county a credit of
$340 per job, and so on.
The Economic Development Board recommends either of three alternatives:
An additional eligibility condition for the Jobs Tax Credit would require
companies, through new investment or expansion, to increase employment by
at least nine jobs or 25% of their current workforce, whichever is greater.
- A tax credit that uses a sliding scale by county that modifies the
amount of credit depending upon an individual county's economic ranking.
The scale would range from a minimum of $300 (Wake County) to a maximum
of $4000 (Graham County) dollars.
- A credit similar to alternative 1. The scale for this alternative
would range from a minimum of $300 (Wake County) to a maximum of $3000 (Graham
- A tax credit modeled on the proposal incorporated in Senate Bill 376,
introduced in the 1995 session of the General Assembly. The tax credit is
graduated over four tiers of counties. Each tier is composed of 25 counties,
assigned according to the level of distress as measured under the current
Targeted Jobs Tax Credit formula. The proposed per job credit for each tier
is: $4000, $2800, $1000, or $300, ranked from most to least distressed.
If the investment in tier four (the least distressed) is within a census
tract with at least 15 percent of the population in poverty, or a designated
redevelopment area, the credit would be increased from $300 to $1000 per
Note: Alternative 1, the Task Force's primary recommendation, was used
to determine the incentive eligibility for the machinery products manufacturer
- Investment, job, wage, research and development expenditures and other
figures are derived from industry profiles in the KPMG Peat Marwick study
"Comparative Analysis of the Relationship of North Carolina's Tax
Structure to Economic Development." The profiles were constructed
using financial information that, on average, reflect the actual experience
of firms in the industry. The primary data source is the Corporation
Source Book, published by the Internal Revenue Service.
- The number of jobs used to determine the anticipated costs of the
proposed incentives is based on actual annual averages of the number of
jobs created in each county.
- Investment was based on an average of actual new and expanding investments
in North Carolina between 1991 and 1994.
- The amount spent on machinery and equipment is estimated at 2/3
of total investment.
- Investment credit eligibility thresholds are equal to 1/10 of one
percent of each county's assessed tax valuation.
- To calculate high end cost estimates we assumed 60% of companies will
begin to use the credit over four years. For the lower end estimates, we
assumed 30% of companies will use the credit which reflects actual experience
under the Targeted Jobs Tax Credit, which has been in place since 1988.
- The revenue loss associated with the expanded jobs tax is adjusted
for the current costs of the existing jobs tax credit.
- The revenue loss associated with the worker training credit is adjusted
to account for the expenditures of the New and Expanding Industry Training
Appendix A Interim Task Force Report, August 29, 1995
Appendix B Interim Task Force Report, November 8, 1995
Appendix C Interim Task Force Report, February 14, 1996
*For more detail, contact the Economic Policy Office (715-4382) for copies
of these interim reports.
Task Force Members
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 of Commerce
- 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
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