Economic Development Board
Incentives Task Force

Final Report

March 4, 1996


Mission Statement
Executive Summary
The North Carolina Economy
Use of Incentives in Economic Development

North Carolina's Implicit Policy on Incentives
Competitor States' Implicit Policy on Incentives


Qualifiying for Tax-Based Incentives
Specific Recommendations

Recommendation 1: Investment Tax Credit
Recommendation 2: Worker Training Tax Credit
Recommendation 3: Research And Development Tax Credit
Recommendation 4: Expanded Jobs Tax Credit

Technical Appendix
Task Force Members

Mission Statement

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.


Executive Summary

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 public incentives.

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 climate:

  1. Reduce the corporate income tax rate to below seven percent.
  2. 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.
  3. 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:

  1. Create an investment tax credit to stimulate investment in machinery and equipment by new and expanding industry;
  2. Create a worker training tax credit to stimulate greater investment in human resources;
  3. Create a research and development tax credit to stimulate continued innovation and product related research and investment;
  4. Expand the Targeted Jobs Tax Credit statewide while providing greater credits in economically stressed areas and lesser credits in economically advantaged areas.
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.

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

Major Findings

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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

Major Findings

  1. 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 dependent industries.

  2. 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.

  3. 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 cases.

  4. 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.

  5. 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.

  6. 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 growing.

  7. 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 location decision.

  8. 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.

  9. 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 Carolina.
  • 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 for investment.
  • 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 new investment;
  • authorization for companies to withhold a percentage of employees' wages (job development fees), which employees reclaim as an individual income tax credit.
  • 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 state:
  • high quality jobs;
  • high performance enterprises;
  • widely shared prosperity.
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.

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.

Eligible Industries

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.

Specific Recommendations


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 discussed above.

: 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.
Eligible Businesses
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 and equipment.
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 the credit.
Eligible Training
All training designated as eligible under the New and Expanding Industry Program.


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
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 forward period.

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:
  1. 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.
  2. 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 County) dollars.
  3. 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 job.
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.

: Alternative 1, the Task Force's primary recommendation, was used to determine the incentive eligibility for the machinery products manufacturer example.


Technical Appendix

Industry Examples

  • 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.

Revenue Impacts

  • 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 program.


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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