The Charlotte Observer

July 26, 1993

Mercedes, have we got a deal for you
N.C. hopes incentives boost its chances

Dan Chapman, Staff Writer

Copyright © 1993, The Charlotte Observer

Gov. Jim Hunt can`t blame the legislature if Mercedes-Benz doesn`t choose North Carolina.

The N.C. General Assembly passed, largely unscathed, Hunt`s much-ballyhooed economic development package geared toward convincing companies like Mercedes to choose the Tar Heel State.

``I am pleased,`` the governor said. ``This represents a new kind of aggressiveness and success on the part of North Carolina.`` Hunt will need all the help he can get if he`s to win Mercedes-Benz, the German automotive giant that is the unstated, yet obvious goal of the legislative offensive.

A handful of states remain in the running for Mercedes` $300 million production plant - states that offer juicier incentives than North Carolina in the high-stakes economic recruitment game.

Hunt`s multimillion dollar package of tax incentives, tax credits and a $5 million war chest makes North Carolina a lot more competitive than it was. In the past, North Carolina didn`t much need to play the incentives one- upmanship game. Four of the last five years, the Tar Heel State led the nation in the number of new manufacturing relocations.

If it ain`t broke, why fix it?

``Having been in this business for eight years,`` said Terry Orell, senior vice president for economic development at the Charlotte Chamber, ``there are now very few clients who visit who do not talk about incentives at the outset of a project. . . . It`s really a matter of being competitive.``

Critics contend, however, that incentives packages like North Carolina`s are unnecessary, unfair and don`t ensure economic prosperity. Hunt pushed hard and largely prevailed on a tax-increment financing plan that some consider a corporate freebie that will inequitably distribute tax revenues.

There is also criticism that elected officials use the special incentives solely for political purposes. Give tax breaks, the argument goes, to get jobs. And don`t forget to remind constituents come election time. Hunt would like very much to be able to remind voters he was the governor who won Mercedes.

He has rallied just about every major government agency - including commerce, transportation, energy, education, labor and revenue - to the industrial recruitment cause celebre of the year. Twenty state employees are working solely on Mercedes, code-named Project Rosewood.

The German automotive giant promises 1,500 jobs and an initial investment of $300 million. Mercedes` total investment, as well as the financial input of auto parts suppliers and service companies, should account for hundreds of millions of additional dollars and thousands of jobs. The stakes are enormous. That`s why Hunt and others say North Carolina can no longer rest on its industrial-recruitment laurels.

The low wages and company-specific training programs, long North Carolina`s trump cards, aren`t special anymore. Just about every other state in the region has successfully mimicked North Carolina`s comprehensive worker- training program.

BMW`s selection of South Carolina over North Carolina and other states for its auto plant last year was a wake-up call that resounded loudly in Raleigh. So too was an April 1993 report done for North Carolina by PHH Fantus Corp., an international site-selection firm that had steered BMW to Upstate South Carolina.

``North Carolina is increasingly seen as a nonparticipant in incentive practices at a time when incentives are growing in importance,`` intones the confidential report obtained by The Observer and prepared for the state.

``North Carolina`s smaller communities are hurt most by the lack of aggressive state incentive capabilities - larger communities tend to have more resources to compensate and are capable of staying in the competition for many projects.``

Reports such as this, as well as a sense that the big industrial recruits of the 1990s weren`t taking North Carolina seriously, convinced the governor, certain legislators and the N.C. Commerce Department that the incentives status quo must go.

``In this environment, one has two choices,`` said Orell, who also chairs the legislative committee for the N.C. Economic Development Association. ``You can wait until the situation gets intolerable and try to catch up. Or you can try and maintain that position on top of the mountain.``

The governor has been to the mountaintop and likes what he sees. Hence, his successful legislative package, which includes money to build an auto technology center, expand tax credits for job creation and something called Economic Development Financing Bonds.

These bonds allow local governments to plow a new company`s property taxes back into projects to benefit the company, such as new roads.

Most of the governor`s package was largely untouched by the N.C. General Assembly. Not so the financing bonds. Originally called tax-increment financing (Hunt`s people decided ``Economic Development Financing Bonds`` doesn`t carry as many negative connotations), the bonds worry those opposed to special tax breaks.

Doug Woodward, an economics professor at the University of South Carolina`s College of Business Administration, questions the equity of tax-increment financing. Woodward, who`s not diametrically opposed to the special financing bonds, asks: Is it fair if a company chooses to set aside part of its future tax liability to pay for its own infrastructure improvements?

``The more people that companies bring in, the more demand there is on local schools, police, fire protection,`` he said. ``You have to decide what the trade-offs are. Certainly, there`s a shifting of burdens. It`s a real complicated question.``

Hunt and other economic development boosters counter there will be no tax giveaways, that the tax increments are needed to lure big companies who expect to be able to use their taxes for their own needs.

``Nobody gets out of any taxes,`` Hunt said. ``All companies that get that advantage would be paying a full tax load.``

Added Orell, ``While there are risks in most anything that we do, we`re talking about freezing taxes for a particular piece of property, developing that property and plowing those improved tax dollars back into that property. . . . It`s really a neat tool to provide the economic stimulus to a particular piece of geography that benefits its immediate surroundings.`` Thirty-six states now offer tax-increment financing, including most of North Carolina`s competitors for Mercedes. (Hunt points out that a referendum isn`t likely until the fall, after Mercedes expects to decide where its plant will go.)

Hunt vows the new and special tax incentives won`t be abused. To that end, he established a task force earlier this month that is expected to lay out investment and incentives guidelines to ensure companies don`t profit at North Carolina`s expense. Edward Bergman, a professor of city and regional planning at UNC-Chapel Hill, will chair the task force.

In the business relocation war between states, local and state governments will be forced to walk an increasingly fine - and expensive - line between offering enough incentives to win the prize and knowing when to say, Thanks, but no thanks.` ``

Woodward calls the competition for big-ticket manufacturing plants and headquarters ``fiscal fratricide.`` Hunt promises North Carolina won`t rob the state`s coffers to win companies like Mercedes. Bergman will watch, wait and see before coming to any conclusions.

``I know Mercedes can do a lot for us,`` Bergman said, ``but at what cost?``


Incentives N.C. is offering

The N.C. General Assembly has approved a package of new incentives for the state to offer companies moving to or expanding in North Carolina. Highlights:

* The Industrial Recruitment Competitive Fund. Gives Gov. Jim Hunt $5 million to spend as he sees fit this fiscal year to finalize deals. He asked for $15 million to spend on equipment, building renovation, water, sewer, gas and electric utility lines.

* Job Creation Tax Credit. Expands number of ``economically distressed`` counties eligible for tax credit from 33 to 50. Companies can take a $2,800 credit against income tax for each new job created. Must employ more than nine people. Available to new and expanding companies.

* Industrial Development Fund. Subsidizes building renovation for companies in 50 most ``economically distressed`` counties. Companies now entitled to $2,400 per job (was $1,200) up to $250,000. Expands types of businesses eligible for program.

* Center for Advanced Automotive Technology. Builds a center to trainthousands of workers for North Carolina`s booming auto industry. Cost: about $35 million.

* Investment Tax Credit. Benefits small, growing companies by allowing investors to take a tax credit up to 25 percent of amount they invest. Maximum is $50,000 a year for individuals, $750,000 for corporations. Credit is capped at $12 million annually.

* Economic Development Financing Bonds. Allow local governments to earmark additional property taxes generated by a new company to finance public facilities used by that company. Constitutional amendment needed. Bonds issued by local governments to finance capital costs. Used just for infrastructure projects, not buildings. Companies must pay competitive local wages.

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Copyright © 1993, The Charlotte Observer.

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