A Conversation with Rick Carlisle
Economic Policy Advisor to the Governor
State of North Carolina
Office of the Governor
March 6, 1996
Rick Carlisle serves as North Carolina Governor Jim Hunt's chief
policy advisor on economic policy and tax-related issues. Among his duties,
Carlisle has primary staffing responsibility for the Economic Development
Board, the state's principal policy board for economic development. Most
recently, he served as lead staff to the Board's Incentives Task Force,
steering the task force through a thorough analysis of the current and future
conditions of North Carolina's economy and helping the task force and Board
to formulate a recommended series of revisions to the current package of
incentives offered by the state.
Evolution of Incentives
Economic Dev. Board
Incentives Task Force
Current Economic Snapshot
I can tell two different stories about the economy, depending on the indicators
we look at. On the one hand, North Carolina's overall rate
of growth and employment has been higher than the national average.
We've added about one hundred to one hundred and ten thousand new jobs per
year over the last several years. Unemployment is below the national average
and per capita income is increasing more rapidly than the national level.
Real incomes in North Carolina over the last twenty years have increased
at about twice the rate of the national increase. Overall, a pretty good
However, when you look at some of the structural
changes that are going on underneath, it gives pause. We have industries
that are restructuring. For example, employment in the textile industry,
among the principal employers, has gone down about twenty thousand jobs
in the last seventeen years and will shrink further because of the introduction
of technology. Other traditional sectors -- apparel, furniture and lumber
-- haven't grown much in employment. We're seeing high growth in higher
technology industries (biotechnology, software) and more capital-intensive
sectors like pharmaceuticals, chemicals, plastics, and automotive components.
But there's increasing competition nationally and internationally for these
Moreover, if you take a look at the geographical distribution
of development, you'll also find two pictures: one of much accomplishment
and one that raises concerns. We have a strong growth corridor running along
Interstate 85 through the center of the state, from the Research Triangle
[Raleigh-Durham-Chapel Hill] to the Charlotte area, which is the third largest
concentration of financial resources in the country. We're seeing a lot
of manufacturing growth in another corridor stretching from the Piedmont
Triad [Greensboro, Winston-Salem, and High Point] along Interstate 40 to
Asheville. Another hot spot is around East Carolina University in Greenville,
particularly with medical and pharmaceutical industries. There are some
other growth areas, but the ones I've mentioned account for a significant
portion of employment and growth in manufacturing and high end services
in the state.
If you look, however, at parts of the northeast, parts of the southeast,
and parts of the far west, you find much higher levels of unemployment,
higher levels of poverty, lower wages, and lower levels of growth and investment.
Putting the geographical and sectoral pictures together shows that a big
part of the developmental challenge for North Carolina lies in three areas.
How do we attract the kinds of jobs and investment, or stimulate inside
the state the kinds of jobs and investment, that would provide higher wage
jobs and growth industries? Second, how do we spread technology throughout
a lot of the existing industries so they can be more cost-competitive and
bring higher levels of job-quality? And third, how do we try to spread more
of that development throughout the state?
The Evolution of Incentives
North Carolina has been working on those questions for
quite some time, and we've been successful. At the core of North Carolina's
efforts has been providing good transportation networks, solid education
to improve the skills of the labor force, and fairly low taxes. These have
been the predominant themes; of course, there are some two-dozen business-related
tax credits that are on the books that focus on energy or spurring capital
investment in small growth companies, but these are minimal and have not
had a significant effect on the economy. [See also, Briefings:
Worker training, for example, has been one of North Carolina's strong points.
North Carolina led the South in creating a state-wide system of community
colleges. There are fifty-eight campuses across the state; the goal was
to have everyone within about thirty minutes of a community college and
by and large that was done. And that intentionally provided heavy investment
in upgrading skills for manufacturing, although the community colleges also
serve a broader purpose now.
As far as the state's transportation infrastructure, the state has had a
very aggressive highway program. Unlike many states, the state builds and
maintains most public roads in North Carolina. North Carolina has had a
highway trust fund for decades which provides a dedicated source of funding
for highway maintenance and construction.
Furthermore, our overall
tax level is fairly low for the Southeast. Although our corporate
tax rate is high for the Southeast, we've had generally favorable tax
treatment of manufacturing through such things as a lower sales-tax rate
on manufacturing equipment and machinery and exempting inventory from property
tax rates are relatively low.
In the past few years, we've added a few other fairly typical incentives,
such as industrial revenue bonds programs and a Governor's fund to help
with recruitment and expanding industry. In 1993 when [Governor Jim Hunt]
came into office, he went through the legislature to set up what's come
to be known as the Competitive
Fund to bring in new companies and help existing companies expand. The
fund has disbursed some 12 million dollars over the past three years, providing
a cash grant through local governments for purchases of a building or land
for specific projects, machinery and equipment, or other statutory uses.
Other states have generally provided more
incentives than North Carolina has for quite some time. Typically, many
states have offered more aggressive use of different types of industrial
financing and, in the Southeast, lower
corporate tax rates.
Most recently, there's been much more aggressive
use of the tax code and tax-based incentives throughout the country.
Property tax abatements, for example, are not something that North Carolina
has done, but they're fairly typical in the industrial midwest as well as
in the Southeast.
The North Carolina constitution states that equal classes of property have
to be taxed equally. This has been interpreted to mean that you can't provide
specific tax breaks industry-by-industry. For example, you can't directly
abate taxes for a particular industry as part of a development incentive;
it requires equal classes. So for example, you could do credits or other
tax-based incentives if you set up a class, but it's got to be a class.
It can't be negotiated company-by-company.
Currently, the primary state incentives available statewide include access
to the Governor's Competitive Fund, highway improvements, and skills training.
Some special programs exist that target jobs growth and investment in the
50 poorest counties, including a Jobs Creation Tax Credit and an Industrial
Development fund for building renovation and site preparation.
By and large, the approach of focusing on infrastructure and training has
been well-accepted in North Carolina. We haven't needed to provide larger
packages with things like specialized tax credits to attract new businesses
and retain existing ones. Local incentives, at least until last year, had
not been controversial. Moreover, there was general agreement about the
need to raise wage levels in the state, and indeed that was a big reason
for some of the earlier initiatives.
People have come to agree that it's not the number of jobs; it's the quality
of jobs that are the issue. At one time, a lot of rural areas would have
disagreed and said that we need jobs and almost any new job is going to
be positive for the local economy. But now there's general consensus that
the primary focus is not just jobs, but the kind of jobs. Will they stay
competitive? Are they going to provide training and investment opportunities?
And do they raise wages and incomes in the state?
If you go back about two decades and look at total investment in the state,
about half came from new locations and about half came from expansion in
the existing industry. If you look to the last five or six years, about
a quarter comes from new investment, and about three quarters comes from
expansion in the existing industry. This is telling us that we've been pretty
successful in building our industrial base, in part from the existing recruitment
policies. Companies are in place. They are profitable here and they are
growing. But with a growing workforce and a real focus on trying to raise
wages and incomes in the state, we need to continue high growth but also
infuse higher wage sectors.
Beginning in the early 1990s, however, a
lot of projects that North Carolina might have gotten seemed to be going
elsewhere. In addition, some companies expanded
operations in a neighboring state when you would have thought they would
have located another plant here. Some closed operations in North Carolina
altogether and moved to other states. [See also, Briefings:
The Art of the Deal.]
The Economic Development Board
These concerns led the Governor to the Economic Development Board, the state's
principal policy board for economic development. The current incarnation
of the Economic Development Board came about following a performance audit
of state government in the early 1990s that called for a central coordinating
body to guide policy and action for economic development at the state level.
Originally an advisory board to the Department of Commerce, the Board was
given expanded authority through the legislature.
Its goals are to develop a comprehensive strategic plan to guide all state
activities related to economic development, to examine state-level expenditures
on economic development, and to report to the Governor and legislature annually
on the effectiveness of the state's policies and programs. The Board consists
of 36 members including eight legislative members appointed by the House
and the Senate and a number of positions determined by statutory authority,
such as the president of the university system, the president of the community
college system, and the Secretary of State. The remaining positions are
appointed to the Board by the Governor.
In 1995, the Governor asked the Board to address the whole issue of incentives.
How important are they to the state's development goals? Where do we stand?
Are we competitive? What do you recommend we do in this environment?
The Incentives Task Force
In May of 1995 the Economic Development Board set up an Incentives Task
Force to address the questions raised by the Governor and the Board. Most
of their time from May to November was spent trying to understand what was
going on both within North Carolina as well as North Carolina in relation
to other states. The task force spent most of this time analyzing the state's
economic performance, recent investment trends, and incentives offered in
other states. They didn't really begin looking at options for incentives
I organized my staff to help the task force compare and contrast specific
effects of incentives in some 20 states whose tax policy had been analyzed
in a previous study. We culled through legislation and found all the statutory
incentives these states offered so we understood what was on the books and
what they were doing.
We weren't looking at the kinds of special deals that might be arranged
with a "trophy" firm, those large, periodic projects like a Saturn
or Mercedes. Instead we focused on statutory incentives, the permanent parts
of an economic development tool kit. These are really driving incentives
We then targeted
eight states that were largely major southeastern competitors, plus
Ohio. Using information from the tax study about specific companies, staff
took the statutory incentives in each of the eight states and estimated
what companies would
qualify for in other states and compared that to North Carolina.
This comparison showed that all else being equal apart from incentives,
North Carolina was not going to be competitive because we simply didn't
have anything on the books that remotely compared with what other states
were offering. Basically, a lot of our traditional tools -- training and
infrastructure -- were now matched by other Southeastern states.
Moreover, the growing use of tax incentives offered by other states lowered
the effective tax rate on an investment pretty dramatically and raised the
after-tax rate of return. If you are a company and you are considering
sites in a number of different states where your quality of labor, access
to markets and other characteristics are reasonably similar, then you're
likely to take a hard look at the incentives you're being offered. If one
state offers a set of incentives that reduces your tax bill over a 12-year
period and raises your effective rate of return on your investment, what
are you going to do? That type of scenario moved the discussion out of a
qualitative judgment about the value of incentives into one that focused
on pragmatic business decisions.
Once the task force had gone through the analysis, it was unanimous that
given the environment, North Carolina had to respond. Like it or not, it
was just a practical matter -- a pragmatic decision based on the competitive
environment. However, there was a countervailing sense that the positives
in North Carolina -- the community college system, university system, our
strong track-record -- meant that we didn't have to match other states'
incentive packages dollar-for-dollar. Nonetheless, North Carolina did need
to address the issue of how tax incentives affected rate of return if all
but incentives were equal.
Eventually, the task force came up with four specific changes in the current
package of incentives that were intended to put North Carolina on a more
competitive footing with other states.. These recommendations were based
on a couple of underlying principles. The first was to tailor the incentives
to the specific economic policy goals previously adopted by the Economic
Development Board: high quality jobs, high performance enterprises, and
widely shared prosperity. So, for example, we wouldn't be just handing out
a gift to a company; we would establish targets and priorities that direct
incentives to those companies that could improve the state's economy over
the long term. Additionally, the task force tried to build into its recommendations
fiscal responsibility and accountability.
accountability drove the task force to consider tax-related incentives.
Tax-related incentives have a built-in performance contract. If it's tax
related, then the incentive is of no value until you have taxable income
in the state, which you are not going to generate unless you're producing
a profit. This guarantees that in order to get the incentive, you must first
accomplish what you said you were going to do-- you have to generate taxable
income, presumably from the creation of jobs and investments. Also, we made
sure that the recommendations incorporated a performance guarantee. In other
words, if you took advantage of the incentive and didn't do what you promised,
then there would be penalties that could be brought to bear.
Given these principles, the task force developed four recommendations. Within
the four recommendations, there are a number of options the task force left
open for the Governor and the legislature to determine. The first was an
tax credit, which specifically addressed the issue of encouraging existing
companies to invest in new technologies and new machinery and equipment,
as well as attracting new, more capital-intensive into the state. Additionally,
the task force recommended that the investment must exceed a threshold for
each county to qualify, with the threshold serving to direct the credit
to investments that will have a pronounced effect on the local economy.
The task force suggested a threshold of one-tenth of one percent of the
assessed property valuation for the county, which means that less-developed
counties would have a lower threshold and consequently more ready access
to the credit than the more industrialized counties.
Another recommendation was an expansion
of the existing Jobs Tax Credit, so that counties throughout the state
could use it rather than just the 50 more distressed counties. Nonetheless,
the recommendation gave rural counties higher levels of credit per job than
urban centers. The task force based its recommendation to expand on the
notion that a prospective company would be comparing rural North Carolina
with, for example, rural Georgia or South Carolina, and urban Charlotte
with urban Atlanta or Cleveland. Thus expanding the credit preserves the
competitiveness of our rural areas while offering metro areas an additional
tool, comparable in scope if not scale, to that offered in other states.
Thus, the expanded credit isn't trying to redirect investment within the
state but put counties on comparable footing with similar areas in other
A third recommendation was a research
and development tax credit to attract high-R&D companies and promoted
more R&D in North Carolina companies.
Finally, the task force recommended a
training tax credit, so that companies could get assistance for training
beyond the long-standing customized training program available through the
community college system. This would provide resources in addition to the
funds appropriated for customized training. This credit is meant to amplify
the effects of the investment tax credit, by helping companies not only
invest in new equipment but also providing the means to train new workers
how to use that equipment.
The Way Forward
Right now the task force report and its recommendations are before the Governor.
The Economic Development Board approved them
on February 14, 1996, two days before the Maready
case went to the Supreme Court. Over the next few weeks, we'll need
to decide how the recommendations will fit within the Governor's legislative
package. This year, we have a short session of several weeks that begins
in May followed by the 1997 regular session beginning in January. Once the
Governor makes his decision, any legislative actions could be introduced
in either session. Discussion of the recommendations in public has just
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