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.


Economic Snapshot
Evolution of Incentives
Examining Incentives
Economic Dev. Board
Incentives Task Force
Way Forward

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 picture.

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 industries.

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: Incentive Policy.]

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. 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.
Examining Incentives

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 until November.

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 policies.

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.

The Recommendations

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.

Concern with 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 investment 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 states.

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 begun.

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