Aiming for the Cream of the Crop

A new governor’s battle plan to energize a sluggish economy zeroes in on incentives that work and the growth of knowledge-based jobs in the Tarheel State.

North Carolina Governor Beverly Perdue and her newly appointed commerce officials are setting out to grow knowledge-based jobs and energize the slowing economy. The first-year governor wants to continue building upon the state’s rich foundations in biotechnology and aerospace, while paving the way for cleaner, greener business endeavors.

As its economic focus is renewed, the state is taking a close look at its incentives, one of which, the tax credit program for new and expanding businesses, is facing criticism as being outdated and largely ineffective. Perdue and the state legislature are reviewing this and other incentives to determine how the state’s economic toolkit can be revamped.

“There will be a lot of discussion around it,” says Kathy Neal, assistant secretary for communications and external affairs for the North Carolina Department of Commerce. Neal says that regardless of any incentive changes, the state’s goal will be to continue recruiting and expanding business in the aerospace, life sciences and military defense industries.

“Commerce is certainly continuing to work on the various sectors that are important to the state—the kind of knowledge-based, higher-paying jobs in sectors that have been useful for us,” Neal says.

Perdue, who was lieutenant governor for the past eight years, has said that based on principle she is not a big proponent of incentives, but she realizes they are necessary when competing with other states to recruit companies. Her administration will weigh the value of maintaining programs such as the William S. Lee Act, which was established in 1996 to award tax credits for job creation and machinery purchases. A recent study by the University of North Carolina Center for Competitive Economies concluded that these credits may have lured business in the 1990s, but may no longer be effective in bringing jobs to the state.

The study revealed that more than 41% of companies receiving a Lee Act tax credit had a declining growth rate, with fewer employees in 2006 than they had in 1996. Though job creation is the major focus of economic development initiatives, only a small number of tax credits are directly attributed to job-creation activities, according to the study. The vast majority of credits have been used for machinery and equipment investment. Also, though job creation and capital and training investments generated the potential for $2 billion in tax credits in 2006, only $632 million were claimed.

Scott Hamilton, president of the North Carolina Economic Developers Association, says the fact that many companies are not claiming their tax credits does not mean they are not helpful in the recruiting process. He likened it to a shopper buying a product because of the rebate, but never getting around to filling out the paperwork and mailing it in.

“The report indicates that the tax credits may not be as effective, but in our conversations with companies and clients we also see that there is a benefit that’s hard to scale, that goes to providing a quality business climate,” Hamilton says. “We think those tax credits being available across all of our 100 counties provide North Carolina with the rankings that [show the state has] a positive business climate. When you go back and look at all the different rankings that North Carolina gets, we’re historically ranked in the top three states as having a pro-business climate.”

The report’s authors surveyed companies receiving Lee Act tax credits and found that incentives ranked low on the list of priorities for business executives. Similar surveys by national magazines, the authors note, demonstrate that “incentives are generally less important than a skilled, well-educated workforce, adequate infrastructure, state tax rates and regulatory climate.” Finally, the authors suggest that North Carolina may be better off giving more cash grants through its discretionary incentive funds and lowering its corporate tax rate. An analysis showed that had statutory tax credits been abolished in recent years, the corporate tax rate could have been reduced from 6.9% to 6.25% in 2005; 6.24 % in 2004; and 6.19% in 2003. “Currently, North Carolina has one of the highest corporate tax rates in the Southeast, which is perceived to be a significant disadvantage in attracting companies,” the authors state.

The state’s two big discretionary incentives are the Job Development Investment Grant (JDIG) program and the One North Carolina Fund, which is lauded for bringing 19,000 jobs and $3 billion in corporate investment since 2001. Both programs are used for targeted industries, and both are performance-based, meaning companies must meet criteria such as job creation, average wage and investment targets before money is awarded.

“They don’t get the money if they don’t perform. That’s the bottom line,” Neal says. “And if they do perform, but then leave, there are claw-back provisions.”

The state can award 25 JDIGs per year, with payouts to each business lasting up to 12 years. Among the 2008 recipients were Mack Trucks, Inc., which could yield $8.5 million after relocating its headquarters from Allentown, PA, to Greensboro, creating 493 jobs and investing $17.7 million. On a larger scale, Spirit AeroSystems, Inc., will open a plant at the Global TransPark in Kinston, investing more than $570.5 million and creating 1,031 jobs; its JDIG could reach $20.23 million. Also, GE Hitachi Nuclear Energy Americas will expand its campus near Wilmington, creating 900 jobs, investing $704 million, and garnering up to $25.7 million in JDIG money.

“Having [JDIG and the One N.C. Fund] in our toolkit has been very important to recruiting knowledge-based companies,” Neal says. “The JDIG program was created in ’02 and just started in ’03, and what you can see if you look at a list of the JDIGs is how many of the companies that have either expanded through JDIG or been recruited through JDIG …are primarily in the targeted industries that North Carolina is looking for. In other words we’re using the discretionary incentives to recruit the kind of industry and jobs that will be sustainable.” To date, 84 JDIGs have been issued, with commitments of nearly 32,000 jobs and $4.9 billion in investment.

One new incentive program that is taking off is the Green Business Fund, championed by Perdue when she was lieutenant governor in an effort to develop and commercialize technologies in areas such as biofuels, green building and renewable energy. In 2008, its first year, the program received 85 applications and awarded 13 grants. Examples included $100,000 each for companies with operations such as converting hog manure to electric power; developing a natural, fiber-reinforced concrete formula; and opening a photovoltaic solar cell production facility. Neal says interest in the program “has skyrocketed,” and the state will look to grow the fund.

“Green collar jobs, the green economy, are, I think, inherent to our culture in North Carolina,” Hamilton says. “That‘s because of the assets that we have in the mountains, the beach, the Sandhills area, so we have always looked at that in our recruitment efforts.”

As the national recession takes its toll across the country, North Carolina is seeing a slow-down in economic growth, but officials are optimistic about the future, particularly with campaigns such as Edge4—Growing Great, a public-private partnership designed to create 50,000 jobs in Raleigh, Wake County and the Research Triangle region by 2015. The goal is to raise $12 million for attracting new businesses, industry retention and talent recruitment. Some of the money will go to the Research Triangle Regional Partnership to boost competitiveness in the 13-county Triangle region.

Neal says the state’s research parks are uniting and working together to succeed in the global economy. She points to the 350-acre North Carolina Research Campus being developed in Kannapolis with the support of seven universities as evidence of how well the state is faring, relative to others. This success, she says, comes after eight years of diversifying the state’s economy, moving away from the traditional manufacturing industries to more knowledge-based areas. Hamilton agrees the state is uniquely positioned to move forward, and he is excited to see Perdue’s focus on economic development.

“I think the good news for North Carolina is that we continue to see project activity across the state, maybe not in the manner that we saw in ’06 and most of ’07, but it’s still there,” Hamilton says. “We have a governor that’s engaged in seeing what she can do to [bring] those projects into North Carolina.”

When it comes to incentives, Hamilton feels the state needs the right tools to compete for business. “Every program can always be fine-tuned to make adjustments. Any program should create quality jobs for the citizens of the state. If they’re not doing that, then we need to look at them.”