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Taking the ‘low road’ to economic development

By Elaine Mejia

North Carolina often acts like a fool in love with big business. State leaders continue to aggressively pursue an economic-development strategy that relies on offering as much as possible by way of cash and tax incentives to a few large, typically well-known corporations. These corporations, which have included Dell Computers and Google, court officials at the state Department of Commerce, and the officials flirt right back by flaunting their ample packages of taxpayer-funded goodies.

All indications are that North Carolina is gearing up to woo another big corporation, and this time state leaders might be going too far once again.

Senate Bill 575, “Modify Corporate Apportionment Formula,” is the latest attempt to change the tax code to benefit one specific corporation. The bill would allow certain companies to be designated as “capital intensive,” meaning they have a large portion of their property in North Carolina, but a much lower portion of their payroll or sales are in-state.

Under the legislation, the state would determine the tax bill of these “capital intensive” corporations based solely on in-state sales. Currently, the state looks at a company’s in-state property, payroll and sales to determine how much of its profits are attributable to doing business in North Carolina.

For some worldwide corporations, the share of their sales that takes place in North Carolina is very, very small; under this bill, their tax liability to the state would likewise be very, very small.

The bill is moving through the legislative process quickly. After racing through the Senate in just a few days, it is now in the House. Speculation in Raleigh is that this fast-tracked special tax break is part of a larger deal to lure an Apple Computers server facility to the western part of the state.

According to the state Department of Revenue, three other companies currently operating in the state would also potentially qualify as “capital intensive,” and their tax bills would be lowered by a collective $1.5 million annually. The cost of the tax break for Apple specifically isn’t included in this figure, since the estimate only includes companies that are already here and who, presumably, were not asking for this special tax break.

There are lots of legitimate policy reasons to question the wisdom of this legislation and its backers, but here’s the real kicker – this bill would actually discourage job growth. If a company receiving this special tax break wanted to expand its workforce in North Carolina (at a faster pace than it expands its property or capital value), it would no longer be designated as “capital intensive” and therefore would no longer qualify for the program, causing its tax bill to rise substantially.

This would be the case if, for example, a company housing a server farm somewhere in North Carolina wanted to relocate its engineering operations or its headquarters or even a call center. If it were to locate those jobs here, it might lose its special tax status as “capital intensive.” So the new tax break designed to grow the economy could actually create an incentive for companies with a presence in North Carolina to add to their workforce in other states rather than here!

This is a clear example of why making permanent changes to the tax code to appease one specific corporation is a foolhardy economic-development strategy. North Carolina has made similar mistakes before, like when lawmakers created a special cigarette export tax credit when trying to keep RJ Reynolds or created a computer manufacturing tax credit to help lure Dell in 2004.

Speaking of Dell, there are some disturbing parallels between that messy love affair and the state’s current attempt to lure Apple. North Carolina’s rumored competition for the Apple facility is Virginia, just as it was for Dell five years ago. After the Dell deal was complete, we learned that Virginia had offered it a package of goodies worth roughly $50 million, compared to North Carolina’s whopping $250 million. Since January of this year, Dell has laid off 260 workers at its Forsyth County plant, and more layoffs may be on the way.

While big corporations like RJR, Google, Dell and now Apple are lavished with goodies, North Carolina’s small businesses are left to suffer through the recession in silence.

Let’s hope the North Carolina House will be more chaste than the Senate and slow down the process for this bill so that the future ramifications for the state’s economy and workforce can be fully considered. Investing all of our resources to charm a few big corporations is not the way to grow our economy or take care of our workforce.

Elaine Mejia is the director of the N.C. Budget and Tax Center.

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