RALEIGH -- There are three steps that North Carolina should take to make it more competitive with its neighbors for new, high-impact industrial and commercial projects. But before addressing these steps, the state's progress in reinventing its economy should be acknowledged.
North Carolina's business recruitment processes, its business and regulatory climate, the transparency and accountability of its incentive programs and its notable successes in recruiting major industrial and commercial businesses in knowledge-based sectors have all received and deserve positive recognition. Nevertheless, the review of the state's economic development incentive programs and delivery systems being conducted by the Joint Legislative Economic Development and Global Engagement Oversight Committee presents an opportunity for promoting economic growth and stimulating job creation through much-needed changes to the state's corporate income tax code that at least will place North Carolina on an equal footing with many of its neighbors.
Site selection searches involve, among other things, an analysis of the comparative costs (including taxes) of doing business over specified periods in competing states. Most southeastern states, including South Carolina, Georgia and Virginia, have lower tax rates; much more favorable tax apportionment formulas (which determines the income tax a multistate business owes to a given state); and sizeable upfront cash grant programs that do not require special legislation. For any large business that has relatively few sales in North Carolina, its corporate income tax here over a 10-year period would be many times greater than it would have to pay if it were to locate the same facility, for example, in South Carolina.
This disparity has not gone unnoticed; for 2011 the Tax Foundation ranked North Carolina among the 10 states with the worst business tax climate. Conversely, Virginia ranked 12th and South Carolina 24th.
Adding to their advantage, South Carolina and Virginia have established discretionary grant programs allowing them to make large upfront cash grants based on the project's merit and its projected rate of return to the state without having to ask the legislature to enact special legislation. Currently North Carolina has in place a mechanism for making such grants, the Site Infrastructure Development Fund (SIDF), but the legislature has not appropriated any funds to the SIDF since it was created to induce Merck to locate a vaccine facility in Durham County in 2003.
If the state. were to eliminate the premium it exacts from companies proposing to do business here through its corporate income tax rate, franchise tax and unfavorable apportionment formula, it would not be necessary to provide large, front-end-loaded cash grants to level the playing field.
While North Carolina has had many business recruitment successes and its programs and policies are envied by many states, it can build a more competitive recruitment framework - and one which would not have to rely as heavily upon "extra" incentives or special legislation when a large, impactful project justifying a major financial commitment comes along. To be more competitive the state should (1) establish a mechanism for offering upfront cash grants where individual grant decisions are made without the necessity of special legislation, (2) reduce the corporate income tax rate to the median rate in the region and (3) adopt a single sales factor corporate income tax apportionment formula.
These changes would do much to eliminate the disadvantages inherent in the state's current business recruitment tools; however, the legislature can not lose sight of the fact that our closest competitors have done all of these things and continue to offer tax credits and other incentives for attracting jobs and investment.
Although these changes can be phased in over a multi-year period, all of these changes should be enacted at one time as a part of comprehensive economic development legislation.
Donald A. Donadio, a partner with Womble Carlyle Sandridge & Rice, LLP, has been involved in representing companies that are considering the location or expansion of major facilities in the state and the region for more than three decades.
