State tax breaks that help businesses in North Carolina are proving hard to kill.
Two years ago, Republican legislators changed the state’s tax code after a bruising, yearslong effort at reform. The goal: eliminate tax credits for a variety of industries – to lower income tax rates for all.
But lobbyists for special interests, company chiefs, advocacy groups and others are pushing back – and they found powerful support this week from elected leaders, including Gov. Pat McCrory.
Legislation that is now moving quickly in the General Assembly – and the budget proposed Thursday by McCrory for the next fiscal year – includes at least seven special tax credit programs that are characterized as needed to preserve or generate jobs.
The aviation industry argues that American Airlines might leave its Charlotte airport hub if it doesn’t get a break on jet fuel. The state’s motorsports industry also wants to keep a break on racing fuel taxes. Backers of a renewable energy tax credit released a study last month that says the credit, having already led to about $650 million in new facilities, must be kept.
And McCrory is making a strong push to resurrect an expired tax credit for historic preservation projects, taking his case directly to towns across the state that he says will benefit.
“No matter what town you’re in in North Carolina, there’s a (blighted) block like this” that can use the credit, he said on one stop.
So far this year, McCrory has dispatched his cultural resources secretary to more than 20 downtowns, joining her in three of them.
Susan Kluttz brings a warning for the local leaders and business owners gathered to meet her. “We have a crisis in Raleigh,” she tells them. The “crisis” is the loss of the historic preservation credit, which has been used to restore 2,484 properties since 1998.
Last month in Rocky Mount, McCrory led a discussion of the program in a dimly lit, sprawling cotton mill that’s been vacant since 1996. Raleigh’s Capitol Broadcasting Co. received tax credits to turn the building into a brewery complex.
McCrory praised the “smell of craftsmanship in the wood” and predicted the brewery will bring economic revival to the community. “This can be replicated across the state,” he said.
After a bus tour of more tax credit-related downtown development, McCrory called on the crowd to call every legislator within “a 100-mile radius of here.” He said the challenge will be getting the historic credit to a floor vote in the state Senate.
“Let me talk to my legislature, through you, right now,” he said. “The historical tax credits were initially started by Ronald Reagan. It is the most conservative philosophy that you can promote, and that is (to) encourage private-sector investment through lower taxes.”
Picking ‘winners and losers’
Some Senate Republicans see the credit – and others like it – differently. Sen. Bob Rucho, a finance committee co-chairman from Mecklenburg County, helped develop the 2013 tax reform plan. He’s not a fan of the historic tax credits – or others.
“People that are in certain towns or cities that may not have historic preservation going on are subsidizing someone else’s community,” Rucho said. “That money could have been better spent in education, in the court system, or in the pockets of working families and small business.”
Rucho said cities and counties should be responsible for promoting historic preservation. If the program “is as successful as one may claim,” he said, local governments can offer a property tax break.
Rucho is also skeptical of the other tax credits that legislators are trying to bring back.
“When government picks winners and losers, some groups get a tax preference and others have to pay more to subsidize that tax preference,” he said.
Rucho said backers of tax credits must make a difficult trade.
“If any of them do come back, there will have to be an increase in the personal income and/or the corporate income tax,” he said.
Keeping jobs in N.C.
Supporters, however, argue that the economics aren’t that simple.
Rep. Charles Jeter, a Mecklenburg County Republican, defended a jet fuel tax break on the House floor this week. He said the state could “run the risk of real problems” if airlines have to pay more.
American Airlines could see its fuel bill rise by $15.5 million in North Carolina next year unless the legislature extends the break. Some fear the airline might stop using Charlotte Douglas International Airport as a major hub.
American has been fighting hard to keep the tax break, which is set to expire at the end of the year. It has five registered lobbyists in North Carolina, including a former aide to state Senate leader Phil Berger.
The lobbying team is poised for a win: The tax credit would be extended under an economic development bill that passed the state House this week. And McCrory’s budget proposal allocates $7.5 million toward keeping it.
Opponents, however, say the money should instead help fund education and other needs.
Jeter disagrees. “It’s a false equivalency,” he said. “The money won’t be there because (American) won’t buy fuel here anymore, because they’ll buy it in South Carolina.”
Similar arguments are being made for other tax credits that are set to expire. Supporters say industries could pull out of North Carolina if the credits expire, causing a drop in tax revenue that would be far greater than the cost of the credits. Most are sought-after industries that could get tax breaks in other states.
The film industry was one. Lawmakers replaced a credit for film productions with a grant program limited to $10 million in payouts per year, saying it made more sense for the state’s long-term goals. Leaders in Wilmington, a film industry hub in the state, said spending by film companies is expected to drop from about $170 million to $50 million this year.
McCrory’s budget proposal includes $1.2 million to extend a tax credit for the motorsports industry, which like American Airlines enjoys a break on fuel taxes.
It was first offered under Democrats, who said NASCAR teams could leave the state without the tax-code break. The McCrory administration has adopted that position.
“North Carolina has a key competitive advantage” with NASCAR, Budget Director Lee Roberts said Friday. “We’d like to keep it that way.”
The motorsports credit is one of seven programs funded in McCrory’s budget. The spending plan allocates $115 million for them, ranging from historic preservation to renewable energy. The biggest expense is a tax break on business expenses for research and development, which would cost the state $58 million in the next fiscal year.
“That’s a key job creation tax credit,” Roberts said. “Every state that we’ve looked at has something similar. Letting that expire leaves us at a competitive disadvantage.”
Roberts will make that case to legislators when he presents the governor’s budget, beginning next week.
Tax credits sought
After North Carolina eliminated many tax credit programs in 2013, some legislators want to restore some of the more popular credits. Here’s what’s on the table this session:
Historic preservation: Heavily supported by Gov. Pat McCrory and mayors’ groups, this program expired Dec. 31 and rewards property owners who fix up historic buildings. McCrory’s effort to restore the program last year fell short, but he included $12.2 million in his budget proposal this week for a scaled-back program that would offer smaller credits.
Jet fuel: This provision caps sales taxes on jet fuel at $2.5 million per year. Only one airline buys enough fuel to hit that cap and avoid further taxation: American Airlines, which has a hub at the Charlotte airport. The credit is estimated to cost the state $10 million a year and is set to expire at the end of 2015. A provision in the House economic development bill would extend the program, and funding is in McCrory’s budget.
Motorsports: The motorsports industry, including NASCAR, also receives a credit on fuel tax. McCrory’s budget includes $1.2 million to keep the credit from expiring.
Data centers: The House economic development bill also includes an expansion of electricity sales tax credits for technology data centers. House Republicans want to apply the existing break to centers housing equipment for multiple companies. To qualify, centers would need to involve at least $75 million in private investment.
Renewable energy: Tax credits for renewable energy projects are set to expire at the end of the year. Owners of solar farms and other renewable energy facilities receive a tax credit equal to 35 percent of the project’s cost. An industry report says the credit has paid out $182.6 million from 2007 to 2014. McCrory’s budget proposal includes $7 million to extend the program, but it would no longer apply to solar projects. That industry has grown substantially, and McCrory’s budget director says it doesn’t need the boost anymore.
Research and development: This credit is slated to cost $58 million in McCrory’s budget proposal. Companies spending money on research and development can receive tax credits for those expenses, and the credit is largest when the business paid a North Carolina research university for the work.
Democrats’ plan: House Democrats have filed a 61-page economic development bill that restores numerous credits they say “were proven to work in the past.” House Bill 89 reinstates credits for historic preservation projects, film productions, professional motorsports teams and cigarette exports, among others.