Senate, McCrory at odds over corporate taxes

by Colin Campbell, The Charlotte Observer, March 18, 2015.

Senate leaders outlined a new jobs plan Wednesday that would rebalance how the state spends millions in incentives money while dropping the overall tax rate paid by corporations.

The plan, backed by Senate leader Phil Berger, would especially limit how much incentives money could go to Mecklenburg, Wake and Durham counties. And in reducing the state’s corporate tax rate to 3 percent, it would mean about $500 million less in revenue to the state.

The proposal is in contrast to a jobs creation effort that has already cleared the state House and is backed by McCrory.

McCrory offered immediate criticism, saying the Senate proposal was “in strong disagreement” with his administration’s ideas and “frankly disappoints me.”

“It breaks the bank,” he said, and “divides” North Carolina.

The differences set up a coming debate about the most effective way to grow jobs – all while McCrory’s administration argues that companies will look elsewhere if the state’s main incentives fund isn’t replenished soon.

The Senate’s plan would:

? Limit Mecklenburg, Wake and Durham counties to a formula tied to their percentage of the population. In effect, it would limit those counties to no more than about half of the state’s incentives money under today’s population figures.

Berger said 86 percent of the state’s main job creation incentives went to those three counties in 2013-2014. The Senate plan would provide more generous benefits in poorer counties, with reduced payouts to urban counties.

? Carve out exceptions that allow for larger incentives packages for a “high-yield” project that creates at least 2,500 jobs. The state is actively courting auto manufacturing projects.

? Lower the state’s corporate income tax to 4 percent in 2016 and 3 percent in 2017 – eliminating an existing requirement that revenue targets must be reached before further cuts kick in. The state’s current rate is 5 percent.

? Shift to a corporate income taxing method known as single sales factor apportionment. It would calculate companies’ tax liability based entirely on sales – instead of also factoring in their payroll and property value. It’s effectively an additional corporate tax cut that favors companies with extensive property and payroll taxes in the state. Berger’s office said it would save companies $75 million.

? Use a separate bill to immediately shore up a depleted jobs creation incentives fund just as the McCrory administration says corporate decisions are being made about the location of several major manufacturing projects.

The House version

The House already has approved a bill that would increase funding for the state’s main jobs creation incentives fund, called the Job Development Investment Grant, by $22.5 million. The House would only apply the single sales factor to companies investing more than $1 billion, likely an auto manufacturer.

Berger says all businesses should get the benefit.

“Single sales factor is something that is already available to businesses in South Carolina, Virginia and other states around the nation,” Berger said. “Single sales factor will help us become more competitive.”

McCrory’s administration has voiced support for the single sales factor but says the state would see a revenue drop by more than the Senate estimate. McCrory’s administration says the cost would be about $180 million initially.

Coupled with the corporate rate cut, McCrory says the Senate plan would leave a budget hole. “It breaks a promise of last year on tax reform,” he said, referring to a pledge that cuts would be revenue neutral.

Berger said his proposal would cost far less than what the governor projected. Berger issued a response Wednesday evening after McCrory’s statement, criticizing McCrory’s budget for including tax breaks that range from jet fuel to NASCAR.

“I’m trying to comprehend how the governor wants to spend $1 billion on new incentives, but considers it ‘breaking the bank’ to allow North Carolina taxpayers and job creators to keep about $500 million of their own money,” Berger said in a statement.

The Senate bill doesn’t include tax credits for jet fuel and technology data centers – two provisions of the House bill.

Berger’s plan also prompted concern on the left that the tax cuts could mean budget cuts for schools, health care and other needs. Cedric Johnson of the liberal N.C. Justice Center said the single sales factor primarily benefits “large, multistate corporations” over smaller businesses that have most of their sales in North Carolina.

“Some core portion of the budget will have to be on the chopping block in order to pay for what’s in the Senate plan,” Johnson said.

Shifting the money

Alongside the tax cuts, the Senate wants to tweak JDIG to ensure that the funding isn’t spent too quickly and that more grants go to rural counties. The plan would release JDIG funding on a quarterly basis, and it would ensure that counties other than Wake, Mecklenburg and Durham receive more than half of future JDIG money.

Berger released a pie chart that depicted those three counties as a Pac-Man video game character eating the slice representing the other counties.

“That sort of an imbalance is something that needs to be addressed and corrected,” Berger said.

Under the proposal, less money would be available to fund incentives in the top three counties, and the grants would be worth a smaller percentage of the company’s tax burden. But Adrienne Cole, head of Wake County Economic Development, says it’s unlikely that companies considering a move to Raleigh or Charlotte would pick a smaller community instead.

“We’re competing with the Austins, the Bostons, the San Joses,” she said, adding that new employers in Wake stimulate the economy of surrounding counties.

Prognosis: Debate

With two competing bills in the legislature – and the immediate reactions on Wednesday – it is unlikely that either economic development bill would reach McCrory’s desk soon.

House Speaker Tim Moore said Wednesday that he was concerned by the Senate’s decision to file its own bill. Senate leaders have parked the House version of an incentives plan in its Rules Committee, where no hearing is scheduled.

“We do think the proper vehicle (for negotiations) would be the House bill that’s been sent over to the Senate,” Moore said. “We need to try to find some common ground on these issues.”

Speaking in Charlotte, N.C. Commerce Secretary John Skvarla on Wednesday criticized the Senate.

He accused the Senate of being more ideologically driven, and less pragmatic than McCrory and the House. The Senate’s tax ideas could cause a revenue shortfall totaling hundreds of millions of dollars, without revenue to replace that or government efficiencies to make up the gap.

“It’s impossible to just flip the switch and make that happen. ... The Senate seems much more aligned with an ideal,” said Skvarla. “They believe if they can create that ideal immediately, build it and they will come.”

Skvarla said he will rally business leaders and economic developers – who made up much of the audience Wednesday – to pressure the Senate to pass the incentives plan. The audience at Central Piedmont Community College’s Harris Conference Center cheered at the call to contact state legislators and voice their support.