Deal Closing Funds Remain a Critical Part of Economic Development Policy

While deal closing funds continue to increase in popularity, what happens when the funds run out? North Carolina is dealing with this issue with much debate in its current legislative session. The House and Senate seem to have different objectives, which could make the ultimate outcome more dramatic than expected.

Republican-sponsored House Bill 117 would double the state’s economic development fund to $45 million and would rename the Job Development Investment Grants (“JDIG”) to “N.C. Competes.” The bill also contains the following items:

• An extension of an annual refund on sales-and-use tax paid on fuel in excess of $2.5 million for passenger air carriers
• Sales tax credits on certain electricity costs to large data centers
• $20 million dedicated to major manufacturing projects

Notably, this bill does not restore the historic preservation and film production tax credits. A Democratic-sponsored economic development bill does include these items; however the bill has not been acted on since it was moved into committee in early February.

Gov. Pat McCrory and Commerce officials believe that without expansion of the state’s deal closing fund, North Carolina will miss out on potential projects. Many opine that much of this is being driven by three major manufacturing projects, at least one of which is a major automotive project.

In contrast, two Senate bills have been introduced this week:

• Senate Bill 326 adds $5 million to the JDIG for the remainder of the fiscal year and another $7.5 million in funding from July 1 to Dec. 31 in order to buy time to figure out a more permanent solution to state incentives.
  
  
• Senate Bill 338 would make changes to the JDIG,;as well as the state’s corporate tax code, including:
  • A single sales factor;
  • Drops the state tax rate over the next two years, regardless of the state budget. This reduction was previously tied to and contingent on state revenue; and
  • Creates an exception to the annual cap on JDIG awards for “high yield” projects — $1 billion in private investment and the creation of at least 2,500 jobs. The cap would double from $15 million to $30 million.

• Prevents the majority of grants from going to the three highest-income counties in the state (Wake, Mecklenburg and Durham).

The Senate bill seems to try to appease proponents of tax reform for all taxpayers, while still providing some type of additional funding to win a coveted automotive facility.

A tightrope seems to exist between having competitive incentives and a lower-cost tax structure for all taxpayers. Just ask Arizona. The new governor of Arizona has swept funding from the Arizona Commerce Authority in order to balance the state’s budget while also avoiding tax increases. However, this leaves the ACA without $100 million in funds it intended to carryover from prior years in which they were not expended. While this does not affect any current year funding, it still has an impact. The sweeping of these funds caused a loss of an additional $70 million in funds for the Arizona Competes Fund and $30 million for job training grants. The Arizona Job Training Program has been depleted and is set to expire in 2016, essentially rendering it worthless. This may affect Arizona’s ability to aggressively compete for a wide variety of projects.

In juxtaposition to North Carolina and Arizona, the deal closing fund in Texas is still alive and well. The Texas Enterprise Fund will remain intact, despite the likely demise of the Texas Emerging Technology Fund. On the heels of a report issued by a Select Committee on Economic Development Incentives, State Rep. Angie Chen Button filed House Bills 26, 27 and 28. There are several economic development reform objectives within these bills, but the aim is to increase transparency and efficiency, conduct regular independent audits and eliminate underutilized programs.

The legislation also includes the creation of an Economic Incentive Oversight Board charged with regularly reviewing programs, participating in the awards process, and forming metrics to evaluate the success of programs. While Texas is grappling with how to make its economic development initiatives even more effective, many taxpayers are hungry for tax reform — especially franchise tax and property tax.

Will the pendulum actually swing and states start to reduce or eliminate deal closing funds? One thing is certain, many states will continue to walk the tightrope of offering robust economic incentives versus broad tax reform in search of the perfect balance.