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Evaluating North Carolina’s Economic Incentives
Brent Lane Director, UNC Center for Competitive Economies Frank Hawkins Kenan Institute of Private Enterprise Kenan-Flagler Business School University of North Carolina Kenan Institute of Private Enterprise
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NC’s Economy is Big GSP of $491 Billion (9th) >GA, MI, MA since 2003 NC = 24th largest national economy 350,000+ employers Population of 10 million (9th) Workforce of 4,619,000 Kenan Institute of Private Enterprise
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Big is Hard to Affect NC has 350,000+ businesses
Targeted incentives to a few dozen firms 1% gain in employment = 46,000 new jobs Economic development “success” insufficient Kenan Institute of Private Enterprise
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NC & Incentives 1996+ Concerned about declining “competiveness”…
Created narrow TAX CREDITS for job creation, investment and worker training Expanded to add’l industries and all NC JDIG / OneNC incentives added Regional partnerships created Kenan Institute of Private Enterprise
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GRANT INCENTIVES 2007-09 Incentive Study
Prompted by high profile incentive deals, NCGA convenes joint legislative study committee GRANT INCENTIVES …and Tax Credits Kenan Institute of Private Enterprise 5
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Joint Select Committee On Economic Development Incentives
Lee Act tax credits, JDIG, and One NC Fund 18th month study of 5,000 firms ( ) “Portfolio analysis” to determine which incentives achieve the greatest return Quality job creation Distressed areas focus Enhanced NC competitiveness Changes/alternatives to better achieve goals? Kenan Institute of Private Enterprise
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Which Incentives Best Achieve NC’s Economic Priorities?
C3E led UNC, NCSU and ECU study Portfolio of $2 billion in incentives during employment histories for 5,000+ incented companies 250,000 pre/post incentive data points Surveys/case studies of incented firms Kenan Institute of Private Enterprise 7
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2006 NC Incentives Portfolio
Statutory Tax Credits Tax credits to qualifying businesses for job creation, training and investment Lee Act and Article 3J Discretionary Performance Grants Cash grants to new and expanding businesses for job creation and/or retention Job Development Investment Grant (JDIG) One North Carolina Fund Kenan Institute of Private Enterprise
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2006 Incentives Portfolio Kenan Institute of Private Enterprise
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Most NOT Jobs Based Kenan Institute of Private Enterprise
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LEAST to Poorest Counties
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Incented Companies Often SHED Jobs
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Investment Credit Kenan Institute of Private Enterprise
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Job Creation Credit Kenan Institute of Private Enterprise
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R&D Credit Kenan Institute of Private Enterprise
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Tax Credit Obsolescence
-5 5 10 Growth Rate in Percentage 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 year State-wide Employment incentive companies (Number of Companies: 1213) Employment Growth Rate: State vs. Incentive Companies with Single Location Kenan Institute of Private Enterprise
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Findings: Time to Update NC’s Incentive Portfolio
Current incentive portfolio relies too much on tax credits that are less effective than in 1990s Incentives were following firms to wealthier areas, rather than leading them to poorer areas Few tax credit incented firms show job growth – most have same or fewer jobs after tax credits OneNC & JDIG potentially better than tax credits Corporate tax rate uncompetitive Kenan Institute of Private Enterprise
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Limited Location Effect
Actual effectiveness is unknowable National surveys indicate incentives are relatively low in importance in location decisions UNC survey of NC incented and non-incented ranked incentives 12th and 13th respectively Negative effect on non-incented firms Incentives do not compensate for disadvantages “But For” are the cards never shown. Kenan Institute of Private Enterprise
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Most Persuasive When … Other location factors are relatively equal
Prospects are highly mobile (and more are) Tailored to companies’ specific priorities Benefits are front-loaded (cash > credits) Combined with other assistance Before the auction starts – “proactivity reward” Kenan Institute of Private Enterprise
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Greatest Benefit When…
Company is a headquarters/local ownership in an export industry – “wealth creation” Company in growth mode – “ROI upside” Company has high catalytic effect on local economy – “ripple effect” Company affinity for location factors and workforces of distressed regions – “significance” Company employs local residents, minimizing new public service cost – “net impact” Kenan Institute of Private Enterprise
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NC Corporate Tax Rate Company executives preferred lower tax rate to selective tax incentives Rate reduction would have positive effect on more firms and across NC Recommended changes to incentives portfolio could support corporate tax rate reduction Kenan Institute of Private Enterprise
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North Carolina Ranked “Best Business Climate” 12 of last 15 years by Site Selection magazine
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Economic Development Success isn’t Economic Success
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Recommendations Eliminate Article 3J statutory credits effective 2010
Retain Research and Development Tax Credit Expand JDIG and One NC programs with increased amounts targeted to distressed counties Increase economic research and marketing budgets for proactive targeting of growth firms Address systemic economic competitiveness factors Reduce corporate tax rate to competitive neutral rate Institute legislative oversight function Kenan Institute of Private Enterprise 24
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Recommendations Eliminate Article 3J statutory credits effective 2010
Retain Research and Development Tax Credit Reduce corporate tax rate to competitive neutral rate Institute legislative oversight function Address systemic economic competitiveness factors Increase economic research and marketing budgets for proactive targeting of growth firms Expand JDIG and One NC programs with increased amounts targeted to distressed counties Kenan Institute of Private Enterprise 25
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JDIG Incentives ROI 2007 to 2014 136 JDIG awards of $757 million for 40,291 jobs Disbursed $34 million for actual 13,651 jobs Average annual actual creation of 1,950 jobs NC added 114,500 new jobs in 2014 Kenan Institute of Private Enterprise
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? Kenan Institute of Private Enterprise
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Kenan Institute of Private Enterprise
Brent Lane, Director, UNC Center for Competitive Economies Kenan Institute of Private Enterprise
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27 years Kenan Institute of Private Enterprise
Brent Lane, Director, UNC Center for Competitive Economies 27 years Kenan Institute of Private Enterprise
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NC PCI Kenan Institute of Private Enterprise
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2008-13 US = 1.8 NC = 1.6 Kenan Institute of Private Enterprise
Top 25 PCI% Northampton, NC 3 Chatham, NC 2.9 Union, NC Bladen, NC 2.8 Gates, NC Halifax, NC Currituck, NC 2.7 Jones, NC Lenoir, NC Greene, NC 2.6 Martin, NC Alexander, NC 2.5 Camden, NC Granville, NC Perquimans, NC Sampson, NC Davidson, NC 2.4 Lincoln, NC Stokes, NC Washington, NC Pamlico, NC 2.3 Swain, NC Montgomery, NC 2.2 McDowell, NC 2.1 Mitchell, NC Bottom 25 PCI% Gaston, NC 1.3 Nash, NC Pender, NC Wake, NC Craven, NC 1.2 Macon, NC Mecklenburg, NC Surry, NC Alamance, NC 1.1 Clay, NC Davie, NC Graham, NC New Hanover, NC Anson, NC 1 Guilford, NC Henderson, NC Durham, NC 0.9 Person, NC Watauga, NC 0.8 Forsyth, NC 0.6 Moore, NC Harnett, NC 0.5 Rowan, NC -0.1 Transylvania, NC -0.2 Lee, NC -0.5 US = 1.8 NC = 1.6 Kenan Institute of Private Enterprise
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Income is More than Wages
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NC’s Income Challenge Economic well-being depends on breath of policies – not just economic incentives Economic incentives can have a regional benefit, but can not meet state-wide needs NCGA has addressed policies enhancing existing income NCGA needs to examine market-based policies that would increase incomes state-wide More capitalism by more citizens Kenan Institute of Private Enterprise
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Questions: Evaluating North Carolina’s Economic Incentives
Brent Lane Director, UNC Center for Competitive Economies Kenan Institute of Private Enterprise
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