Bill Lee Act tax
credits were a major factor in DuPont's decision
to build this $40 million Teflon plant in Bladen County
Priming the Pump
It isn't perfect, but officials
maintain the Bill Lee Act
is working well at helping Tar Heel companies expand
By Heidi Russell Rafferty
Two
years after it broke ground at a tree-studded tract in Bladen County
for a $40 million Teflon plant, DuPont has completed testing the new
manufacturing process it will use there and is “looking toward the
future of making a full investment” of nearly $300 million at the
site, says Kelli Kukura, manager of state government and public
affairs.
Several states courted the new DuPont plant and officials say it might
have gone elsewhere but for North Carolina’s economic development
incentive program, officially known as the Bill Lee Act. The program
offered DuPont lucrative tax credits for creating jobs, investing in
worker training, buying new machinery and equipment and for R&D
costs.
For companies like Dupont, the tax credits offered through the Bill
Lee Act “made all the difference, absolutely,” Kukura says.
“When a state is able to step up and show it is interested in
development in a tangible way, it is able to get the attention of
corporate leadership,” she says.
Such praise by companies like DuPont for the Bill Lee Act is echoed by
the state’s many economic development professionals, who assert that
the five-year-old legislation has been instrumental in the state’s
economic expansion over that time. But there are some who question its
usefulness and its cost, and many of those critics sit in the General
Assembly.
Reacting to that criticism, the North Carolina Department of Commerce
this summer released studies that conclude that the legislation
generally seems to be achieving what the legislature intended. More to
the point, Commerce Secretary Jim Fain says the studies prove the
program is accomplishing its core mission of encouraging existing,
in-state companies to expand here and create new jobs here instead of
some other state. Moreover, a proportionally significant number of
those new factories and jobs are going to rural parts of the state —
a major goal of the legislation.
Fain says the data shows that more than three-quarters of new business
investment has been generated by existing North Carolina companies
that have taken advantage of Bill Lee Act incentives. Of the 730
investment announcements last year, 562 of them, or 77 percent, were
by in-state companies that were expanding, he notes. All told, the
state recorded $7.55 billion in new investment last year and the
creation of 39,778 jobs.
In addition, studies released by Commerce show that the credits are
helping companies maintain a competitive edge by investing in new
technologies and ensuring that new economic growth reaches all parts
of the state. Companies are heavily using tax credits for investing in
machinery and equipment, as well as research and development, the
studies say.
But Fain says another study the department commissioned raises a
worrisome issue. Many other southeastern states are outpacing North
Carolina in the types and value of incentives they offer, which Fain
says should prompt the General Assembly to re-examine the state’s
centerpiece recruitment and retention tool.
Fain says he will be meeting with the state’s Economic Development
Board during the next three to six months to take a fresh look at the
incentives, to gather data on other states and find ways to add to the
state’s economic development tool kit.
He notes that, even during the recent economic downturn, the state
this year has had 177 project announcements, representing $1.1 billion
in investment and about 7,300 new jobs. Besides, he says, North
Carolina’s attractiveness goes beyond any incentive program.
Businesses consider a multitude of factors, and the state can’t lose
sight of those.
“In North Carolina, we have a number of things that help us recruit
successfully in addition to the Lee act,” Fain says. “I think
those things are serving us well — a great workforce, good training
programs, good infrastructure, quality of life, quality education, and
those help us in good times and in bad. We’re holding our own and
having good results given the slowdown and in spite of the fact that
we’re losing a number of jobs.”
Fain notes that the Lee act, named after the Duke Power Co. chairman
who pushed hard for the legislation and who died days before it was
enacted, is designed to equally provide incentives to existing
businesses as well as those that the state wants to attract. “Our
existing enterprises create 70 to 75 percent of new jobs and
investment each year. We need those incentive programs and others that
help us to not only recruit but to fully encourage our existing
industries,” he says.
Good But Not Great
Although many in North Carolina’s economic development community
worry that the state is less competitive than it once was with other
states, North Carolina continues to place high in national rankings
for new capital investment and job creation. However, the state has
slipped slightly from the top rankings it achieved in the mid-1990s,
according to Site Selection magazine, which tracks each state’s
performance annually. This year, the magazine ranked North Carolina
seventh for new jobs per 1 million residents between 1998 and 2000.
North Carolina ranked fifth for capital investment those same years.
In the South Atlantic region alone, North Carolina had the most new
corporate facilities and expansions between 1998 and 2000, compared
with seven other states in the region and the District of Columbia,
the magazine says.
Ron Starner, editor of Site Selection, says North Carolina is
recruiting business with its available labor.
“North Carolina is competing extremely well — its three-year total
for new or expanded (corporate) facilities is 2,438,” Starner says.
The Lee act has been a key component in expansion decisions for
existing companies, notes another trade magazine, Plants Sites &
Parks, which is based in High Point. The magazine credits the Lee act
with encouraging companies to look outside of major metro areas for
expansion.
For example, it points out one such success story in Edgecombe County,
an economically distressed area that was hurt by flooding caused by
Hurricane Floyd in 1999. Last year, electronic retail giant QVC
invested $70 million for a 1.1-million-square-foot distribution center
there, creating 800 new jobs.
In Nash County next door, another area hit hard by Hurricane Floyd,
the world’s largest tobacco leaf dealer broke ground in August for a
new facility to replace one in Rocky Mount. Universal Leaf North
America will consolidate processing plants in Henderson and Wilson and
open the new facility in July 2003. The company bought 1,000
acres and will invest at least $80 million for a plant that will
encompass 120 acres.
Todd Haymore, director of external affairs for Universal Leaf, says
negotiations are ongoing with the Commerce Department for some type of
tax credits under the Lee act. Even though the new project will offer
1,134 jobs, they are being reshuffled in the state, and the
company’s tax credits may have to be derived from other investment
aspects of the project.
Haymore notes that although tax credits were important, they did not
play a defining role in the company’s final decision to locate in
Nash County, because the company was “focused on being in the heart
of tobacco-producing country.” But the tax incentives that may be on
the table “were definitely a consideration,” Haymore says.
At DuPont, the incentives made all the difference, Kukura says. To
bring DuPont’s investment to Bladen County, and the 25 new jobs it
has created so far, the General Assembly in 1999 expanded the Bill Lee
Act to allow DuPont to claim credits and incentives worth $44 million
over the next 20 years, lengthening the time span previously allowed
under the legislation to claim the credits.
“Some experts say that the state should not offer incentives, and
that may be, but until the playing field is leveled, a state must
exist in competition. Should a state be reasonable and prudent?
Absolutely. Should they draw benefits? Absolutely. It must be a
win-win situation. But the state can’t sit back and lose to
surrounding states,” Kukura says.
Commerce is required by state law to reexamine annually the
effectiveness of the tax incentives provided under the act. This
year’s study concludes that the act is accomplishing its goals,
primarily encouraging investment in new technologies for existing
businesses.
Of the $87.8 million in all Bill Lee Act tax credits that companies
claimed between 1997 and 1999, $39.4 million, or 45 percent, was
attributed to investments in machinery and equipment. Commerce reports
that actual investment in machinery and equipment during those years
totaled at least $2.6 billion.
More importantly, about three-fourths of the machinery and equipment
credits go to expanding North Carolina businesses. About four-fifths
of the credits went to firms that had been doing business in the state
since1990 or earlier.
The research and development tax credit also has sparked business
expansion investments, which can amount to billions for the state.
According to the National Science Foundation, in 1997, North Carolina
industries invested $4.7 billion in research and development – the
second-highest aggregate expenditure among nine Southeastern states.
Only Florida surpassed North Carolina’s outlay, with $4.8 billion
invested.
According to Commerce’s study, of those companies that took
advantage of the Lee act between 1997 and 1999, 302 firms generated a
total of $50.4 million in research and development tax credits, of
which they were able to claim about $21.2 million to date. Tax credits
represented more than $1 billion in added private sector research.
On average, companies using those types of credits were newer to North
Carolina than those accessing the machinery and equipment credit –
46.5 percent of them were chemical companies, and 39.7 percent of them
were hi-tech manufacturing plants.
Helping in the
Hinterland
Fain points out that although there are a larger raw number of tax
credits going to companies in non-distressed counties, studies show
that, on a per-capita basis, companies in distressed counties are
generating more credits than the more-urban counties, fulfilling
another goal of the Lee act. A second study by Dr. Michael I. Luger of
the Kenan Institute for Private Enterprise at UNC-Chapel Hill came to
the same conclusion.
Findings in Commerce’s study on job creation and worker training
bear that out.
A county’s economic status, ranked by the state in five tiers, is
the determining factor in apportioning the size of the tax credits a
company will receive in exchange for its investment. For example,
businesses that expand or locate in the state’s most affluent, or
Tier 5, counties, receive relatively small tax credits compared to
those in the most economically distressed, or Tier 1, counties.
Commerce’s study re-examined the tier system, which takes into
account population growth, a three-year average unemployment rate and
a three-year average per capita income.
From 1997 to 1999, 24 businesses in the state generated $2.7 million
in worker credit training — less than 1 percent of all credits
generated over the three years. Most of those credits — 35 percent
— went to Tier 4 and 5 counties, those that are the least
economically distressed. Tier 1 and 2 businesses generated 7 percent,
and Tier 3 businesses 8 percent.
But Tier 1 companies generated the most worker training tax credits
per capita.
Likewise, businesses in the lower tier counties seem to be qualifying
for and receiving comparably larger shares of the job creation tax
credit.
Tier 5 businesses generated 37.5 percent of the jobs during the
three-year period, while Tier 1 counties generated just 4.7 percent.
But between 1998 and 1999, Tier 1 companies generated tax credits
totaling $38.20 per capita and claimed tax credits totaling $2.02 per
capita. Companies in Tier 5 showed the lowest expenditures compared to
the population, generating $1.32 per capita and claiming 74 cents per
capita.
Fain says that although more credits go to companies in Tier 5
counties, critics should remember that those areas are in direct
competition with places like the Silicon Valley, Boston and Austin,
Texas.
“I think that generally speaking, people want all of North Carolina
to be successful, and there’s an understanding that Tiers 4 and 5
have perhaps the fiercest competition,” he says.
Greener Pastures
Meanwhile, another study completed for Commerce by Ernst & Young
shows that incentives are juicier in other states and draw away
business from North Carolina.
They compared North Carolina’s incentives with those of six other
states– Georgia, South Carolina, Alabama, Virginia, Tennessee and
Kentucky. Ernst & Young compared tax rates and factored in
exemptions available in each state for sample clients: an auto
components manufacturer, a chemical manufacturer, an information
technology manufacturer, a transportation equipment manufacturer and a
data processing company.
Results showed that North Carolina consistently ranked last or nearly
last in overall incentive value over a one-, five- and 10-year period.
They also found that certain industries like data processing were
ineligible for benefits, because the industry did not meet wage
requirements for the county it had chosen.
In addition, North Carolina does not provide discretionary grants for
infrastructure across most localities. Alabama and South Carolina
provide such incentives to most qualifying companies.
And companies investing in North Carolina must take their incentive
over four- and seven-year periods, with the limitation that only 50
percent of the income can be offset. Other states’ incentives, such
as Alabama’s Capital Credit, which offers a 100 percent return on
investment over a 20-year period, reduce a company’s operating
expenses in the early years of a project.
But Starner at Site Selection magazine is quick to point out that
although North Carolina “lags behind” its competitors in incentive
programs, “no one even comes close” to the state in the number of
new corporate facilities and expansion of corporate facilities during
the past three years. Alabama, for example, with all of its
incentives, drew 553 projects compared to North Carolina’s 2,438,
Starner says.
“North Carolina has a strong base of industrial manufacturing, which
contributes to its economy. And you have to look at
Raleigh-Durham-Chapel Hill as a driver for the state’s economy with
its high-tech companies. Local and regional economies have far more to
do with expansion than state programs,” Starner says.
He says North Carolina’s attractiveness to people who want to
relocate also ultimately helps business expansion.
“Population growth for the state has been so pervasive that only
three of 100 counties posted a population loss during the 1990s.
Charlotte and Research Triangle Park accounted for half of the
population growth in the last census.”
Fain notes that the state wants to help counties develop the products
that will help gain industry, such as workforce development and sites.
Commerce is working on a program that would take various state
resources and make them available to counties, “assuming the county
wants to engage with us.”
“This is not a one-size-fits-all process,” he says. “It’s hard
work, figuring out what’s working and what’s not. We need to get
about the business of putting plans and resources in place.”
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