Capital Goods - July 2009

The state’s core investment
By Scott Mooneyham

More than a decade ago, a writer for a national publication reported that businesses and governments were becoming “disillusioned with incentives.” Apparently her powers of prognostication weren’t preternatural when it came to North Carolina. More than ever, this state appears willing to hand out cash or refashion policy to induce major companies to build here.

The latest effort involves a $1 billion data center that Cupertino, Calif.-based Apple Inc. plans to build in the state. As of early June, the company hadn’t announced where but was thought to be considering a site near Hickory. To bring Apple here, Gov. Beverly Perdue and a majority of legislators were willing to rework the corporate tax code so that the company would enjoy a tax break worth $46 million over the next decade. That price might seem cheap when you consider that in 2004 state and local governments offered incentives worth as much as $280 million to Round Rock, Texas-based Dell Inc. to build a computer-assembly plant in Forsyth County. That plant, though, last year employed 1,400 (a figure Dell has trimmed since). When completed, the data center might never employ more than 50 workers.

The Apple project and the state incentives bring to mind a couple of parallels. In 1988, the state changed the corporate-tax formula to bring an RJR Nabisco cookie factory to Wake County. Back then, political leaders worried that adverse court decisions might undo incentive deals. To try to prevent that, they applied the change — double-weighting the sales part of the apportionment formula — to all companies paying corporate taxes. The effort didn’t end well. RJR Nabisco ultimately decided not to build.

This time around, the tax break is being accomplished by again changing the formula by which corporate income taxes are figured. There’s one key difference: The legislation is so tightly crafted around the size and type of investment that only Apple is likely to benefit. Even so, the inducement required rewriting the tax code rather than relying on the state’s inventory of cash grants and other industrial-recruiting incentives.

The server farm that Mountain View, Calif.-based Google Inc. is building in Caldwell County is the other project with parallels to Apple. As with Apple, the operation is light on jobs and heavy on investment. Google is expected eventually to invest more than $600 million and employ around 210 people. The state agreed to sales-tax breaks on electricity that some estimate could total $89 million over three decades. It also decided to provide a cash grant of $4.7 million. But late last year, the company announced that it would have to forego the cash because it couldn’t meet a requirement to create 200 jobs within four years.

The deal received some of the harshest criticism ever aimed at incentives, but not because of the state handout. Local governments, desperate for any jobs in the wake of losses in the furniture industry, agreed to forego all business-property tax and 80% of real-estate taxes for 30 years. In the eyes of critics, the local governments — facing the prospect of providing services to new workers and paying local schooling expenses for their children — had been fleeced.

With Apple, attention again will focus on local incentives. But as seen in the overwhelming votes in the state House and Senate, it’s tough to say no to a company that offers a chance at economic rebirth during these tough times, especially one with a name as glossy as Apple’s. Only a handful of conservative Republicans raised a ruckus as legislators debated the deal. “At least we know what our price is,” said Rep. Jonathan Rhyne of Lincoln County. “It’s a billion dollars.”

Some liberal Democrats who typically join with conservative Republicans to vote against these deals as corporate welfare didn’t this time. They explained their conversion by talking about wage guarantees and a nonbinding provision encouraging Apple to try to fill jobs from the local work force before bringing in outsiders. But a more likely reason is changing times. The economy is scarier than it has been in decades. “It is really bad for a lot of people in North Carolina,” Rep. Jennifer Weiss, a Wake County Democrat said, trying to justify her support of the package. She voted against both the Google and Dell deals.

In the current economy, maybe it isn’t a good time to be in the car business, the banking business or the newspaper business. Really, it’s not the best of times to be in just about any business. But it still seems a good time for companies to be in the incentives business.

Scott Mooneyham is the editor of The Insider,