Capital goods - July 2011

Incentives to win
By Scott Mooneyham

It wasn’t happenstance. Gov. Beverly Perdue, delivering her State of the State address to the General Assembly back in February, recognized a company and its CEO, who stood in the House gallery. Gordon Jones of Clearwater Paper Corp. had announced the previous summer that the Spokane, Wash.-based company will build a tissue-paper plant in Cleveland County. “We used every tool in the toolbox to convince companies that the Tar Heel State deserves our reputation as the best place in the nation to do business,” Perdue said.

By tools, she mostly meant business-recruiting incentives. To lure Clearwater, the state offered a Jobs Development Investment Grant, based on the plant’s projected payroll taxes, worth up to $3.48 million, and $500,000 from the One North Carolina Fund, sometimes called the governor’s “walking-around money.” Golden LEAF, the nonprofit that gets half the state’s proceeds from the national tobacco settlement, ponied up $3 million, most of it for job training.

At the time, Perdue and the new Republican leaders of the General Assembly were engaged in a fight, the first of many to come, over the budget. Legislators wanted to direct her to where they felt she could find some savings, and that included incentive funds. She responded by uttering the four-letter word no politician can resist: jobs. That might explain why they have left the state’s package of grants, tax breaks and other recruiting inducements untouched. (She won that skirmish, by the way, vetoing the bill and forcing Republicans to let her decide where best to search for state government’s loose change. But she lost the battle when the Republicans rallied a handful of Democrats to override her veto of the final budget bill.)

Not so long ago, the nearly monolithic legislative support for incentives seemed to be cracking as more Republicans began voting against packages and GOP candidates for governor criticized them. Chucking rocks from the back row is easy, but once Republicans won control of the legislature, criticism wasn’t enough. They needed to figure out something better.

There has been no serious attempt to rein in incentives or even call for a study of how the state compares with its neighbors these days, much less how effective something as relatively new as JDIG has been. A few bills were filed to restrict or even eliminate incentives for the film industry, but they appear to have about as much support as opening prisons or shuttering public schools. A provision tucked into the budget bill required a bit more detail of annual incentives reporting by the N.C. Department of Commerce. JDIG took a hit in the budget, but its writers gave Perdue more One North Carolina money.

Just a year earlier, Rep. Johnathan Rhyne, the Lincolnton Republican who now co-chairs three key committees, proclaimed on the House floor: “We’re simply prostituting the state of North Carolina for these big corporations.” That kind of rhetoric grabs people’s attention.  Senate President Pro Tempore Phil Berger, one of the more vocal critics of film incentives, isn’t convinced that the sentiment, if growing in recent years, is widespread just yet. Although the most powerful person in the upper chamber, he has only one vote on the chamber floor. “We operate within the confines of a representative democracy,” he says. “My personal position has not really changed. I am understanding of what can be achieved.”

The state’s most vocal incentives critic, former N.C. Supreme Court Justice Bob Orr, believes it’s tough for any politician to tackle the issue while the economy is still struggling. Orr, who made his opposition to incentives a key plank in his unsuccessful bid for the Republican gubernatorial nomination in 2008, says those who dislike inducements won’t scale back or drop them without some other job-growth strategy.

Orr, who heads the conservative North Carolina Institute for Constitutional Law, offers a couple of predictions: One, incentives reform will gain traction as more people recognize that tax breaks for some put added taxing pressure on others; two, incentives reform would ultimately be tied to larger tax reform. “You have to give them some time to focus on some reforms,” he says. “How do we still grow jobs, but how do we do it in a more cost-effective manner?”

Even the critics may have a little nagging worry. In the absence of nothing else, what if Perdue is right? What if instead of holding up examples of success, she waves around evidence of failure after legislators pluck away her “tools.” Picking winners and losers in business might offend the philosophical sensibilities of some Republicans, but it beats having to pick up the phone to make a congratulatory call to a rival on election night.

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.