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Business subsidies: Expansion with no new accountability

Posted on August 7, 2008 by Staff

Elaine Mejia

During the mad rush that was the last few weeks of the recently adjourned legislative session, one bill was passed easily and quietly that should have drawn dissent and jeers. Lawmakers quietly and overwhelmingly continued their policy of aggressively pursuing large corporations by offering them tens of millions of dollars to expand in or relocate to North Carolina. More specifically, in the last few days of the legislative session lawmakers significantly expanded the Job Development Investment Grant Program, or JDIG.

JDIG was originally created in 2002 and it is the state’s most generous program for luring (i.e., bribing) large corporations. The program authorizes state government to give cash grants to corporations who expand in or relocate to North Carolina. Gone are the days when simply reducing a corporation’s tax bill would do (although North Carolina still does lots of that too). These days nothing short of cash-on-the-barrel-head will suffice, and that’s what JDIG does.

Last fall, state lawmakers came under intense scrutiny when they passed a bill that gave Goodyear Tire’s Fayetteville plant and Bridgestone-Firestone in Wilson tens of millions of dollars — not to expand their North Carolina operations but to merely maintain the current workforce. Back then, state lawmakers made bold promises to study the issue further and look for ways to keep this type of spending in check and hold the state’s incentive programs accountable. In fact, there is currently a legislative study commission looking at the issue of business subsides.

Instead of waiting for the recommendations from this committee due out later this year, legislators quickly went along with the Department of Commerce’s request to increase the maximum annual cost of the new JDIG grants the state enters into from $15 million to $25 million per year. Keep in mind that many of these sweetheart deals offered to specific corporations can last for more than 10 years. So the corporations with whom the state makes deals this year will be getting checks drafted from the state’s bank account for up to $25 million per year for 10 years.

Here are a few key facts that you should know about the JDIG program. Cash grants are awarded for up to 25 new companies per year and the agreements can last up to 12 years. For those companies, the state can pay no more than $25 million per year. The grants are awarded by the Economic Investment Committee, which is made up of the secretaries of Commerce and Revenue, the director of the State Budget Office and two citizens appointed by the General Assembly. The maximum award that can be given to any corporation is capped at 75 percent of the income tax withholdings of the new employees. Finally, there is no minimum-wage requirement for jobs in the most distressed one-third of the state’s counties. Most of the new jobs subsidized through this program pay less than $40,000 per year. According to research by the Budget & Tax Center, a family of four needs to earn just over $41,000 annually to meet a basic family budget.

There are a number of reasons to suspect that this program is not sufficiently accountable to taxpayers. For one, the methodology the state uses to determine how much it can offer to specific corporations and make sure the deal is not a financial net loss to the state is flawed, primarily because it relies on shaky long-term projections about a particular company’s sales. This formula leaves the state vulnerable to “overbidding” for jobs. Another problem is that too many of the grants are awarded to companies locating in the urban, more prosperous regions of the state and too few are awarded to companies in distressed areas. Companies in Wake, Mecklenburg, Guilford and Durham counties have been awarded the most grants so far.

The legislative study committee looking into these two issues and many more has hired researchers from the university system to assist them. Too bad most state lawmakers didn’t wait for these experts to finish their work before they committed the state to an additional $120 million over 12 years. Let’s hope that’s not a sign of how the committee’s ultimate recommendations will be received.

Elaine Mejia is the director of the N.C. Budget and Tax Center.

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