Business North Carolina magazine's David Mildenberg recently spoke to Nexsen Pruet attorney, Ernie Pearson, for his insight on how North Carolina can compete with the region to win large economic development projects. This article was originally published on July 9, 2017 and can be viewed here.
Want a big manufacturing plant in your state? All it takes are acceptable sites and a willingness to engage.
That’s the secret sauce that will enable North Carolina to finally land a large manufacturer, says Ernie Pearson, a former N.C. Department of Commerce executive who now works at the Nexsen Pruet law firm in Raleigh.
And for the first time, North Carolina is ready to “engage,” which is fancy talk for providing large amounts of tax incentives.
For decades, North Carolina hasn’t offered competitive deals to match South Carolina, Alabama and other states vying for big automakers or semiconductor companies, or other mega plants. That changed with passage of the state budget in June, which included a clause marking a historic change in state policy.
Job Development Incentive Grants have historically been limited to 75% of state income-tax withholdings on all employees of the target company for up to 12 years.
Now, North Carolina will hand back 100% of state tax withholdings for up to 25 years — provided the company invests at least $4 billion and creates at least 5,000 jobs.
Here’s an example of what that could mean: Say Acme Auto Company hires 5,000 people with an average wage of $50,000, who each pay a 4% state income tax (a conservative estimate), or $2,000 annually. Multiply 5,000 workers times $2,000 a year for 25 years, and Acme is in line for $250 million.
Now, that’s in the ballpark of what others offer.
To put that in perspective, the state pledged $96.5 million in grants to 15 companies in 2015, according to a state report Insulin maker Novo Nordisk and investment giant Fidelity each received pledges of about $20 million. Last year, the state pledged $69 million to 17 companies.
Of course, “transformative projects” with investments topping $4 billion and 5,000 jobs are rarities. But Pearson predicts that a company planning something slightly smaller — say $3 billion and 3,500 jobs — could probably prompt the General Assembly to modify the rules.
Mercedes-Benz received about $200 million (or $300 million adjusted for inflation) in incentives to put a plant in Alabama, besting North Carolina, says Pearson, who was then working in state government. He then questioned if ‘Bama could ever get a return. Now, 20 years after its opening, he thinks it was a wise investment because other suppliers have set up shop near the plant, along with all of the indirect benefits from the manufacturer itself.
Given North Carolina’s consistently high rankings for corporate relocations and startups, and the state’s rebound from the rough 2007-09 recession, it’s easy to question the need for lavish incentives — the “corporate welfare” argument.
But that debate didn’t really happen because the clause was a tiny part of a massive, complex budget bill. And like Republicans in Congress trying to replace Obamacare, Republicans in Raleigh wanted this change without a lot of attention. It worked in North Carolina, less so in Washington, D.C.
Bottom line: “The state has crossed a very important threshold for these types of projects,” Pearson says.