INCENTIVES FOR community ECONOMIC DEVELOPMENT

1. INCENTIVES FOR community ECONOMIC DEVELOPMENT By Marqueta welton

2. Economic development defined • The process of building strong, adaptive economies (National League of Cities / Center for Research and Innovation) • The sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area (Wikipedia) • The specific activities, programs, and tools aimed at:: • Increasing employment opportunities, wages, and personal incomes; • Attracting or creating private investment to expand a tax base; and • Increasing wealth in a community. (Jonathan Q. Morgan UNC SOG)

3. Economic development goal • The main goal of economic development is improving the economic well being of a community through efforts that entail job creation, job retention, tax base and quality of life enhancements. • Efforts to improve the quality of life for the people who live in a community

4. Strategy/policy • As there is no single definition for economic development, there is no single strategy or policy that guarantees successful economic development. • Communities differ in their geographic and political strengths and weaknesses. Consequently, each community will have a unique set of challenges for economic development.

5. 5 things that matter • Local economic strengths and weaknesses • Community’s economic development vision and goals and related strategy • Local economic development stakeholders, partners, staff and resources • Community’s regulatory environment and policies that affect economic development • Incentives

6. The role of incentives in economic development • Incentives are tools used to influence business decisions about where new investment will take place. • Financial v Non-Financial • Incentives rarely matter until the last few sites are being compared

7. Who provides incentives? • Federal agencies • State agencies • Regional organizations • Counties • Municipalities • Private entities • Public-private partnerships • Nonprofits

8. Types of incentives • Cash grant • Loan • Free land and/or building • Public utility rate break • Workforce training • Public infrastructure improvements • State development zones • Foreign Trade Zones (aka Free Trade Zones)

9. Tax based incentives • Tax Exemption • Property tax exemptions that are intended to promote economic development remove a class of property from the property tax base. (See G.S. 105-275 for examples.) • Tax Credit • A tax credit is a sum deducted from the total amount a taxpayer owes to the state. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors. • Tax Incremental Financing (TIF) • A public financing method to use future gains in taxes to subsidize current improvements, which are projected to create the conditions for said gain.

10. Tax based incentives cont’d • Tax Abatement • Reduction of or exemption from taxes granted by a government for a specific period, usually to encourage certain activities such as investment in capital equipment.. • Tax abatements are barred under the North Carolina constitution which reserves to the General Assembly the exclusive power to classify property for taxation and to exempt property from taxation. (Article V, Sections 2(2) and 2(3))

11. tax credits as incentives • Article 3J Tax Credits • Provide tax credits to qualifying businesses for job creation, investment in business property and in some cases investment in real property. • Interactive Digital Media Tax Credit • Provides tax credit for developing interactive digital media. • N.C. Ports Tax Credits • Provide tax credits toward income taxes paid by businesses or individuals using North Carolina Ports facilities at Morehead City and Wilmington. • Renewable Energy Tax Credits • Provide a tax credit of 35% of the cost of renewable energy property. • Technology Development (Article 3F) Tax Credits • Provide tax credits for qualified North Carolina research expenses during a taxable year.

12. Tax exemptions as Incentives • N.C. G. S. §105-275 • (33) Inventories owned by manufacturers. • (34) Inventories owned by retail and wholesale merchants. • (37) Poultry and livestock and feed used in the production of poultry and livestock. • (40) Computer software and any documentation related to the computer software.

13. Why are incentives necessary? • Because virtually every state in the country has an economic development program to recruit and retain industry. • Local jurisdictions vie for the same business as thousands of cities, towns and counties across the United States, and even more globally. • It is estimated annually that on average about 15,000 communities compete for roughly 1,500 industrial development projects nationally. (Economic Development Handbook, Jonathan Q. Morgan 2009)

14. Considerations in determining incentives • Presence of competition • Location of proposed facility • Headquarters • Capacity of available infrastructure • Schedule of construction • Sustainable design • Historic classified property • On-site child care • Corporate and social responsibility • Amount of new taxes projected • New Capital Investment • New Jobs • Estimated value and SF to be constructed • Estimated Costs of design and construction • Product or Service provided • Reputation of the company • Type of business relative to the tax base • Salaries corresponding to jobs • Health insurance

15. What Tax administrators need to know • Are there similar businesses in North Carolina? • What is the total building square footage by use – i.e. what square footage will be assigned for each purpose? • Will the project be a new construction or existing? If existing, what modifications will be done to the building? • Will there be a parking deck? If so, how many spaces? • What kind of equipment is involved? • How much is in computers? • Furniture and fixtures (F&F)? • Machinery and equipment (M&E)? • Is the business already using this type of equipment somewhere else? • Obtain as much detail about business operations as possible

16. Are we getting what we bargained for? • Potential Challenges • Promised investment is not met • Promised jobs are not delivered • Incremental revenues are less than the cost of incentives • Taxpayer appeals assessment • Company closes or relocates

17. Protections/recourse • Include benchmarks in investment grant agreement as conditions precedent to payment • Include provision in the agreement that limit payments to no more than the amount of ad valorem taxes paid • Include provision in the agreement that requires adjustment of the grant amount in the event the company appeals • Include a clawback requirement pursuant to N.C.G.S. § 158-7.1(h)

18. Questions?

19. Thank you! • Marqueta Welton • Deputy County Manager • Durham County Government • mwelton@durhamcountync.gov