news-record.com

RALEIGH (AP) - North Carolina should drop some business tax credits that began in the 1990s because they no longer create jobs, and the state should give more cash grants and lower the corporate tax rate, according to a university report released Tuesday.

The recommendations from the University of North Carolina Center for Competitive Economies were offered to a legislative committee. The report says credits for companies that invest in research and development should remain in place because they are best linked with job growth.

The study was based on the center's review of tax returns and other state records for thousands of companies - documents the Legislature gave special permission for the UNC-Chapel Hill business school organization to examine.

"The incentives that worked well 10 years ago are not performing as well today and suggests that the portfolio should be reallocated to capture higher returns and changing (to) the types of incentives that we use," center director Brent Lane told the Joint Select Committee on Economic Development Incentives.

North Carolina also should lower its corporate income tax rate from 6.9 percent to 6.5 percent so it will no longer be the highest rate in the Southeast, the report said. A UNC survey found that executives preferred the lower rate to targeted incentives.

The reduction would cost at least $56 million annually, but the report said that could be made up through the potential $574 million in savings between 2010 and 2015 if incentives previously under the state's William S. Lee Act were eliminated rather than extended this year.

Those credits have been upstaged in recent years as former Gov. Mike Easley and lawmakers favored using cash grants or tax withholding rebates to lure new industries or expand existing companies.

Incentives through Easley's Job Development Investment Grants and the One North Carolina Fund are flexible and can better target emerging industries like biotechnology even when the firms aren't yet making a profit. Incentives packages for Dell, Google and Mack Trucks have included JDIG grants.

Companies created jobs and made capital and training investments that generated the potential for $2 billion in Lee Act credits from 1996 through 2006, although only $632 million in credits were taken, the report said.

The Lee Act gave tax breaks for companies for each job created in a handful of industries and if they bought machinery. Credits of $10,000 per job went to companies in the state's poorest counties.

The law was changed in 2006 to boost credit amounts in more economically distressed areas to $12,500 per job and to eliminate seldom-used credits. The credits are now referred as "Article 3J" credits, a reference to its location in the statutes.

The report, which reviewed more than 1,200 companies that received the credits, said the credits worked well in the 1990s by giving the firms a slightly higher employment growth rate than those that didn't get the credits. But the gap has been narrowed. And the average employment for companies that received machinery and equipment tax incentives in 2004 has actually declined, the report said.

Rep. Pryor Gibson, D-Anson, a committee member, said the report doesn't analyze the credits since the 2006 changes.

"Tell me how you can say '3J' is mature enough to say it needs to be canned already?" Gibson asked Lane, who responded that the credits in the two laws are essentially the same.

The committee will make its recommendations to the full Legislature next week. The report may attract an unusual coalition of liberals and conservatives that have never liked targeted tax incentives when the Legislature reconvenes Jan. 28.

"Those who have philosophical problems with economic incentives based on a fairness issue might find it more palatable to look at lowering tax rates rather than having special incentives," said Rep. Jennifer Weiss, D-Wake, a committee co-chairwoman. But reducing the tax rate may be difficult as long as revenues are needed to narrow the budget shortfall, she said.

Keith Crisco, Gov. Bev Perdue's new commerce secretary, attended the meetings but declined to say whether the administration wanted changes.

"We need to base our decision on good, sound research," Crisco said.