Fact Sheet on H 4478: The S.C. Economic Development Competitiveness Act of 2010

Sponsored by House Speaker Bobby Harrell and 108 other representatives, the Economic Development Competitiveness Act is the product of Speaker Harrell’s economic development working group. This 49-page bill combines a few good ideas with several bad ones. Paramount among the good ideas is the elimination of the corporate income tax. But this is clearly the sweetener being used to force down the bitter pill of more government-driven economic development.

 

The good ideas are as follows:

 

Eliminating the corporate income tax. Although the corporate income tax accounts for only about 6 percent of annual General Fund revenue, it has high compliance costs and reduces wages for workers. Eliminating this tax would send the message that the state wants to create a competitive tax environment for all corporations. That being said, very few firms actually pay the corporate tax (for 2008, 556 filers accounted for 84 percent of revenue). Reducing the personal income tax rate on non-corporate filers by a corresponding amount (cf. § 12-6-545) would lead to the creation of even more jobs.

 

Encouraging nuclear energy. In itself, encouraging nuclear energy production is a good idea, but one that should be left to private investors operating under federal oversight. H 4478 would provide for fee-in-lieu-of-tax incentives on real and personal property associated with a qualified nuclear plant (§ 6, 27). However, even billions in federal aid have done little to prop up a poorly run industry plagued by cost overruns, ratepayer revolts and safety questions. In short, nuclear is the Amtrak of alternative energy.

 

Also of note … Clarifying that leased (subcontracted) and part-time employees do not count for the purposes of job development credits (§12); requiring recipients of enterprise zone tax credits to provide comprehensive health care and pay hourly wages that meet or exceed state per capita income levels (§ 13); suspending job development credits for failing to meet minimum requirements (§ 15); capping job development credits (§ 15); reducing economic impact zone community development tax credits (while expanding the applicability of the credits) (§ 18).

 

These are the bad ideas:

 

Expanding the scope of government-driven economic development. H 4478 presumes that state-driven economic development is a fait accompli – and, under the current legislative leadership, that may very well be the case. Of particular note are amendments to the tax code, in particular regarding job tax credits, as well as changes to the Enterprise Zone Act (EZA) of 1995 and the Economic Impact Zone Community Development Act of 1995. Changes to the latter are particularly important in that they broaden applicable income tax credits to include all qualifying manufacturing and productive equipment property – as opposed to just investments in communities affected by military base closures (§ 17-18; 31). In other words, H 4478 essentially eliminates economic impact zones by extending the applicable tax credits statewide. Of course, the better option would be to simply lower the state’s 10.5 percent manufacturing property tax.

 

Expanding the power of the Ports Authority: Last session the General Assembly effectively eliminated gubernatorial oversight over the Ports Authority. This bill would expand the authority’s influence in allocating tax credits to port users and permits the authority to recommend annual awards of up to $1 million for new investments. H 4478 also removes a $1 million annual cap on port incentives (§11). Traffic at the port has reportedly declined by 37 percent over the past 5 years. Instead of incentives, why not follow other states, such as Maryland (and possibly Virginia), that are privatizing ports?

 

Creating new ways to run up state and local debt: The federal stimulus bill permits states (on behalf of localities) to issue two new types of bonds: recovery zone facility bonds and recovery zone economic development bonds. The facility bonds are to be used to subsidize a wide array of private ventures (or, at least, more than currently envisioned by state law) while the economic development bonds are dedicated to funding government programs, such as job training or green energy projects. With federal taxpayers subsidizing 45 percent of the interest payments, state lawmakers are trying to get their cut of the action – though not every locality is eligible. A new committee, headed by the state treasurer, would manage allocation of the bonds (§ 8.A).

 

Allocating more money for failed renewable energy programs: H 4478 also expands enterprise zone credits to manufacturers of solar and wind turbine equipment, as well as manufacturers of batteries for alternative energy motor vehicles (read: hydrogen) (§ 19-22). Such manufacturers are also eligible for a 20 percent depreciation allowance (§ 25). These giveaways are in addition to a new solar power tax credit passed in the FY09-2010 budget, not to mention more than $40 million of tax dollars spent on failed hydrogen projects.

 

Also of note … Giving the Commerce Department power to circumvent the Centers of Excellence Matching Endowment review process (§ 2); increasing from 20 to 30 years fee-in-lieu-of-property-tax agreements (§ 4); expanding the use of special source revenue (fee-in-lieu-of-tax) bonds to pay for personal property (§ 7); doubling maximum job development credits in select cases (§ 15); expanding qualified expenditures for job development credits to include personal property and employee relocation expenses (§ 15); exclusive allocation of Rural Infrastructure Fund dollars for economic development activities and expanding the definition of such activities (§ 16); clarifying terms related to corporate license credits for utilities and other businesses (§ 23); providing guidance regarding eligible expenditures from the $18 million Economic Development Fund controlled by the Coordinating Council for Economic Development (§ 24); potentially expanding select manufacturing property tax breaks (§ 26).

 

What about independent business?

As indicated above, H 4478 does not extend an equivalent personal income tax cut to businesses that do not pay the corporate income tax. The bill, though, does provide for an apparently universal income tax credit for qualified manufacturing and productive equipment property. Again, though, a better option would be to reduce the state’s highest-in-the-nation effective manufacturing property tax rate. Apart from a few select giveaways (e.g., for alternative energy producers), the primary purpose of the bill is to codify the state’s role in economic development.

 

What’s next?

Needless to say, H 4778 enjoys significant support in the House and should have an easy time passing that body. Already, the bill has passed out of a Ways & Means subcommittee with no discussion whatsoever and will likely pass out of full committee today. The bill may slow down some in the Senate, but it will be difficult for legislators to vote against a so-called jobs bill that also eliminates the dreaded corporate income tax. The problem is that state-driven economics doesn’t create jobs or prosperity. If it did, we’d have more to show for shelling out more than $1 billion in incentives over the past 10 years. The alternative to more economic development programs is to make the entire state a free-market development zone by lowering taxes, reducing regulatory burdens and cutting spending.

 

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