NC is awarding companies significantly fewer incentives this year. How come?

So far in 2023, North Carolina is on pace to award fewer major economic incentives than it has in years to help grow or recruit companies.

Since Jan. 1, the North Carolina Department of Commerce has approved job development investment grants, known as JDIGs, to nine businesses, including a Finnish producer of electric vehicle chargers, the German company Siemens Mobility, and Auction Direct USA. Yet this year’s total is poised to fall well below the grant levels the state gave in 2022 (28), 2021 (32), 2020 (27), and 2019 (28).

In fact, North Carolina hasn’t awarded fewer than 20 JDIGs in a year since 2016, according to an Oct. 1 Commerce Department report. The last time the state issued under 12 JDIGs in a year — its current 2023 pace — was 2005.

The cause of this decline is external, said N.C. Commerce Department spokesperson David Rhoades.

“Our JDIG approval process has no bearing on the volume of grants approved this year,” he wrote in an email. Instead, Rhoades said, the smaller 2023 total “is more a factor of macro factors in the nation’s economy.”

Higher interest rates have led many employers to scale back from recent hiring sprees, including with layoffs. Rhoades noted JDIG deployments over the previous two years “were absolutely extraordinary, the best on record in fact.”

Job development investment grants are North Carolina’s largest incentive program, but it’s not the only taxpayer-backed incentive to have dropped this year. The One North Carolina Fund, which enables the governor to make cash grants to attract job creators, has approved 11 projects so far in 2023 compared to more than 25 in each of the previous four years.

The Economic Development Partnership of North Carolina (EDPNC), which helps recruit large employers to either move into or expand within the state, referred The News & Observer to the Commerce Department to discuss the reasons behind the lower incentive totals.

Some neighboring states have also greenlit fewer incentive projects this year. The South Carolina Coordinating Council for Economic Development told The N&O it has approved discretionary grants on par with 2020 levels, but below 2021 and 2022 totals. And data from Virginia shows the state last year awarded 15 grants through its Commonwealth Development Opportunity Fund, which is similar to the One North Carolina Fund. So far in 2023, Virginia has only approved six.

The NC incentive program at 20: Hits and misses

This year marks the 20th anniversary of the JDIG program. Since 2003, the Commerce Department has approved 406 projects and disbursed $489.5 million to create 61,228 new jobs. This equates to approximately $8,000 spent per job.

The Oct. 1 report found JDIGs have also helped the state retain 140,441 jobs.

“It’s working as designed,” Rhoades said of the program.

JDIG benefits are largely realized through payroll tax rebates, with companies only getting tax breaks after they’ve met certain annual hiring thresholds mutually agreed upon with the state.

In recent years, North Carolina has dangled tax breaks to lure sizable employers: Apple in Wake County (3,000 promised jobs), VinFast in Chatham County (7,500 jobs), Wolfspeed in Chatham (1,800 jobs), Toyota in Randolph County (2,100 jobs), and Boom Supersonic at the Greensboro airport (1,750 jobs.)

The largest 2023 project — in terms of job creation — is Siemens Mobility, which in March pledged to bring 455 jobs to a passenger rail vehicle manufacturing plant in Davidson County.

However, most JDIG projects historically don’t meet their initial job-creation or investment goals.

Since 2003, more than one in five JDIG projects (92) ended before any taxpayer money went to grant recipients. An additional 91 grants terminated early with some public funds allocated after recipient companies created or retained some jobs.

Of the 406 JDIGs North Carolina has issued over the past two decades, 42 reached their full hiring and investment goals while 181 remain active, meaning these companies could still meet their original targets. The Oct. 1 report noted the average term for this grant is more than 10 years.

The man who made the incentive model

But if the past is an indication, many of these active projects will fall short of their initial publicly stated goals.

In 2017, for example, eight of that year’s 16 approved grants remain active and the other eight have already terminated early. Fitting into this latter group is Allstate, which in July asked the Commerce Department to terminate its job development investment grant after the insurance giant created zero of its promised 2,250 new jobs in Charlotte.

Allstate could have received $17.8 million had it reached its grant commitments. Public data shows the project, an operations center, did receive nearly $1.5 million in local government cash grants.

In a 2022 interview with The N&O, former North Carolina Commerce Secretary Tony Copeland said he believes most companies enter incentive agreements “in good faith” but that unforeseen factors over the lifetime of a grant — like recessions or leadership changes — may interrupt their plans.

Because payroll tax breaks are tied to hiring, state officials often posit the JDIG program has a “no harm, no foul” safety blanket: If a company meets some or all of its hiring goals, that’s a benefit. If it creates no jobs, no state incentives will be given.

“The data mostly shows that new jobs and investment have come to the state that otherwise wouldn’t have,” Rhoades said.

North Carolina can also “claw back” money if a company discontinues operations at a site; since 2003, the state has retrieved $4.5 million “due to lack of performance by companies,” the annual Oct. 1 report found.

Building a backstop into the JDIG program was important from the start, said Michael Walden, a retired North Carolina State University economist who designed a set of formulas, called the Walden Model, that the state has used to calculate every JDIG since the program’s inception.

“If the state was going to provide incentives, there had to be some assurance that it would still come out ahead,” Walden said.

Keeping up with other states

John Quinterno, a visiting professor at the Duke University Sanford School of Public Policy, believes other states’ use of corporate incentives may make North Carolina officials feel they must retain their own.

“As long as everybody else has these things in their toolbox, (their thinking is) we can’t get rid of ours,” he said.

A critic of corporate incentives, Quinterno remembers tracking the JDIG program in the mid-2000s when he worked as a research associate at the North Carolina Budget and Tax Center.

He says he’s surprised the incentive model — while still controversial to some — is not more of a policy lighting rod.

“When this first came up 20 years ago, this was very contested politically,” he said. “Now, everybody just kind of accepts it on both sides of the aisle. And I don’t really know if that’s a good thing.”

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