If the legislature offers a tax credit to insurance companies that invest in venture capital but caps the total credit so that only the first companies to claim it get it, is the cap constitutional under the uniformity clause?

Plain-English summary

Representative Michael Wilkins had sponsored the CAPCO bill in the 1995 session, a proposal to give insurance companies a credit against their premiums tax for investing in certified venture capital companies. Wilkins was concerned that the eventual credit volume might exceed the legislature's budget appetite. He proposed adding a cap: the first companies to make qualifying investments would get the credit, and once the cap was reached, no further credits would be issued. He asked the AG whether the first-come-first-served structure was constitutional.

Chief Deputy AG Andrew Vanore, for AG Easley, said probably yes.

The constitutional concern is the uniformity clause in NC Const. Art. V, § 2 and the federal Equal Protection Clause. Both require that taxpayers similarly situated be treated similarly. Hajoca Corp. v. Clayton, 277 N.C. 560 (1970), defines uniformity as "equality in the burden of taxation," in "the mode of assessment, as well as in the rate of taxation." If two insurance companies make identical qualifying investments but only one gets the credit because the other filed its return a few weeks later after the cap was reached, the differential treatment looks like a uniformity problem.

Vanore identified two layers of defense for the cap:

1. The insurance premiums tax may not be covered by the uniformity clause. Assurance Co. v. Gold (1958) held that the uniformity rule applies to taxes on property, professions, franchises, and incomes. The premiums tax is technically a "license tax" measured by gross premiums, which might fall outside the listed categories. If the premiums tax is not subject to uniformity, then the cap is constitutionally fine regardless of the analytical merits.

2. Even if uniformity applies, the cap is reasonable. All eligible taxpayers have notice of the cap when they decide whether and when to invest. They have equal opportunity to comply with the statutory conditions and file their returns promptly. The legislature has authority to impose conditions on tax-relief measures, citing Ward v. Clayton, 5 N.C. App. 53 (1969). The strong presumption of constitutionality means a court would uphold the cap unless the challenger could overcome the presumption with a substantial showing.

Vanore's bottom line: "Although allocating a credit upon a first-come basis is unusual, we believe that ultimately the State would probably prevail against a 'uniformity' challenge raised in this context."

He flagged one important limit: the analysis might come out differently for a pure income tax. Income taxes are annual, computed on full-year results, and apply to the income earned during the year. A first-come-first-served cap on an income tax credit would conflict with the annual-accounting structure: companies that earned identical income in a given year would get different treatment based on filing speed, which is harder to justify. The premiums tax is different (some taxpayers pay quarterly, some annually, and the credit is keyed to investments rather than to annual income), so the cap can attach more comfortably.

The opinion is a cautious, "likely-survives" green light. Vanore explicitly says "only the judiciary can ultimately resolve constitutional issues." The legislature can proceed with the cap, knowing that a challenge is possible and that the AG's confidence is moderate rather than high.

Currency note

This opinion was issued in 1997. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. North Carolina's CAPCO program had a complex post-1997 history; some states' CAPCO programs were ultimately criticized and modified. The insurance premiums tax statutes in Chapter 105 have been amended multiple times. The uniformity clause analysis under Hajoca and Assurance Co. remains the doctrinal framework, but anyone considering a current first-come-first-served tax credit cap should consult current case law and any subsequent AG opinions on the same issue.

Background and statutory framework

The CAPCO (Certified Capital Company) model originated in Louisiana in the 1980s as a way to direct insurance industry capital into state-based venture capital companies. The basic structure: an insurance company invests in a CAPCO; the CAPCO must then invest in qualifying small businesses within the state; the insurance company gets a credit against its state premiums tax for the amount invested. CAPCO programs spread to about a dozen states over the 1990s and 2000s.

The 1995 NC proposal that Wilkins had sponsored followed this model. Insurance companies that invested in qualifying NC venture capital companies would get a credit against their premiums tax under NCGS 105-228.5. The credit amount would equal the qualifying investment.

The problem was that there was no obvious limit on aggregate investments. If the General Assembly wanted to control state revenue exposure (the credit reduces premiums tax revenue), it needed to cap the program. A cap can take various forms: annual cap, lifetime cap, per-taxpayer cap, or first-come-first-served cap. Wilkins picked first-come-first-served, presumably to incentivize early investment.

The constitutional analysis depends on the structure of the underlying tax. NC Const. Art. V, § 2 requires uniformity for taxes on property, professions, franchises, and incomes. The premiums tax under NCGS 105-228.5 is a license tax measured by gross premiums. Whether that counts as a "franchise" tax or as something outside the uniformity list is unsettled doctrine. Assurance Co. v. Gold (1958) recited the uniformity-covered categories without expressly addressing where premiums taxes fit. Vanore takes a cautious position: the State could argue that the premiums tax is outside the uniformity clause, but in case that argument loses, the cap is also defensible on the merits.

The Equal Protection Clause analysis is essentially identical. Hajoca observed that "the requirements of 'uniformity,' 'equal protection,' and 'due process,' are, for all practical purposes, the same under both the State and Federal Constitutions." So the analysis covers both constitutional grounds.

The argument that the cap is reasonable rests on two pillars. First, notice: all insurance companies have the same statutory text in front of them and the same opportunity to file promptly. Differential outcomes are a function of company-level filing speed, not of arbitrary state-level discrimination. Second, legislative authority: courts have allowed the legislature to attach conditions to tax relief, including waiting periods, filing deadlines, and pre-approval requirements. Ward v. Clayton is the touchstone. A first-come-first-served cap is one more legislative condition.

The opinion's flag about pure income taxes is significant. Income taxes have an annual accounting structure: all income for the year is measured at year-end, and the tax is calculated on the totals. A first-come-first-served cap on an income tax credit would create perverse incentives (file early on partial-year data, or wait and lose the credit) and would likely fail uniformity scrutiny. Premiums taxes are different in structure, so the cap has more constitutional room.

Common questions

What's a "CAPCO" credit?

A Certified Capital Company tax credit. The structure: a state certifies certain venture capital companies as CAPCOs; insurance companies (or other large taxpayers) invest in a CAPCO; the investor gets a tax credit equal to the investment; the CAPCO must then deploy the capital into qualifying small businesses in the state. The model was used in about a dozen states from the 1980s through the 2000s. It has been criticized for high effective subsidies relative to actual job creation and capital deployment outcomes.

Could the cap be challenged as arbitrary?

Yes. A company that invested on December 15 and filed promptly might get the credit, while a company that invested the same day and filed a week later might miss the cap. That is the structural complaint a challenger would raise. The AG's answer is that all companies have equal opportunity to file promptly, and the differential is a function of their own choice of filing speed, not of state discrimination.

Does the opinion approve the underlying CAPCO program?

No. The opinion is narrow to the cap question. The CAPCO program itself was the subject of substantial 1995 legislative debate. The AG opinion takes no position on whether the credit is good policy.

What if the cap were a per-company cap rather than first-come-first-served?

That would likely be even more defensible. A per-company cap (each insurer can claim up to $X) is symmetric, predictable, and does not depend on filing speed. First-come-first-served is the harder case because it creates differential treatment for similarly situated taxpayers based on timing rather than substance. The AG opinion's "probably constitutional" assessment turns on the Ward v. Clayton line allowing legislative conditions; a more symmetric cap would not need that defense.

Has NC enacted a CAPCO with first-come-first-served caps since 1997?

The opinion treats the 1995 CAPCO bill as a proposal. North Carolina's actual CAPCO history is mixed; some legislative proposals advanced, others did not. Anyone working on a current CAPCO or analogous tax credit proposal should check current statutes and the post-1997 case law for any reported challenges.

Source

• Landing page: https://ncdoj.gov/opinions/constitutionality-of-insurance-premiums-tax-credit-allowed-upon-first-come-basis/

Citations

• N.C. Const. art. V, § 2
• N.C. Gen. Stat. §§ 105-228.3, 105-228.5, 105-228.10
• U.S. Const. amend. XIV
• Assurance Co. v. Gold, Comr. of Insurance, 249 N.C. 461, 103 S.E.2d 344 (1958)
• Hajoca Corp. v. Clayton, Comr. of Revenue, 277 N.C. 560, 178 S.E.2d 481 (1970)
• Ward v. Clayton, 5 N.C. App. 53, 167 S.E.2d 808 (1969), aff'd, 276 N.C. 411, 172 S.E.2d 531 (1970)

Original opinion text

March 6, 1997

Representative Michael S. Wilkins
North Carolina House of Representatives
Room 1220, Legislative Office Building
Raleigh, North Carolina 27601-2808

Re: Advisory Opinion; constitutionality of insurance premiums tax credit allowed upon "first come" basis; N.C. Constitution, Art. V, §2; G.S. 105-228.3, et seq.

Dear Representative Wilkins:

We understand from your recent letter that during the 1995 legislative session you were lead sponsor of the "CAPCO" bill, a proposal to grant premium tax credits to insurance companies for investments in certain qualified venture capital companies. Unsure as to the extent of the initial investments, and the amount of tax credit that might be claimed, you are considering adding to the bill a limiting provision as to the availability of the credit. Under the amendment, the first companies that make eligible investments receive the credit up to a maximum amount, and after that cap is met, no other companies will receive any credit.

In lieu of income taxes, G.S. 105-228.5 levies a license tax upon insurers measured by "gross premiums" derived from business conducted within North Carolina during the preceding calendar year. Smaller companies pay the tax annually, larger insurers, quarterly. As we understand the proposed credit, it will substantially rewrite present G.S. 105-228.10 to provide a credit against premiums taxes equal to the amount of qualifying capital invested during the taxable year.

Art. V, §2 of the North Carolina Constitution in essence provides that no class of property shall be taxed except by uniform rule, uniformly applicable throughout the state. The constitutional rule of uniformity applies to the taxation of property, professions, franchises and incomes. Assurance Co. v. Gold, Comr. of Insurance, 249 N.C. 461, 443, 103 S.E.2d 344 (1958). "Uniformity" implies "equality in the burden of taxation," in "the mode of assessment, as well as in the rate of taxation." Hajoca Corp. v. Clayton, Comr. of Revenue, 277 N.C. 560, 569, 178 S.E. 2d 481 (1970). "Equality within the class or for those of like station and condition is all that is required to meet the test of constitutionality. . . ." Id., p. 568.

If the credit is enacted with a first-come-first-served provision, it may be challenged by a taxpayer who made a qualifying investment but received no credit because the cap was reached before his return was processed. The plaintiff in such an action would claim that the credit statute unlawfully distinguishes between otherwise identical groups of taxpayers based only on the sequence in which they filed their tax returns. This result, plaintiff would contend, violates Art. V, § 2, of the North Carolina Constitution or the Equal Protection Clause of the U.S. Constitution. If the claim were grounded only on the state constitution, the State would contend that the license tax on insurance carriers is not among the taxes identified in Assurance Co. as being subject to the rule of uniformity. However, if this defense were rejected or if the plaintiff's claim were based on equal protection, the court would consider the merits of the uniformity issue. The substantive analysis would be the same regardless of the constitutional provision relied upon by the taxpayer. See Hajoca, supra at 569, noting that "the requirements of 'uniformity,' 'equal protection,' and 'due process,' are, for all practical purposes, the same under both the State and Federal Constitutions."

We believe the State could successfully defend a suit of this type by arguing that duly enacted legislation enjoys a strong presumption in favor of validity, Hajoca, supra, and that the plaintiff can make no showing to overcome that presumption. It would be the State's position that all taxpayers who are in a position to make qualifying investments are presumed to have notice of the statutory conditions associated with the credit and, therefore, have an equal opportunity to comply with those conditions and file their returns promptly. The State would further argue that the courts have long recognized the legislature's authority to impose conditions on measures relieving taxpayers of liability, Ward v. Clayton, 5 N.C. App. 53, 167 S.E.2d 808 (1969), aff'd., 276 N.C. 411, 172 S.E.2d 531 (1970), and that conditioning the availability of the credit on requesting it before the cap is reached is a reasonable legislative policy decision.

Of course, only the judiciary can ultimately resolve constitutional issues. Although allocating a credit upon a first-come basis is unusual, we believe that ultimately the State would probably prevail against a "uniformity" challenge raised in this context. Our opinion, however, might be otherwise if we were construing a pure income tax or similar levy that rested more directly upon an annual accounting.

Andrew A. Vanore, Jr.
Chief Deputy Attorney General