Can a North Carolina town legally run a 'Business Development Investment' tax-rebate program that gives incentive grants to private companies to attract economic development?

Plain-English summary

The surviving portion of this opinion addresses Lexington's proposed Business Development Investment (BDI) Program. It asks whether the incentive grants serve a public purpose under G.S. § 158-7.1 and whether the proposed tax rebates satisfy the North Carolina Constitution's tax-uniformity rule. The stored text begins at question 1; the opening request is missing. Source

On public purpose, the AG said it could not evaluate the program without its grant-evaluation guidelines and criteria. The proposed program referred to guidelines to be established and basic criteria projects should meet, but neither had yet been developed in the text the AG reviewed. The opinion says those criteria "must satisfy the public purpose clause" and that, without knowing them, "we cannot evaluate whether the BDI Program satisfies" it. It imposes no publication requirement or express ban on approving a grant before criteria are adopted. Source

On tax uniformity, the AG said the proposed rebate scheme appeared to operate uniformly throughout Lexington, the affected taxing jurisdiction. It distinguished the sales-tax arrangement invalidated in Hajoca Corp. v. Clayton. With details of the BDI Program's actual impact still undeveloped, the opinion concluded only that the program "as presently structured would withstand a uniformity analysis." Source

Currency note

This opinion reflects a proposed program as described in the available 1997 text. Check the complete source, the adopted program terms, and current law for any present proposal.

Background and statutory framework

The opinion says G.S. § 158-7.1 authorized cities and counties to make economic-development incentive grants, subject to the constitutional rule that public expenditures be "for public purposes only." It quotes Maready v. City of Winston-Salem for the principle that "the ultimate gain must be the public's" and Madison Cablevision for the requirement that permitted activities primarily benefit the public. The missing guidelines prevented an application of that standard to specific BDI grants. Source

The uniformity discussion quotes Article 5, Section 2(2) and Hajoca for the rule that a tax must be uniform across the territory to which it applies. The AG described counties and cities as independent taxing units under G.S. 105-273(16) and found the proposed Lexington scheme distinguishable from the statewide tax structure considered in Hajoca. Source

Common questions

Did the AG approve Lexington's grant criteria?

No. The opinion says guidelines and criteria had apparently not yet been developed and expressly declines to evaluate whether the program satisfies the public-purpose clause without them. Source

Did the AG require written, published, town-wide criteria before any grant?

The available text states no such specific condition. It says the guidelines and criteria used to evaluate grants must satisfy the public-purpose clause, but does not prescribe publication or a grant-approval timetable. Source

Was the tax-uniformity conclusion definite?

The AG described the scheme as appearing to operate uniformly in Lexington and said it appeared to withstand uniformity analysis "as presently structured." The opinion notes that details of its actual impact had not yet been developed. Source

Citations

• N.C. Gen. Stat. § 158-7.1 (city/county authority for economic development incentive grants)
• N.C. Const. Art. V, § 2(1) (public purpose clause)
• N.C. Const. Art. V, § 2(2) (tax uniformity clause)
• N.C. Gen. Stat. § 105-273(16) (counties and cities as independent taxing units under Machinery Act)
• Maready v. City of Winston-Salem, 342 N.C. 708, 467 S.E.2d 615 (1996)
• Madison Cablevision, 325 N.C. 634, 386 S.E.2d 200 (1989)
• Hajoca Corp. v. Clayton, 277 N.C. 560, 178 S.E.2d 481 (1971)

Source

• Landing page: https://ncdoj.gov/opinions/confidentiality-of-proposed-business-development-investment-grant-program/

Original opinion text

1. Is the BDI Program Permissible under G.S. § 158-7.1? G.S. § 158-7.1 authorizes North Carolina's cities and counties to use public moneys to make incentive grants to private industry in order to encourage economic development. However, expenditures under G.S. § 158-7.1 must serve a public purpose in order to satisfy the requirement of Article 5, Sec. 2(1) that all expenditures of public monies must be "for public purposes only." Therefore, the question of whether the BDI Program is permissible under G.S. § 158-7.1 is really a question of whether the BDI Program serves a public purpose.

Maready v. City of Winston-Salem, 342 N.C. 708, 467 S.E.2d 615 (1996) is the key appellate case construing the public purpose clause. In Maready, the North Carolina Supreme Court held that the "fundamental concept underlying the public purpose doctrine" is "that the ultimate gain must be the public's, not that of an individual or private entity." Id. at 719, 467 S.E.2d at 622. The Maready Court reaffirmed its prior holding in Madison Cablevision, 325 N.C. 634, 386 S.E.2d 200 (1989), that "even the most innovative activities N.C.G.S. § 158-7.1 permits are constitutional so long as they primarily benefit the public and not a private party." Id. at 724, 467 S.E.2d at 625.

Thus, the question under G.S. § 158-7.1 for Lexington's proposed BDI Program is whether the tax rebates it provides primarily benefit the public. Part II, Program Parameters, of the BDI Program states that each investment grant project will be evaluated on an individual basis "using guidelines established under the direction of the Board of Directors." (Emphasis added.) Part III, Project Qualifications, states that each project "should be required to meet basic criteria." (Emphasis added.) There are not guidelines or criteria denominated as such in the BDI Program. Apparently, the guidelines and criteria to be used in evaluating the investment grants have not yet been developed. These criteria and guidelines must satisfy the public purpose clause of the North Carolina Constitution. Without knowing what these guidelines and criteria are, we cannot evaluate whether the BDI Program satisfies the public purpose clause of Art. 5, Sec. 2(1).

2. Is the BDI Program Constitutional? Your letter suggests that you are concerned that the BDI Program might pose a taxation problem, and on page two of your letter, you direct our attention to Art. 5, Sec. 2 of the North Carolina Constitution. Art. 5, Sec. 2(2) states, in pertinent part: "No class of property shall be taxed except by uniform rule, and every classification shall be made by general law uniformly applicable in every county, city and town, classification shall be made by general law uniformly applicable in every county, and other unit of local government." (Emphasis added.) We believe it can reasonably be argued that the BDI Program's tax rebate scheme complies with the uniformity rule of Art. 5, Sec 2(2).

The seminal case addressing the concept of tax "uniformity" as prescribed by the North Carolina Constitution is Hajoca Corp. v. Clayton, Comr. of Revenue, 277 N.C. 560, 178 S.E.2d 481 (1971). There a retailer based in Buncombe County challenged the uniformity of the state's first local option sales tax act which had been approved in only 25 North Carolina counties. As applied, the act required businesses operating in counties that had implemented the additional one cent levy to collect the tax upon deliveries into counties which had not adopted the tax. In contrast, competing retailers located in counties that had not enacted the supplemental tax were exempted from the tax, even when making sales in counties which had adopted the optional tax.

Speaking to the constitutional rule of "uniformity of taxation," the Court concluded: The uniformity must be co-extensive with the territory to which it applies. If a State tax, it must be uniform all over the State. If a county or city tax, it must be uniform throughout the extent of the territory to which it is applicable. Id. At 569.

Focusing upon the structure of the optional tax, the Court found that the taxes challenged were not local, but concluded instead that "the State of North Carolina and not Buncombe County levied" the taxes contested. Since the state tax did not extend to every county, there was no uniformity of application to otherwise similarly situated retailers.

Although all details disclosing the actual impact of the BDI Program apparently have not been developed, the proposed scheme seems distinguishable from that stricken in Hajoca. Under the Machinery Act, counties and cities constitute independent taxing units. G.S. 105-273(16). The proposed program appears to operate uniformly throughout the Town of Lexington, the only affected taxing jurisdiction. In contrast, the patchwork of counties adopting the optional sales tax construed in Hajoca in essence created a state tax which skipped throughout North Carolina without semblance of uniformity.

In view of the foregoing, it appears the BDI Program as presently structured would withstand a uniformity analysis, which does not require the higher standards of constitutional review, such as those required for regimes predicated upon suspect classifications.

We hope the foregoing is helpful to you.

Andrew A. Vanore, Jr.
Chief Deputy Attorney General

George W. Boylan
Special Deputy Attorney General

W. Wallace Finlator, Jr.
Assistant Attorney General