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 Town of Lexington designed a Business Development Investment (BDI) Program that would offer tax rebates as incentive grants to private companies relocating or expanding in town. The town asked the AG to review the legal foundation before launch. Two questions were front and center.
Question 1: Is the BDI Program permissible under G.S. § 158-7.1?
§ 158-7.1 authorizes NC cities and counties to spend public money on incentive grants to private industry to encourage economic development. But all expenditures of public money must serve a public purpose under Art. V § 2(1) of the NC Constitution. So the question collapses into: does this BDI Program primarily benefit the public?
The 1996 NC Supreme Court decision in Maready v. City of Winston-Salem is the key case. Maready held that economic development incentive grants under § 158-7.1 are constitutionally valid so long as the "ultimate gain" is the public's, not a private party's. That reaffirmed Madison Cablevision (1989): even the most innovative activities permitted by § 158-7.1 are constitutional if they primarily benefit the public.
The AG found Lexington's BDI Program had a structural problem: its written terms referred to "guidelines established under the direction of the Board of Directors" and "basic criteria" projects "should be required to meet," but those guidelines and criteria had not been drafted yet. Without seeing the actual standards, the AG could not certify that the program would satisfy the public-purpose clause. The AG's answer was effectively: come back when you have written criteria.
Question 2: Is the BDI Program constitutional under the tax-uniformity clause?
Art. V § 2(2) requires that no class of property be taxed "except by uniform rule." Lexington was worried that giving tax rebates to some businesses but not others might violate uniformity.
The AG analyzed Hajoca Corp. v. Clayton (NC Supreme Court 1971), which struck down NC's first local-option sales tax act as non-uniform. Hajoca involved an opt-in tax adopted in only 25 of 100 counties; the court held that what looked like a county tax was effectively a state tax that skipped across counties without uniformity. The BDI Program is different because it operates uniformly within Lexington only. Under the Machinery Act § 105-273(16), counties and cities are independent taxing units. A municipal program that applies uniformly within its city limits passes a Hajoca-style uniformity test.
The AG's conclusion on uniformity was a soft yes: "appears to withstand a uniformity analysis." Pre-detailed BDI guidelines, the AG could not lock the conclusion down further.
The opinion's practical effect: Lexington could proceed conceptually with the BDI Program but should not approve any specific grants until written public-purpose criteria were adopted and published, and those criteria had to apply uniformly to qualifying applicants town-wide.
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.
§ 158-7.1 has been amended multiple times since 1997, generally to expand the toolkit local governments can use for economic incentives. Maready remains the leading NC Supreme Court case on public purpose in this area, and its core framework is still the law. Towns and counties designing modern BDI-style programs should also consult more recent NC AG opinions and case law on specific incentive structures (cash grants, fee waivers, infrastructure improvements, etc.).
Common questions
Q: Why is this opinion catalogued as "Confidentiality of Proposed Business Development Investment Grant Program"?
A: That is the title the AG's office attached to the published opinion in the archive, but the body actually addresses public-purpose and uniformity questions, not confidentiality of the BDI Program documents. The slug is a bit misleading; readers looking for confidentiality law should keep searching.
Q: What is the "public purpose" test under Art. V § 2(1)?
A: It is the constitutional requirement that public money be spent for public, not private, ends. Maready and Madison Cablevision read this generously for economic development: if attracting a business produces public benefits (jobs, tax base, multiplier effects), giving that business an incentive grant can serve a public purpose even though the immediate beneficiary is a private company. The line is drawn at programs that primarily enrich a private party.
Q: What kind of "guidelines and criteria" should Lexington have drafted?
A: Things like: minimum capital investment thresholds; minimum number of jobs created or retained; wage levels relative to county averages; clawback provisions if the company fails to meet commitments; performance milestones tied to rebate payments; geographic or sectoral targeting; conflict-of-interest screening for council members; sunset and review provisions. Without something like these, every grant decision would look arbitrary and the public-purpose review would be impossible.
Q: Is a tax rebate the same as a tax exemption?
A: Not quite. A tax exemption permanently relieves a class of property from taxation. A tax rebate first collects the tax and then refunds it back to the qualifying property owner. The uniformity analysis is slightly different: a uniform tax with a uniform rebate program may pass Art. V § 2(2) where a tax exemption favoring a single business would not. Lexington's BDI was structured as a rebate.
Q: Could the public-purpose problem be cured retroactively?
A: An incentive grant approved without public-purpose findings could be challenged at any time. Cure is easier the earlier it happens. A town that adopts BDI criteria after the fact, then re-examines previously approved grants against the new criteria, is in a better position than one that defers the cure indefinitely.
Background and statutory framework
§ 158-7.1 has long been the workhorse statute for NC economic development incentives at the local government level. The 1996 Maready decision was a major moment for NC: the Supreme Court upheld Winston-Salem's economic development program after a citizen challenge, putting the public-purpose clause concern largely to bed for properly structured grants. Madison Cablevision (1989) had earlier set the framework. After Maready, the question shifted from "may we?" to "how must we structure?" — and that is exactly the question this opinion confronts in Lexington's BDI Program.
The Art. V § 2(2) uniformity clause is older NC constitutional doctrine, with Hajoca (1971) being the lead case. Hajoca's analytical approach — characterize the tax by its operational structure, not its statutory label — remains controlling.
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, Inc. v. City of Morganton, 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
- 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).
- 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