August 29, 1997
Robert B. Smith, Jr. Smith and Gamblin, PLLC Attorneys at Law Post Office Box 1737 Lexington, NC 27293-1734
RE: Advisory Opinion on Constitutionality of Proposed Business Development Investment Grant Program (BDI)
Dear Mr. Smith:
On June 5, 1997, you wrote to the Attorney General on behalf of the City Council of the City of Lexington ("Lexington"), in Davidson County, requesting an Attorney General’s opinion on the constitutionality of a Business Development Investment Grant Program ("BDI Program") adopted on February 25, 1997 by the Davidson County Commissioners. You attached to your June 5 letter a copy of the Davidson County BDI Program, and you stated that Lexington is considering a "similar" program.
The stated purpose of Lexington’s proposed BDI Program is "to expand economic development options" that will "diversify the tax base, offer improved employment opportunities for the citizens" and "promote the economic growth and welfare of the business and industrial community" of Lexington. The BDI Program purports to formalize "the parameters for local government economic incentives" to be used to encourage business investments in Lexington. Under the BDI Program, Lexington may contract with a company to rebate a portion of the company’s property taxes as an inducement to investment in Lexington. The BDI Program provides as follows: "If the company has met specific criteria as outlined in a formal agreement, a portion of the property taxes paid by that company to the county each year for five consecutive tax years would be returned to the industry in the form of a local business development investment grant."
As you explain in your June 5 letter, the BDI Program has four levels, and the percentage of local property taxes to be rebated varies from 70% to 85%, according to the level of the investment. Your letter gives examples of the "grant" amounts at each of the four levels. Thus,
(1) Is the BDI Program permissible under G.S. § 158-7.1, and (2) more generally, is the BDI Program permissible under the North Carolina Constitution?
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