Bev Perdue’s Small Business First Approach

Bev Perdue is proud of North Carolina’s continued strong position in state economic development rankings.  In 2007, for the sixth out of the last seven years, North Carolina finished No. 1 nationally in business climate for relocating and expanding businesses.  North Carolina is now ranked No. 3 nationally in the key growth sector of biotechnology.  And in 2007, North Carolina achieved the highest approval ranking in the National Federation of Independent Businesses’ survey of its small business members throughout the 50 states.

Yet Bev knows that North Carolina must increasingly compete in the global and ever-changing economy of the 21^st century.  That means we must have the best educated and healthiest workforce possible – a goal which will require continual improvement in our public education system and significant reforms to make health care more available and affordable for our working families.  North Carolina’s economy must also diversify and become more highly entrepreneurial.  Bev has demonstrated her leadership on this front by taking such actions as:

• Developing the state’s first Green Business Fund to stimulate environmentally-oriented industries;
• Organizing North Carolina corporate CEOs and retired military commanders to collaborate through the new North Carolina Military Foundation to establish North Carolina as a national hub for business activity related to defense and homeland security, and aerospace concerns; and
• Proposing a Main Street Solutions initiative to focus on the economic revitalization of our smaller cities and towns.

Bev also recognizes that the state’s tax structure is an important underlying factor in economic development.  She understands that a smart approach to business taxation requires balancing multiple concerns about our tax structure. 

It is important for North Carolina to maintain an overall tax burden that is highly competitive vis-à-vis other states and that avoids placing a disincentive on business activity here.  The good news is that the business-backed Council on State Taxation (COST) has ranked North Carolina’s business tax burden as one of the most competitive in the nation, especially in light of our relatively low property tax rates. 

But the specific tax rates on corporations and individuals matter – and must be subject to periodic reevaluation and adjustment if we hope to send the right competitive signals to businesses we want to attract or retain.  At the same time, revenue also matters.  A state’s tax structure must always raise enough revenue to fund quality education, an adequate health care safety net, and other services vital to businesses and their employees and to keep our state’s economy ahead in today’s competitive global race.

One traditional view holds that a state’s economic development strategy should concentrate simply on lowering business tax rates, even at the expense of maintaining current levels of revenue available for education and other social infrastructure.  The John Locke Foundation and a few others still express the most extreme version of this view, advocating total elimination of the state’s corporate income tax – a move that could create a hole in the state’s budget as large as $1.7 billion.[1] 

As a lawmaker, Bev explored these issues in the mid-1990’s as the General Assembly considered steps it could take to render the state more attractive to businesses contemplating expansions and re-locations here.[2]  She helped sponsor bills that offered various strategies for reducing corporate taxes, including one that proposed a significant phased–in reduction.[3]

But from that experience, Bev took away a strong belief that the state should make targeted adjustments to its corporate tax structure and take other actions to enhance its economic competitiveness in particular spheres, rather than attempt drastic reductions.   The small business sector is a key policy target for such adjustments because it has emerged in recent decades as the chief generator of new jobs and business innovation.  As our next Governor, Bev Perdue will make sure that this targeted pro-small business approach is a centerpiece of our state’s economic development strategy.

Below are two examples of the targeted approach that Bev will pursue as North Carolina’s next Governor:

1.      A Bottom-Up Approach for Small Business Tax Relief

North Carolina’s single corporate tax rate of 6.9% applies to the very first dollar of income earned by a business.  Yet our biggest corporations often gain significant tax relief in multiple ways – ranging from their status as multi-state and even multi-national organizations to their greater eligibility for tax incentives and their overall financial sophistication.  As a result, their effective tax rates can be far lower than 6.9%.  

Our smallest corporate entities, however, have few, if any, such advantages.  That makes their effective rate much closer to 6.9% on every dollar of income they earn –often much higher than most bigger and more profitable businesses.

Bev Perdue believes that North Carolina should change the way our corporate tax rate applies to our smaller businesses.  As our next Governor, Bev will institute a “bottom-up” approach for small business tax relief. 

Many small businesses struggle for years simply to survive, and they need the legal protections provided by incorporation.  Taxing the first dollar of their profits at the highest corporate rate does not send the right message about their importance to our economy and way of life in North Carolina.  96% of all businesses in North Carolina have 100 employees or less and 77% have 10 employees or less.  While our “Mom and Pop” Main Street businesses have long been the lifeblood of our smaller communities, fledgling start-up ventures – particularly those of women and minorities – increasingly represent the “new faces of small business” in our state.[4] 

Bev believes a good starting point for change is the small-business tax reform plan first developed in the state Senate during the 2004 session.  Under that plan, companies that make a net profit of less than $100,000 would be able to exempt their first $25,000 of net income from the 6.9% rate.  Companies making between $100,000-200,000 would be able to exempt the first $15,000.  The estimated budgetary cost of such a targeted exemption plan was estimated to be $18 million.[5]

2.      Providing a Leg Up to North Carolina’s High Technology Start-Ups

A bottom-up tax relief approach will signal that North Carolina recognizes the importance of developing its entrepreneurial economy.  But Bev also believes we should even more specifically encourage successful high-tech entrepreneurial risk-taking that results in new North Carolina jobs.  We especially need to target assistance to such promising ventures in their infancy when they may be earning no profit and thus have no tax liability.  Such assistance needs to include business activity conducted through partnerships and “Sub Chapter S” entities. 

Over the last two years, the state has been developing this kind of targeted initiative to boost high-technology ventures across North Carolina. 

The One North Carolina Small Business Fund currently provides an automatic matching grant to North Carolina start-up companies that win Phase I Small Business Innovative Research (SBIR) grants or a Small Business Technology Transfer Research (STTR) grants from the federal government. 

The federal SBIR and STTR programs award grants to companies to develop marketable technologies that are of special interest to the federal government.  Eleven federal agencies participate – ranging from the Department of Defense to the Department of Agriculture and the National Science Foundation.  Each agency, by law, must set aside 2.5% of its annual budget for SBIR-STTR awards.  While SBIR grants go exclusively to private sector entities, STTR grants target business-university partnerships.  The SBIR-STTR grant process is highly competitive and known for its very rigorous merit-based standards. 

Phase I SBIR-STTR grants typically provide crucial funding of around $100,000 – the kind “seed” of funding so many infant high-technology enterprises need to start their development.  The One NC Small Business Fund provides a state matching grant that in effect doubles the amount of seed capital available for North Carolina companies that win federal SBIR-STTR grants.  The goal, as the Triangle Business Journal has put it, “is to give North Carolina a competitive edge over those in other states that are vying for the same pot of federal dollars.”[6]  North Carolina entrepreneurs have especially noted that the state’s matching Phase I support gives them a clear advantage when vying for the larger Phase II SBIR-STTR grants that are valued at up to $750,000.[7] 

The Business Journal has also observed that North Carolina start-ups are “flooding” to the state’s new matching grant initiative.  In 2006, all of the fund’s initial $1 million appropriation was awarded and disbursed to North Carolina companies.  In 2007, all of its expanded $5 million in annual funding was similarly accounted for.[8] 

Underscoring the program’s success, Phase 1 SBIR grants from the federal government to North Carolina companies rose to $12 million in 2006, up 29% from 2005. 

The program has made, to date, 120 grant awards totaling $8.2 million to North Carolina small businesses.  The program was expanded this year to reimburse fledgling North Carolina firms for up to $3,000 of the cost to prepare competitive proposals – boosting the quality of North Carolina’s applications and increasing our state’s chances to securing a bigger slice of the federal government’s national research dollars. 

Bev is a strong supporter of the state’s new SBIR matching-grant initiative.  And as North Carolina’s next Governor, Bev will champion a phased-in expansion of the One North Carolina Small Business Fund to $10 million a year.