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Job Development Credits: Taxpayer-Funded Payouts

There’s nothing like money in your pocket.

 

Nearly a half-billion dollars in state job development credits – a widely popular taxpayer-funded payout – have been claimed by S.C. businesses since 1999, state records reviewed by The Nerve show. And the numbers have grown each year, despite actions about six years ago to slow them down.

 

On top of that, a handful of businesses could be eligible for several million dollars more under a related state Court of Appeals ruling in January involving a large software company, according to the S.C. Department of Revenue.

 

In its investigation of that case, the  Department of Revenue informed The Nerve that it would not reveal which specific types of incentives it audits other than job development credits.

 

In a weeklong series in January on the incentives deal to bring a new Boeing Co. plant to North Charleston, The Nerve reported that the Department of Revenue and other state agencies routinely refuse to reveal details about incentive deals given to companies.

 

Job development credits are refunds of a portion of employee state income tax withholdings in exchange for minimum employment and investment levels. The percentage of the credit ranges from 2 percent to 5 percent of the withholdings depending on the hourly pay level; the higher the pay, the greater the credit amount, which is claimed quarterly.

 

In addition, the amount of the refund depends on where the company is located. Qualified businesses located in counties designated as “least developed” can take the full amount; those located in “developed” counties are limited to 55 percent of the maximum allowed amount.

 

State law also requires that the state Coordinating Council for Economic Development, made up of the heads of 10 economic development agencies and staffed by the S.C. Department of Commerce, determine that the “total benefits of the project exceed the costs to the public,” though the law doesn’t spell out the criteria.

 

The credit is limited to the creation or expansion of manufacturing, processing, “services,” distribution, warehousing, research and development, corporate offices, “technology intensive” prospects and certain tourism initiatives, according to state law. An eligible business must create at least 10 new full-time jobs.

 

New and existing companies have long sought the incentive – enacted in South Carolina in 1995 under the Enterprise Zone Act – because they typically have employee tax withholdings, though they might not have any corporate income tax liability, to which many other types of incentives apply. South Carolina was one of the first states in the nation to adopt the job development credit, or JDC.

 

“It’s what I would call a hard-dollar credit,” Columbia attorney Burnie Maybank told the S.C. Administrative Law Court in a 2008 hearing, according to a transcript of the hearing. “The companies very eagerly look forward to the incentive.”

 

Conflict of interest?

At that hearing, Maybank, of South Carolina’s go-to economic development law firm of Nexsen Pruet, represented Blackbaud Inc., a Berkeley County firm described by company officials in court papers as the world’s largest software developer for nonprofit organizations.

 

Blackbaud contended that the Department of Revenue had undercounted the amount of the company’s job development credits. The S.C. Court of Appeals – the state’s second-highest court – agreed in a ruling issued Jan. 11, modifying an earlier Administrative Law Court decision.

 

Maybank was a two-time director of Revenue and a key player in the incentives negotiations last year to bring Boeing’s new 787 assembly plant to North Charleston. He also helped craft a controversial incentives package for the proposed Okatie Crossings retail mall in Jasper and Beaufort counties.

 

He also wears a public hat as the chairman of a special legislative committee, known as the Tax Realignment Commission, charged with recommending reforms to most of the state tax code. Senate Finance Committee Chairman Hugh Leatherman, R-Florence, appointed Maybank to the commission.

 

Maybank told The Nerve he couldn’t discuss specifics of the Blackbaud case unless he received permission from his client. But he denied there was any conflict of interest by trying to get incentives for Blackbaud and serving on TRAC, which, among other things, is looking at ways to close certain industry-specific incentives.

 

“Certainly being the TRAC chair doesn’t require me to drop all of my clients and quit practicing law,” he said. “They (TRAC) don’t even pay me a per-diem.”

 

Blackbaud case

Revenue spokeswoman Adrienne Fairwell told The Nerve her agency doesn’t plan to contest the Court of Appeals ruling, though she wouldn’t say why when asked.

 

Responding to a list of written questions submitted by The Nerve, Fairwell said the department believes there are six to eight other businesses affected by the ruling, which could cost the state an estimated additional $2 million. She said she wasn’t aware of any suits against the state by those companies.

 

For Blackbaud, the amount of credits in dispute was $281,264 – not including interest – from 2003 through 2005. Over the company’s 15-year deal with the state, the difference will grow to a projected $1.6 million, according to a Revenue estimate included in court records.

 

Under state law, the incentive is negotiated between the eligible company and the Coordinating Council for Economic Development. Although the terms vary, the agreements generally require the companies to have a minimum number of new jobs and investment within five years.

 

In its 1997 agreement with the Coordinating Council, Blackbaud promised to create at least 300 jobs and invest a minimum of $29.6 million in moving its headquarters from New York to Berkeley County. It had about 1,600 U.S. employees in 2008, according to court testimony.

 

Under old guidelines, companies could continue to claim the job development credits for the remainder of their agreements as long as they maintained at least 85 percent of their agreed-upon minimum employment levels. They could claim credits for no more than 150 percent of the minimum levels; for Blackbaud, that meant it couldn’t claim credits for more than 450 employees.

 

At issue in the Blackbaud case was whether the company could claim newly created jobs above the minimum after the five-year cut-off date. The Court of Appeals ruling said Blackbaud was entitled to the credits after the cut-off date so long as it maintained the minimum employment levels.

 

The ruling means Blackbaud could collect a projected total of $27 million in refunds over 15 years, according to a Department of Revenue estimate. But that figure was $23 million less than the projected 15-year cost in a 2001 analysis by the Coordinating Council.

 

That same analysis projected the total benefit-to-cost ratio at 22:1, estimating total income benefits at nearly $300 million and total public costs at about $12.2 million.

 

Audit secrecy

State law requires Revenue to conduct audits of claimed job development credits every three years. In legal briefs submitted for the Jan. 11 ruling, the department said it has conducted about 500 audits, and that it has “consistently made adjustments to taxpayer (job development credit) claims where a taxpayer has created new jobs after the cut-off date.”

 

When asked if the department’s estimate of six to eight affected companies with the Jan. 11 ruling was too low given the department’s stated position in its legal briefs, Fairwell told The Nerve, “The statute of limitations may be a bar to some of these taxpayers receiving additional credit as many did not oppose the Department’s adjustment,” and that “some taxpayers no longer are in the (Enterprise Zone Act) program.”

 

Although Fairwell acknowledged that the department audits job development credits, she declined to identify other types of audited incentives.

 

“We are not required to reveal which ones we audit or what our auditing criteria are,” she said. “As you are aware, there are laws that exempt the (department) from disclosing our auditing practices/procedures.”

 

Fairwell, however, did not cite those laws, though requested to do so by The Nerve.

 

Maybank, who helped create and write a 260-plus-page Department of Revenue publication on economic development incentives, told The Nerve that job development credits are about the only state incentive that has a “100-percent audit rate.” That’s because, he explained, companies have to pay filing fees, which, in turn, have been used to hire back retired auditors to do the audits.

 

Generally, the Department of Revenue is geared toward auditing a company’s income tax return as a whole, not by specific incentive types, Maybank said.

 

No slowing the JDC train

Despite having to go through audits,  companies were so infatuated with job development credits that the Coordinating Council for Economic Development, concerned about exploding taxpayer cost of the credits, approved new guidelines that took effect in 2004, records show.

 

The changes included lowering the total payment period to 10 years from 15 years, requiring companies to maintain agreed-upon minimum employment levels for any quarter, and limiting credits for any additional jobs above the minimum level to those jobs created within the five-year cut-off date.

 

But state Board of Economic Advisors and Department of Revenue records reviewed by The Nerve show that the 2004 guidelines haven’t slowed the upward trend in costs. In fiscal year 2005, for example, a total of about $56 million in credits was claimed; by fiscal year 2009, that number had grown to $70.3 million, a 25-percent jump.

 

As a comparison, about $19 million in credits were claimed in fiscal year 2000. The total tab for the credits through fiscal year 2009 was $498,021,558.

 

The credits from fiscal years 2000 through 2008 represent 17 percent of the approximate $2.4 billion in total tax credits and other incentives claimed statewide over the nine-year period, records show.

 

And it’s more than just pocket change to S.C. taxpayers.

 

Reach Brundrett at (803) 779-5022, ext. 106 or rick@scpolicycouncil.com

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