Carolina Journal Weekly Report

September 09, 2002

In This Issue:
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Feature 1 - Cost of Stimulus Bill Soars

Feature 2 – LEAF Director Defends Roles

Feature 3 -  Stretching the Rules  
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Feature 1
Cost of Stimulus Bill Soars
Spending cap was underestimated, analysts say

An economic stimulus bill that its sponsor says has a $540 million spending cap actually carries a price tag that ultimately could be double that amount, policy analysts with the John Locke Foundation say.

The analysts dispute a claim by the bill’s sponsor, Bill Owens, D–Pasquotank, that the most recent version of the Job Development Investment Program of the N.C.

Economic Stimulus and Job Creation Act has a spending cap of $540 million. Assuming a 4 percent annual growth in salaries for participating companies, the program would balloon to $676 million, the analysts said. In addition, an obscure clause allowing the awards committee to include additional future positions could allow the program to soar to more than $1 billion.

The grant program allows a seven-member Economic Investment Committee to award selected companies a rebate to the company of up to 75 percent of the state withholding taxes paid by company employees. The duration of eligibility can be up to 12 years.

The bill, approved by the House on Aug. 26 was sent to the Senate for its consideration. Opposition to the bill surfaced in the House when some lawmakers said the legislation needed restrictions on spending. Owens then amended the bill to include the spending cap. The bill now reads: “Ceiling. — the maximum amount of total annual liability for grants for agreements entered into in any fiscal year may not exceed fifteen million dollars ($15,000,000).”

Although the grants were proposed on a three-year trial basis, some legislators wondered what the potential total obligation to the state would be. In response to questions, Owens acknowledged that the language effectively created a cap of $540 million. That figure was arrived at by multiplying $15 million times the 12-year duration, times the three years of initial grants for a total of $540 million.

Locke analysts said the phrase “grants entered into in any fiscal year,” in effect negates the cap. If the total value of the grants awarded in the first year is $15 million and wages and withholdings increase an average of 4 percent, the cumulative value of the grants would grow to $676 million.

Perri Morgan, state director of the National Federation of Independent Business, also noticed the problem. “I have been meeting with members of the Senate to discuss the cap problem and other concerns with the bill,” she told Carolina Journal.

She also noted that a vote against the bill was not a vote against business, economic development, or job growth. “We want jobs as much as anyone else, but this bill has serious problems and that is why many House members voted against it,” she said.

Ahead of the Curve

• In an Aug. 25 Winston-Salem Journal article detailing issues North Carolina Republicans and Democrats plan to emphasize in campaigns this fall, Democratic state Senate President Pro Tem Marc Basnight cited business incentives as among his party’s major issues. “The issues that we run on are jobs — putting people back to work,” he said.

The newspaper reported that Basnight listed “the recruiting incentives and biotechnology proposals as Democratic initiatives.” He was apparently referring to the N.C. Economic Stimulus and Job Creation Act, which would give businesses relocating in North Carolina large rebates on employees’ withholding taxes, as the Democrats’ initiative. But what was the Democrats’ biotechnology proposal Basnight was talking about?

Eleven days before the article appeared, the Golden LEAF Foundation — created by the legislature to operate outside of political influences — announced an $85.4 million economic stimulus program to advance the biotechnology industry in the state. No biotechnology proposals have advanced in the legislature this year.

Basnight spokeswoman Amy Fulk said he told her he was not referring to the Golden LEAF proposal. She told Carolina Journal in an e-mail that “the Senate is indeed working on a biotechnology proposal and I will be happy to let you know when it's ready for public consumption.”

So, expect biotechnology-related economic stimulus legislation to emerge from the Senate in anticipation of the fall elections.

Feature 2
LEAF Director Defends Roles
Board member in a position to help his other organizations

J. Claude Mayo, an insurance businessman and tobacco farm owner in Nash County, holds three positions that could allow him to influence how the Golden LEAF grants awards to other organizations he represents.

Mayo is the chairman of the Nash County Board of Commissioners, and also serves on the board of directors for the Carolinas Gateway Partnership, which pursues economic development opportunities for Nash and Edgecombe counties. Mayo also serves on the board of directors for Golden Long-term Economic Advancement Foundation, whose headquarters is in Rocky Mount, Nash County.

In 2001 Carolinas Gateway Partnership requested a grant of $1 million for Nash County for services offered to Universal Leaf North America to build its new tobacco processing plant there. Golden LEAF awarded $400,000 later in the year for the county’s engineering costs to extend water and sewer services to the new plant. The Golden LEAF award did not play a part in drawing Universal Leaf to the county, but alleviated costs to Nash County for delivering utilities to the project.

“The plant was coming anyway,” said S. Lawrence Davenport, chairman of the board of directors of Golden LEAF. “It was just a chance for us to help out.”

Mayo apparently was appointed to the Golden LEAF board after it voted to support the Universal Leaf project. He also said he “wasn’t familiar” with Carolinas Gateway Partnership’s application for the grant when he was appointed to Golden LEAF’s board. He said the two counties, plus the cities of Rocky Mount and Tarboro, pay the partnership to represent the areas for economic development purposes.

“Our economic developers are the ones that worked this out,” Mayo said.

Davenport said Golden LEAF is considering proposals again this year from Carolinas Gateway. Awards will be announced in November.

Both Mayo and Davenport denied that Mayo has a conflict of interest in representing Golden LEAF, Carolinas Gateway, and Nash County.

“Absolutely not,” Mayo said, adding that he would abstain from any Golden LEAF votes on Carolinas Gateway Partnership proposals.

“What are we going to do, kick ’em off every time we come across something like that?” Davenport said. “If we used that criteria, we’d all have to quit.”

Golden LEAF has a conflict-of-interest policy, written by its legal counsel, Dave Kyger of Smith, Moore LLP in Greensboro. He says it is modeled after a similar policy issued by the Internal Revenue Service.

Kyger said the policy requires a board member to identify any project considered by Golden LEAF in which he would have a financial interest. In such an instance, a board member could make presentations and answer questions about the project, but could not participate in deliberations or votes on a project.

“The way philanthropic organizations have dealt with this…there’s going to be conflicts,” Kyger said. “I don’t think you want to exclude every project one of your members is involved with.”

“I’m going to vote my conscience with anything on Golden LEAF,” Mayo said. “I’m going to vote for anything to enhance the quality of life of these people down here. We need all the help we can get.”

Capital Quotes

“When I go home now, about a month ago my dog started barking at me. About two weeks ago, my wife started joining the dog.”

— Rep. Doug Yongue, D-Scotland, talking with the Winston-Salem Journal about the length of the legislative session.

With the “short” session having already run more than 100 days, the House rejected a constitutional amendment to limit the length of sessions to 180 days in odd-numbered years and 90 days in even-numbered years, with an optional 10-day extension in any year.

“We don’t have to do one thing to bring in a regional jet. Not one thing do I have to do different. As a matter of fact, none of these airports would have to do anything.”

—Jim Turcotte, manager of the Pitt-Greenville Airport, commenting to The Daily Reflector of Greenville on a Lenoir Committee of 100 document describing the attributes of the Global TransPark and other eastern North Carolina airports.

Among the questionable statements in the document, which was not meant for public release, were that Greenville’s airport is funded by local tax dollars, operates in the red, and has unreliable air service.

Greenville, New Bern, and Jacksonville were all listed as needing major upgrades to support regional jets.

“It’s going to have a very positive impact on our tourism and restaurant industry. We’ll see the quality of our restaurants triple and be comparable to those in New Orleans, Charleston, and Boston.”

— Charlotte Mayor Pat McCrory expressing his joy to The Charlotte Observer over the decision of Johnson & Wales University to open a culinary arts college in Charlotte.

The college a tract of land in Uptown Charlotte to the university for $1 million. The land’s tax value is $7 million.

Feature 3
Stretching the Rules
Committee plans to include lottery in budget bill

 If the General Assembly is going to include a lottery referendum in the state budget plan, as it is considering in conference committee, it will have to act quickly and stretch, if not break, the rules.

The North Carolina House and Senate each passed their own versions of revenue and appropriations bills earlier this summer, and members from each chamber have conferred over budgetary differences since mid-August. According to the rules of both the House and Senate, conference committees may address only differences between the versions, and may not consider new measures that don’t exist in either version.

Including a lottery referendum for North Carolina voters, which was not in the House or Senate plan, would seem to violate that rule.

“The only thing a conference committee can do is settle those things in contradiction,” said House Minority Leader Leo Daughtry, a Smithfield Republican. “They’re sticking it in there without any regard for our rules.”

But House Appropriations Chairman David Redwine, a Brunswick County Democrat and conference committee member, said the rules are a matter of interpretation. “That’s a literal interpretation of the rules,” Redwine said. “But we’ve always had the latitude since I’ve been here to include things that are considered having to do with spending in the bill.”

Redwine cited the example of Gov. Mike Easley’s More at Four program and his plan to reduce class sizes for kindergartners and first-graders, which he said carry a cost of $60 million. Because those items are in the existing budget versions, Redwine said considering a lottery could be justified to generate the revenue for them.

Asked whether that was a “stretch” of the rule, Redwine said, “It depends on your point of view, I suppose,” adding that it probably depends on whether someone is for or against the lottery. He said measures have been added in budget conference reports on many occasions to provide “room to maneuver” — they just haven’t been as high profile as the lottery referendum. Calling Daughtry’s interpretation a “strict constructionist” view of the rule, Redwine said, “Sometimes you have to get a little outside that to get what you need.”

“They can put all the sugar around it they want,” Daughtry said, “but it’s a bitter pill.”

If the conference report goes to the House and Senate with the lottery referendum included, a member could raise a point of order citing the rule, objecting to its inclusion. House Speaker Jim Black or Senate President Pro Tem Marc Basnight would then decide whether it is within the rules, and if it is, the ruling can be appealed. Overturning the decision would require a two-thirds majority vote of the members.

Getting a lottery referendum on the Nov. 4 ballot is another obstacle for legislators. State Board of Elections Deputy Director Johnnie McLean said the board needs to know whether there will be a referendum when the board meets Sept. 17 to certify the primary election results. That means both legislative bodies would have to pass the conference report this week.

If a referendum is included in the appropriations bill, then only one vote would be required to approve it. However, if the conference report includes new tax revenue measures, then it must be read to the full body, voted, and approved twice on separate days, then signed by the governor to become law.

On The Cutting Edge

Protectionism

• Nations that impose tariff or trade restrictions on entry into their markets engage in protectionism. In the past, many economists contended that the costs of protectionism were a small portion of gross national product. However, critics have argued for decades that the price of protectionism is significant.

A paper by Harry Johnson in 1960 argued that the cost of protectionism ranged from 1 to 2 percent of GNP. Richard Harris echoed these views in 1984, saying that “It is well known that conventional calculations of the costs of protection give number which are quite small; often in the order of 0.5 to 2.0 of GNP.”

Many economists now believe that even these estimates are far too low. Using past data to model, researchers find that tariffs less than 15 percent are unlikely to have welfare costs exceeding 1 percent of GNP. However, beyond that tariff level, high levels of protection can readily lead to losses nearing 10 percent.

Additionally, if there are large fixed costs of introducing products into the market and unproductive profit-seeking, then even modest protection can lead to large deadweight losses.

For example, in 1807 the United States imposed an embargo of 45 percent on imports. This led to a direct cost ranging from 7 to 10 percent of GNP, far exceeding the 1 to 2 percent of GNP predicted by previous models. Protection may have cost India 7.3 percent of GNP in 1964 and Turkey 15 percent in 1968.

This has implications for future trade talks. If the costs of protection are higher than previously thought, there are substantial gains to be had from future globalization. Conversely, imposing new tariffs can lead to extremely costly results.

Researched by Arvind Panagariya. “Cost of Protection: Where Do We Stand,” American Economic Review. Volume 92, Number 2. May 2002.

Automobile Inspections

• Over 60 million registered motor vehicles in 20 states are subject to mandatory periodic safety inspections. The economic argument for mandatory inspection relies on the idea that vehicle maintenance reduces the accident rate and therefore provides external benefits. However, a new study in the Southern Economic Journal suggests this is not the case.

The study finds that inspections do not significantly decrease the number of old cars on the road. Moreover, inspections do not significantly increase the amount of revenue that repair companies earn.

Putting these two observations together, the researchers conclude that inspections do not improve the quality of vehicles on the road. If inspections did improve quality, then either old cars would be pulled off the road because of safety failures or people would need to spend more money on repairing their automobiles. Since neither occurs, inspections fail to reach their goal.

The authors suggest that oversight of inspectors is weak. A Washington Post investigation found that in a recent year, about 600 out of 4,300 inspection stations in Virginia issued no rejection stickers at all. Massachusetts officials claim that monitoring the inspection performance of licensed garages is prohibitively expensive. Additionally, other studies show that inspection stickers can be readily obtained on the black market for as little as $40.
 
Researched by Marc Poitras and Daniel Sutter, “Policy Ineffectiveness or Offsetting Behavior? An Analysis of Vehicle Safety Inspections,” Southern Economic Journal, April 2002.

Short-Haul Flying

• As security procedures add to the time spent at airports and the frustrations of flying, many business commuters are choosing to drive to their destinations if the distance is only 200 to 300 miles. Such decisions are taking their toll on airlines that specialize in short-hop routes.

For example, driving time for the 216-mile trip from Dallas/Ft. Worth to Austin is about four hours. But although the flying time is only an hour, more or less, so many would-be fliers have taken to their cars that airlines making the trip have eliminated 27 percent of their seats.

Overall, airlines have cut their seats on flights under 200 miles by 15 percent since a year ago — compared to an 8 percent cut in domestic seats. Other routes hard hit by the switch are Los Angeles to San Diego; Portland, Ore. to Seattle, Wash.; Atlanta to Columbia, S.C.; and Pittsburgh to Cleveland.

Companies often let their traveling employees decide whether to fly or drive, and three out of four corporate travel managers say some employees substitute driving for flying. About 15 percent say the crossover has been substantial, according to a Business Travel Coalition survey last spring.

America West’s short-haul flying is down 21 percent, United is off 32 percent, American 19 percent, and Continental 20%. Those figures include commuter affiliates, whose turboprops often make them better-suited for short-distance flying. They have cut their schedules dramatically.

The switch has boosted several travel-related industries, including rental-car companies, hotel chains, and even bus companies.

Reported in USA Today, 8-16-2002.


Coming Up

•  Political commentator Michael Barone will be the featured speaker at a John Locke Foundation luncheon at noon  Sept. 12 at the Brownstone Hotel in Raleigh.

Barone is a senior writer for U.S. News & World Report. He grew up in Detroit and Birmingham, Mich. He graduated from Harvard College (1966) and Yale Law School (1969). He also was editor of the Harvard Crimson and the Yale Law Journal.

Barone is the principal coauthor of The Almanac of American Politics, published by National Journal every two years. The first edition appeared in 1971, and the 16th edition, The Almanac of American Politics 2002, appears in August 2001. He is also the author of The New Americans: How the Melting Pot Can Work Again (Regnery, 2001) and Our Country: The Shaping of America from Roosevelt to Reagan (Free Press, 1990). Barone also is a regular panelist on “The McLaughlin Group,” and is a contributor to the Fox News Channel.

The cost of the luncheon is $20 per person. For more information or to preregister, contact Thomas Croom at (919) 828-3876 or e-mail him at events@johnlocke.org.

 

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Material published here may be reprinted provided the
Locke Foundation receives prior notice and appropriate credit is given.

 

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