The Locker Room

What Constitution?

Posted by Becki Gray at 12:45 PM

Jason Kay, staff attorney over at North Carolina  Institute for Constitutional Law testified in a House Finance Committee meeting this week on constitutional concerns with the proposed Life Science Development Act (hard to keep up with the bill number as described here). There are plenty of concerns with this bill as we’ve discussed here and here.  It’s hard to imagine that legislators, who take an oath to uphold the North Carolina Constitution, would consider passing a bill with these kinds of problems.

Talking Points:  N.C. Live Science Development Corporation Act
North Carolina Institute for Constitutional Law
Jason Kay, Senior Staff Attorney

The system proposed by Senate Bill 580 (the “Act”) contains a number of glaring problems. These are not subtle or minor constitutional issues.

Below is a summary of only three of those issues, which point to the probable illegality of the Act under the Constitution of North Carolina. Other legal and Constitutional problems exist.

Under the most recent version of the bill, the proposed system would essentially function as follows:

A private Nonprofit Company would be created, on the board of which would sit the Secretary of Commerce and several others. The Nonprofit Company, in turn, would manage (as the sole controller) a private, for-profit Investment Company.

The Investment Company would solicit investment funds from individual investors (venture capital groups, etc.) and contractually agree to give a return on the investment. It would promise, like a bank, to give regular re-payments of the principal and interest.

If market conditions arose that prevented the Investment Company from making good on its promise to make payments, then it would be empowered to issue North Carolina State tax credits to its investors instead of the normal contractual payments. Once the Investment Company determined that the tax credits should be paid, the Secretary of Commerce would be compelled to issue the tax credits and thereby “pay” the investors with government-issued tax breaks.

    1. Article V, Section 2(1) of the North Carolina Constitution states that “The power of taxation shall be exercised in a just and equitable manner, for public purposes only, and shall never be surrendered, suspended, or contracted away.

The Act allows a private Investment Company to exercise the taxing power of the state by issuing tax reductions to investors. The government has thus sub-contracted the decision-making function of who gets what tax breaks. The Investment Company, not the government, decides that the tax law does not apply to certain citizens in the same way it applies to others.

2. Article V, Section 3(2) and Section 3(3) of the North Carolina Constitution state:
(2) Gift or loan of credit regulated. The General Assembly shall have no power to give or lend the credit of the State in aid of any person, association, or corporation, except a corporation in which the State has a controlling interest, unless the subject is  submitted to a direct vote of the people of the State, and is approved by a majority of the qualified voters who vote thereon.

(3) Definitions. A debt is incurred within the meaning of this Section when the State borrows money. A pledge of the faith and credit within the meaning of this Section is a pledge of the taxing power. A loan of credit within the meaning of this Section occurs when the State exchanges its obligations with or in any way guarantees the debts of an individual, association, or private corporation.

The whole point of the Act is to empower the Investment Company to offer government-backed investments. These aren’t normal investments. When they fail, the government steps in to repay the debt with tax credits. It is just like a parent co-signing for a child’s car loan.

When a person gives money and receives a contract for repayment of that money, it is a debt. If the Investment Company cannot pay its debt, it would be empowered to give the investors tax credits instead. These tax credits can be redeemed for tax reductions or – in the event that the credit is more than the investor’s tax bill – for a tax refund. In either case, the government is backing the debt with public funds. This requires a vote of the people.

The Act does contain a statement that the Investment Company is not allowed to pledge that the State will back its debts to investors. This language appears to have been thrown in the bill to avoid just the problem mentioned above.

But the Act is specifically designed to issue government-backed debt. This is the whole point of the Act. Thus, the attempt to rescue the Act from unconstitutional state by inserting magic legal words is not much more than legal lipstick on an unconstitutional pig.    

3. Article I, Section 6 and Article II, Section 1 of the North Carolina Constitution state in effect that the legislature cannot delegate its power to make laws. A recognized exception allows the legislature to delegate this power to other governmental branches, thus enabling them to make rules with the force of law, only when it issues adequate guiding standards so the other body of government clearly knows that it cannot exercise the legislative power inconsistent with the directives of the legislature.

But all these Constitutional rules apply to delegations of legislative power to other branches of government. If the legislature delegates law-making power to a private entity, this is flatly prohibited.

This is good common sense. Individual citizens can only exercise governmental power when they are actually part of the government. For any branch of government to give over its power to private entities turns the principle of representative democracy on its head: it gives government power to the favored few.  

This is exactly what is occurring in the Act. The Investment Company (which is a private, for-profit entity) is empowered to exercise its discretion to determine who gets a tax credit and when it is issued. The Investment Company’s decision is binding on the Secretary of Commerce, who must then issue the tax credit. Thus, the Investment Company has the authority to lower the taxes of certain citizens. This may only be done by the legislature. It cannot be done by private entities.


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