Cash Incentives for Revitalizing Main Street

Tyler Mulligan is a School of Government faculty member. A city seeks to fill vacant store fronts and improve the appearance of its historic Main Street business district.  To entice owners to make improvements to their buildings, a council member proposes to establish a “revitalization incentive.” To earn the incentive, an owner must make improvements to a building in the district to increase the building’s taxable value. In return, the city will make a cash grant to the owner each year for five years in an amount equal to the additional tax assessed as a result of the higher taxable value. No jobs required, no wage standard, no minimum capital investment amount. Do local governments in North Carolina possess legal authority to enact this revitalization incentive?

We’ll start by ruling out the most widely-used statutory authority for business incentives, G.S. 158-7.1. At first glance, the statute appears to supply sufficient authority for almost any conceivable business incentive, but its scope is limited by the North Carolina Constitution. As the North Carolina Supreme Court explained when it first approved incentives under G.S. 158-7.1, its approval was based on the generation of a net public benefit “by providing displaced workers with continuing employment opportunities, attracting better paying and more highly skilled jobs, enlarging the tax base, and diversifying the economy.” Maready v. City of Winston-Salem, 342 N.C. 708 (1996). However, the revitalization incentive proposed by the council member above is not designed to produce those public benefits, because the proposed incentive does not contain any job, wage, or capital investment requirements. G.S. 158-7.1 therefore cannot supply the authority to enact the proposed revitalization incentive, so we’ll need to look elsewhere in the statutes. The statutory authority is found in G.S. 160A-456 (cities) and G.S. 153A-376 (counties). Those statutes authorize local governments to issue grants and loans for “community development programs and activities,” which are programs enacted for the benefit of low- and moderate-income persons. More specifically, the statutes permit the making of grants or loans for the rehabilitation of private buildings in either of two instances: (1) for the benefit of low and moderate income persons, or (2) for the restoration or preservation of older neighborhoods or properties. The proposed revitalization incentive fits under the second category when applied in a low-income area. An additional source of authority deserves mention. Many Main Street business districts are situated in municipal service districts—also known as business improvement districts or BIDS—in which additional property taxes are assessed on property in the district for the purpose of funding revitalization projects there. Under G.S. 160A-536, permissible revitalization projects range from making infrastructure improvements to providing extra security in the district. Most important for our purposes here, the proceeds may be expended for “promotion and developmental activities” such as “promoting business investment” in the district. The authority appears broad enough to include the payment of cash incentives to businesses improving real property in the district. Smithfield provides an example of how this type of incentive operates in a business improvement district. Although statutory authority for the proposed incentive program has been identified, we must examine whether it would be found constitutional by a court upon review. There are three primary constitutional issues that could be raised. First, would such an incentive pass muster under a court’s public purpose analysis? No case addresses the question directly, but it seems safe to conclude that it would. To the extent that the incentive serves to improve the aesthetic character of the business district, regulation of the aesthetic character of a community has been determined to serve a legitimate public purpose. State v. Jones, 305 N.C. 520 (1982). Additionally, the proposed revitalization incentive is analogous to other local government activities which have been found to serve a public purpose even when they result in some private benefit: blight eradication under Urban Redevelopment Law (e.g., Redevelopment Comm'n of Greensboro v. Security Nat'l Bank of Greensboro, 252 N.C. 595 (1960)) and incentives to private businesses pursuant to G.S. 158-7.1 (e.g., Maready). Second, the business district revitalization incentives are calculated on the basis of property taxes paid, so would they be viewed as an illegal tax rebate prohibited by G.S. 105-380 or as an improper attempt to classify or exempt property for taxation in violation of Section 2 of Article V of the North Carolina Constitution? As discussed in an earlier post here, this concern is mitigated when an incentive serves a legitimate public purpose and is meaningfully contingent on factors other than merely making a capital investment and paying taxes. That is the case for the proposed revitalization incentive, which directs private investment to an area specifically sanctioned by statute—the struggling historic business district—in order to preserve and enhance it for the public’s benefit. It would of course be possible to add other requirements to the incentive to strengthen the argument, such as bringing a substandard building up to code, keeping the building open to customers during regular (or perhaps even extended) business hours, and maintaining a minimum level of business operations for the entire calendar year for which a grant is awarded. Finally, the North Carolina Constitution, Article I, Section 32, states that no person “is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services.” In other words, public funds cannot be paid to someone except in return for some public service. In this case, the public service being provided is the enhancement of structures and activity in the historic business district. A concern might be whether an incentive was paid to a business for doing something it would have done anyway without the incentive. To address this concern, the local government could secure an agreement with the business—prior to it constructing improvements—which sets out the requirements for the incentive and certifies that the business would not have made the improvements “but for” the incentive.