This report produced through a collaboration between NCGrowth and the ncIMPACT Initiative at the UNC School of Government.

Introduction

The North Carolina County Tiers system was developed out of a desire to spur economic development in economically distressed geographic areas. County Tier designations were originally intended to help determine whether or not a company would receive tax incentives for local job creation. In the Tiers system, counties are classified from most distressed, Tier 1, to least, Tier 3. Since its inception, the Tiers system has also been used to allocate school funds, determine health care provider loan forgiveness, and more. The simple method of calculating Tiers and the diverse ways in which Tiers are used have created many challenges, including:

• The designation obscures sub-county-level needs and characteristics. Tier 3 counties have communities in them that experience Tier 1 level distress. 
• The system has failed to slow the growing economic disparity observed between the state’s urban and rural areas.
• The Tiers system as originally designed was linked to one specific economic development program; its broad application now conflates economic status with education, health and other specific community needs that would benefit from more targeted metrics.
• The system’s method of force ranking the 100 counties is much like grading on a curve. Under the forced ranking, a county may change Tiers simply because its position changed relative to other counties, having nothing to do with the underlying economic circumstances within the county of interest.
• The ubiquity and false simplicity of the system have led communities and policymakers to assign objective meaning to Tier status, when in reality it is merely a reflection of the county’s status in relationship to other counties.  The system cannot be used to set benchmarks or assess progress as it does not give an indication of economic performance that could be used to set goals, i.e. is our county performing at the level that we would like it to?

History of the Tiers System in NC

In 1987, a new tax incentive for companies was introduced that attempted to promote job creation in distressed counties. As a result, the NC Department of Commerce was tasked with identifying the 20 most distressed counties to encourage area specific growth. Subsequently, the William S. Lee Tax Incentives for New and Expanding Businesses were introduced, which promoted capital expansion, professional development, and innovation, along with job creation. This legislation also developed a five-Tier system to stratify counties by economic distress level.

In 2006, the William S. Lee Tax Incentives were replaced with a similar tax incentive program that reduced the number of Tiers from five to three. This new legislation offered a specific credit amount per job created. The credit amount was linked to the Tier of the county in which the new job was created. Tier three counties offered the least credit, and Tier one counties offered the most credit.  That program expired in 2014. Since then, the Tiers system is primarily used to determine allocation of funding for state-funded programs across departments.  There are two economic development incentives that still utilize the Tiers system: the Jobs Development Investment Grant (JDIG) program and the One North Carolina Fund.  Both are discretionary grants awarded only in competitive recruitment or retention situations.  The county Tier designation is used to determine the level of local match required and the size of the grant awarded.

Current Tiers System Definition

NC General Statute 143B-437.08 defines how the Tiers are categorized and how counties are assigned a Tier. The counties are first ranked based on four determining factors:

1. average unemployment rate
2. median household income
3. percentage population growth
4. adjusted assessed property value per capita.

These rankings are then summed for a total ‘rank sum.’ As there are 100 counties, this rank sum will range from 4 to 400.  The 40 counties with the lowest rank sum are designated Tier 1 counties, the next 40 are Tier 2 counties, and the 20 with the highest rank sum are Tier 3 counties. Statute requires this 40/40/20 split; though in the event of a tie both counties are placed in the lower tier.  Each year by November 30th, the Secretary of Commerce submits a written report on how the rankings are calculated and each county’s designated Tier.  The memo states “Any county underperforming the state average on any of the four factors may request assistance from the Department to improve their performance on the given factor.”

Changes to the Tiers System

There have been multiple proposed bills to adjust or eliminate the Tiers system (see appendix). Originally, Tier 1 counties held this status for at least two consecutive years before the county could be redesignated. This criterion was later changed requiring counties to be redesignated yearly. The Program Evaluation Division of the North Carolina General Assembly evaluated the Tiers system in late 2015, resulting in an almost 40-page report on its merits, weaknesses, and recommendations for future implementation. Most recently, proposed Senate Bill 671 (4/10/2023) called for all departments, excluding the Department of Commerce, to stop using the Tiers system by July 1, 2025. Each department would develop their own development criteria to use instead of the Tier system. This bill also proposed changes to § 143B-437.08, including making an adjustment for urban counties that are population dense to automatically fall within the ten least distressed counties, ensuring these counties receive a Tier 3 designation. Additionally, the changes called for the Department of Commerce’s report to specify low-wealth census tracts within Tier 3 counties. A full timeline of proposed and enacted changes to the Tiers system can be found in the appendix in Figure 1.

Current Tiers System Usage

The Tiers system is now used in dozens of state programs, by statute and voluntarily, to determine eligibility, prioritization of funding, funding allocation and required local contribution.  There are seven programs within Department of Commerce meant to spur economic development that factor in county Tier designation (listed here); beyond that there are a multitude of programs unrelated to economic development and administered by a range of departments that also rely on the Tiers system either by statute or voluntarily. A few recent examples of Tiers in use outside of economic development programs include:

• Public school funding: The 2023 Governor’s Budget allowed Tier 1 and Tier 2 public schools to receive priority for hiring nurses and social workers. These counties also could receive financial advice from state agencies on how to spend allocated funds. This bill also delineated the ratio at which counties receive matched state funds based on Tier. Tier 1 counties had a dollar matching ratio of 1:3, Tier 2 counties had a dollar matching ratio of 1:2, and Tier 3 counties had a dollar matching ratio of 1:1.
• Education loan forgiveness: The 2023 Appropriations Act used the Tier system to provide health care providers in Tier 1 and 2 counties with education loan forgiveness.
• Medical cannabis licenses: To obtain a license, suppliers are required to operate at least one dispensary in a Tier 1 county and priority is given to those that commit to dispensaries in more than one Tier 1 county.  See the side bar for further discussion of this proposed use of Tiers.
• Veterinary Spay and Neuter Program: Tier 1 counties are prioritized for reimbursement when program funds are insufficient to pay 100% of the requests.

Many stakeholders criticize how the Tiers system is currently used because it is a specific metric being applied broadly, it is used as an ‘on/off switch’ to determine program eligibility, and it forces the county rankings into three categories of arbitrary size.

How do other states prioritize economic development resources?

County-level Tiers systems used for allocating funds for economic, educational, and health programs are not common outside of North Carolina. In place of Tiers, many states use localized grant funding, census tracts, or community nominations to determine where economic development would be the most impactful. South Carolina has a four-Tier system that is used solely to administer tax incentives to companies who create jobs in low-wealth counties. Unlike in North Carolina, the South Carolina Tier system is not used by any other state agency or for any non-economic development-related purpose. South Carolina’s Coordinating Council for Economic Development oversees the Tiers system as well as all other economic development efforts. This council evaluates potential projects on a case-by-case basis and determines what projects to fund. After allocating funds, economic development activities are primarily managed and administered by partner organizations.

Virginia’s state economic development programs offer loans, grants, and tax abatement. The Joint Legislative Audit & Review Commission is statutorily required to evaluate economic development programs and report on findings. The FY13-FY22 report found that most economic development incentives since 2017 have been custom grants. Grants are administered with specific goals for each program, most of which are in the areas of job creation, average wages, and capital investment. Some of Virginia’s economic development incentives rely on area economic distress levels in the state. Until 2021, the state primarily focused on rural areas as low population density was equated with economic distress. Since then, the state has recognized that distress is not only present in rural areas and now considers attributes such as access to capital, educational attainment, aging infrastructure, and others to determine distress levels. These factors are used to determine eligibility for state-funded economic development programs on a case-by-case basis.

Alabama also uses county-specific measures to define two economic development designations under its Enterprise Zone Program, originally enacted in state legislation in 1987. “Targeted Counties” have a population of 50,000 or fewer. 45 of Alabama’s 67 counties were designated Targeted Counties in 2024. “Jumpstart Counties” are those that are not Targeted Counties, have experienced negative population growth, and as of 2019 house fewer than two Opportunity Zones (economic development program established by Congress in the Tax Cuts and Jobs Act of 2017). No counties qualified as Jumpstart Counties in 2024. More recently, these county classifications are used for economic development purposes including capital investment embedded in the Alabama Jobs Act and tax credit for job creation, allowing companies to claim a tax rebate if they meet specific job creation or capital investment thresholds. Greater incentives are offered for job creation and capital investment that occur within Targeted or Jumpstart Counties.

Texas uses nominations to determine how discretionary funding is spent on economic development programs. Community-nominated Enterprise Zones qualify for a sales and use tax refund from the state. Businesses in these Zones can qualify for refunds based on capital investment and average wages for full-time employees. Additionally, Texas utilizes grants or loans for purpose-based initiatives. For example, the Texas Water Development Board provides financial assistance for projects serving economically distressed residential areas where water or sewer services do not exist, or existing systems do not meet state standards.

Economic development measures and strategies vary widely. Some systems use population density, income, unemployment rate, access to education, or other factors to determine how distressed an area is. These measures differ in effectiveness when using counties, municipalities, states, or census tracts. Below is a distilled analysis of three major frameworks used to measure distress with the goal of alleviating that stress through development initiatives or resource redistribution.

Conclusion

The North Carolina County Tiers system was originally developed to encourage job creation in economically distressed counties by providing tax incentives. Since then, the system has been broadly applied as on indicator of distress that is used for education funding, health programs, and other reasons unrelated to economic development, drawing questions and criticism from many stakeholders as to whether it accomplishes its stated purpose. North Carolina is unique in its use of a Tiers system, and even among peers that use a Tiers system is unique in the broad application of that metric outside of economic development. 

Timeline of Proposed Legislative Changes to Tiers

July 6, 1987	Senate Bill 113 Created an employer tax incentive for companies creating new jobs in distressed counties Department of Commerce identified the 20 most distressed counties in the state
August 2, 1996	Article 3A, William S. Lee Tax Incentives Incentivized capital expansion, professional development, innovation, and job creation Created five-Tier system for counties: the 10 most distressed counties, the next 15 most distressed counties, and three groups of 25 counties representing the less-distressed areas of the state
August 4, 1999	Senate Bill 1115 Amended Article 3A to prohibit Tier 1 counties from moving to a higher Tier until the county has had Tier 1 status for two consecutive years
August 17, 2006	Article 3J, Tax Incentives Program Incentivized capital expansion, professional development, innovation, and job creation County Tiers system reduced from five Tiers to three Tiers Planned sunset for tax incentives in 2014
December 2015	Program Evaluation Division Report Full evaluation conducted calling for Tiers system elimination
May 10, 2016	Senate Bill 844 (or HB 1082) – Not Passed Instructed departments to discontinue use of the Tiers system and create their own development criteria
April 4, 2017	Senate Bill 660 – Passed Removed adjustments and exemptions for the Tiers system Added an index with development factors for standardization of the county ranking process
April 11, 2017	House Bill 795 – Not Passed Proposed changes to Tier determination criteria; ratio of employment to population instead of unemployment rate and annual average wage instead of median household income Departments have the option to discontinue use of the Tiers system
April 4, 2019	Senate Bill 597 – Not Passed Proposed an additional five-Tier economic distress system to be used along with the three-Tier system
April 5, 2021	Senate Bill 491 – Not Passed Proposed an additional five-Tier economic distress system to be used along with the three-Tier system
May 5, 2021	House Bill 870 – Not Passed Proposed that sufficiently rural counties are automatically excluded from being ranked in the lowest 20 counties.
January 26, 2023	House Bill 13 – Not Passed Called for Joint Legislative Economic Development and Global Engagement Oversight Committee to evaluate Tiers system for possible elimination
April 10, 2023	Senate Bill 671 – Not Passed Departments (excluding Commerce) to stop using Tiers system and create departmental development criteria

References

“Appalachian Regional Commission.” Appalachian Regional Commission. https://www.arc.gov/

Bifurcate Economic Distress Categorization. S. 671. (2023)

“County Distress Rankings (Tiers).” NC Department of Commerce. November 29, 2023. https://www.commerce.nc.gov/grants-incentives/county-distress-rankings-Tiers

“Enterprise Program,” Alabama Department of Economic and Community Affiars, 2024. https://adeca.alabama.gov/enterprise-zone-program/#:~:text=A%20targeted%20county%20means%20any,population%20of%2050%2C000%20or%20less.

“First in Talent: Strategic Economic Development Plan for the State of North Carolina.” NC Department of Commerce. July 2021. https://www.commerce.nc.gov/guidelines-north-carolina-strategic-plan-economic-development/download?attachment

Grittayaphong, Praew. “Beyond GDP: Three Other Ways to Measure Economic Health.” Federal Reserve Bank of St. Louis. April 19, 2023. https://www.stlouisfed.org/open-vault/2023/apr/three-other-ways-to-measure-economic-health-beyond-gdp

“How States Can Direct Economic Development to Places and People in Need.” The Pew Charitable Trusts. February 1, 2021. https://www.jstor.org/stable/resrep57550.4

“New York Empowerment Zone Program.” Empire State Development New York State. https://esd.ny.gov/new-york-empowerment-zone-program#how-to-apply

North Carolina General Statute § 143B-437.08 (2023)

“North Carolina Should Discontinue the Economic Development Tiers System and Reexamine Strategies to Assist Communities with Chronic Economic Distress.” NC General Assembly Program Evaluation Division. December 2015. https://sites.ncleg.gov/ped/wp-content/uploads/sites/11/2022/07/ED_Tiers_Report.pdf

“One North Carolina Fund.” North Carolina Department of Commerce. August 8, 2022. https://www.commerce.nc.gov/grants-incentives/competitive-incentives/one-north-carolina-fund#GuidelinesStatutesOneNorthCarolinaFund-2490

“Opportunity Zones.” U.S. Economic Development Administration. https://www.eda.gov/grant-resources/comprehensive-economic-development-strategy/opportunity-zones

Reevaluate County Tier System. H.R. 13. (2023)

S.C. Code Ann. § 12-6-3360

Sound Basic Education for Every Child. H.R. 885. (2023)

“Texas Enterprise Zone Program,” Texas Economic Development and Tourism, 2024, https://gov.texas.gov/business/page/texas-enterprise-zone-program