Lawsuit Filed to Block North Carolina Tax ‘Giveaways’

Published August 1, 2005

A former North Carolina Supreme Court Justice has filed a lawsuit challenging the constitutionality of a $280 million tax incentive package granted to Dell Computer by the State of North Carolina, Forsyth County, and city of Winston-Salem.

“There are questionable provisions that violate the Commerce Clause of the U.S. Constitution and a number of sections of the North Carolina constitution,” said Robert Orr, now director of the North Carolina Institute for Constitutional Law.

Orr, representing seven state taxpayers, filed the suit June 23 in Superior Court in Raleigh, North Carolina.

Defendants include the state of North Carolina, Forsyth County, Winston-Salem, and state and local officials.

Credits, Cash, Perks Given

The North Carolina legislature approved the incentives in 2004, in exchange for Dell’s commitment to build a manufacturing plant in Winston-Salem. The incentives include a combination of tax credits, cash, and perks such as worker training and police monitoring. Dell promised state officials about 1,700 employees, earning $9.50 to $14 an hour, will be hired.

Orr said the incentives discriminate in favor of in-state economic activity, in violation of the Commerce Clause, and are bad public policy.

A Dell spokesman in Austin, Texas said the firm does not comment on litigation.

Reversal, Clarification Sought

Plaintiffs are asking for:

  • a declaratory judgment that the Dell legislation, city and county resolutions, and any contracts entered into for the incentives package be declared unconstitutional;
  • an order that any public moneys or benefits already paid by the defendants to Dell be refunded to the public treasury of the city, county, and/or State of North Carolina; and
  • a judicial resolution regarding the scope of and limitations to state and local economic development subsidies and practices under the North Carolina and United States Constitutions.

Cuno Ruling Cited

The Constitutional complaints in the lawsuit track with last year’s ruling of the 6th U.S. Circuit Court of Appeal in Cuno v. DaimlerChrysler. That ruling struck down part of a $281 million package of incentives the State of Ohio and local officials granted the corporation in 1998 to build a Jeep manufacturing plant in Toledo.

The appellate judges ruled an investment tax credit Ohio granted DaimlerChrysler gave the firm preferential treatment to entice it to locate in Ohio, thus violating the interstate Commerce Clause of the U.S. Constitution, which prohibits states from favoring in-state businesses over out-of-state firms.

That ruling has been appealed to the U.S. Supreme Court, which has not decided whether it will hear the case.

Incentive Supporters Unite

The Council on State Taxation (COST) has formed a coalition to promote federal protection of state tax incentives, in response to the Cuno ruling. Kevin Thompson, COST’s legislative counsel, said Orr’s lawsuit “is interesting. They seem to be hanging their hat on the Commerce Clause challenges and are throwing in the state challenges. It’s tough to say what will happen.”

He said states need to have the flexibility to offer incentives to compete not just with other states but with other countries. He also said states should be free to set their tax policies.

He noted the Cuno ruling struck down an investment tax credit that was not unique to DaimlerChrysler. In North Carolina, “most of the statutes were crafted with a specific company in mind. I’m not sure if that will have an impact on the resolution of the case.”

Richard Wagner, editor of Carolina Journal, which has written about North Carolina incentives programs, noted the North Carolina package is worth nearly three times as much as the Dell plant, which is estimated to cost $100 million. The plant is scheduled to open in September.

States in Bidding War

Wagner also noted North Carolina had engaged in in a bidding war with Virginia and may have offered Dell more than $100 million more than Virginia offered to win the plant.

Orr said that is one reason he opposes such tax incentives.

“We’ve seen a proliferation of these large corporations playing one state against another, one community against another,” Orr said. “Our hope is our lawsuit will determine the types of selected subsidies that violate the Constitution. On the assumption it will end up in appellate court, we’ll get a broader ruling on how tax incentives can be spent.

“We hope to generate an increasingly detailed national debate on the issue of incentives and whether Congress should step in and stop this war among the states by limiting what states are doing in this incentives gamesmanship,” Orr said.

Firms Subsidizing Competitors

States argue such tax giveaways pay off over the long term, but Orr says the prime beneficiaries are the corporations that end up with huge subsidies instead of paying taxes as other businesses must do. He also said large corporations with political connections are much more likely to receive favorable treatment than smaller firms that do not have political connections or the financial muscle to buy connections.

“It makes no sense to punish the broad base of businesses that are already in North Carolina while attempting to attract a few new businesses with targeted subsidies,” Orr said. “The existing businesses end up subsidizing new business, sometimes their direct competitors. It’s bad economics, and it’s unfair.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.