RALEIGH – By all accounts, the special session of the General Assembly scheduled to begin Thursday is intended to end on Thursday – after a perfunctory consideration of an economic-incentive package for Dell Computers and an overwhelmingly legislative endorsement of Gov. Mike Easley’s proposal. But there are important reasons for lawmakers of both parties and all political persuasions to stop, look, and listen before voting to offer this latest basket of goodies to an out-of-state corporation on the promise, perhaps fleeting, of creating jobs in the state.
Yes, there are substantial economic and empirical arguments against incentive policies. They don’t appear to correlate with job creation or state economic growth. They often benefit companies that would have come to North Carolina anyway. They distort markets, imposing costs on some businesses while reducing costs for others. And so on.
But perhaps the most compelling reason for caution about the Dell incentives, assuming they involve some kind of tax credit or exclusion, is a legal one. On September 2, a federal court in Ohio handed down a decision that struck down state tax credits designed to attract a DaimlerChrysler plant to the state. The decision in Cuno v. DaimlerChrsyler was based on a reasonable and not-uncommon interpretation of the Interstate Commerce Clause of the federal constitution, which reserves to Congress the sole authority to regulate interstate commerce. In effect, the clause prohibits state governments from erecting the equivalent of trade barriers against their neighbors.
Likening the use of tax credits for DaimlerChrysler to previous cases upon which the U.S. Supreme Court has ruled, the federal appeals-court panel determined that Ohio’s investment tax credit “is to encourage further investment in-state at the expense of development in other states, and the result is to hinder free trade among the states.” The appeals panel did not strike down another tax incentive offered to DaimlerChrysler, a property-tax exemption.
Some business groups, including the U.S. Chamber of Commerce in Washington, have reacted to the Ohio decision with alarm. I’ve seen their panicky emails and coalition statements alleging that the decision would prohibit states from lowering their tax rates to attract new economic investment, which is false and hysterical, and that it would inhibit much of what constitutes “economic-development policy” in the various states, which is true and welcome. As long as state tax policies treat everyone the same – if you earn income in North Carolina, you pay the same tax rate on that income – they can differ from their neighbors in whatever salutary or destructive manner their elected representatives may choose.
In the Dell case, state lawmakers need to be exceedingly careful not to enact a specialized set of tax credits that could be struck down in federal court in the same way that the Ohio credits were (Ohio is in a different federal circuit, and so the case is not binding here, but the concepts are the same). Cash grants, below-cost loans, free exit ramps, and other giveaways may be objectionable and counterproductive, but the use of selective tax credits may also be unconstitutional.
That’s worth a closer look by state lawmakers, even if it takes a while, right?
Hood is president of the John Locke Foundation and publisher of Carolina Journal.