A three-judge panel peppered lawyers with questions Wednesday in a case that could determine the future of economic development tax incentives in North Carolina.
The judges were hearing a lawsuit challenging $279 million in tax incentives for a Dell computer plant in Winston-Salem.
“The taxpayers of North Carolina are being deprived of revenue by virtue of these incentives,” said Bob Orr, director of the North Carolina Institute for Constitutional Law and a former N.C. Supreme Court justice. “This is revenue that should be going into state and local government coffers.”
The institute is appealing a trial court’s decision to dismiss its lawsuit. Meanwhile, one of Orr’s former Supreme Court colleagues, retired Chief Justice Burley Mitchell, offered oral arguments supporting the Dell incentives. “This is a political case,” Mitchell told the appellate judges. “It’s clearly a public policy decision.”
The General Assembly had the right to grant the incentives in 2004, Mitchell said. “It’s a simple separation of powers issue,” he said. “The legislature sets the economic policy of the state.”
“Who primarily benefits from these incentives? Dell,” Orr said. “Are we at the stage now where the legislature can selectively pick companies, based on their size or their prominence, and hand out hundreds of millions of dollars in grants?”
Neither Orr nor Mitchell presented much of his prepared remarks before judges interrupted with questions. “You’re saying the benefit to Dell is greater than the benefit to the public,” Judge Martha Geer told Orr. “How would you prove that?”
Geer and Judges James Wynn and Rick Elmore also asked about the eligibility, or “standing,” of the institute’s original plaintiffs. They also questioned Orr and Mitchell about the impact of the 1996 N.C. Supreme Court Maready case. Orr and Mitchell participated in that high-court ruling as justices. Mitchell supported, and Orr opposed, the ruling that favored tax incentives.
Mitchell provided the court a humorous moment when he suggested that people opposing corporate tax incentives should run for office. “Go run for the legislature and block the legislation, or run for governor to veto it.”
“I’m taking Burley’s advice,” Orr said after the hearing. He’s already announced plans to run for the Republican nomination for governor next year.
Orr took more than twice as many questions from judges as Mitchell. “That’s normally the case when you’re the appellant [the party who appeals an earlier court ruling], and obviously interpreting the Maready decision is a critical component to not only this decision, but I think sort of the long-term utilization of economic development and the taxpayers’ money. So it didn’t surprise me that they had a lot of questions.”
Mitchell and the lawyers representing the state don’t want the case to move forward, Orr said. “The legislature doesn’t always pay close attention to the state Constitution,” he said. “That’s why we have the courts. That’s why we have people willing to go out and challenge acts of state or local government that they think violate the Constitution.”
“Hopefully, they’ll agree with us that the motion to dismiss was improper and that it should go back to the trial court,” he said. “But it will be interesting to see how they resolve, or attempt to resolve … whether there is a weighing of the private benefits versus the public benefit, or whether they accept the state’s argument that as long as they say it’s for a public purpose or in the public interest, they can spend the money any way they want to.”
Lawyers presented their oral arguments nearly a year after a judge threw the suit out of Wake County Superior Court. In May 2006 Judge Robert Hobgood rejected NCICL’s arguments and ruled that the taxpayer plaintiffs lacked legal standing to bring the case to court.
“In essence, he said they couldn’t show individual injury,” Orr told the News & Observer after that ruling. “If these taxpayers don’t have standing, who does? Does it have to be another computer manufacturer?”
The Dell incentives sparked concerns from the start. When details of a North Carolina incentive package first circulated among state lawmakers in 2004, Carolina Journal reported that a Nashville newspaper analysis showed Tennessee had overpaid to secure a Dell plant in that neighboring state.
The same day as the CJ report, Nov. 4, 2004, the N.C. House voted, 92-18, and the Senate voted, 33-15, in a special session to grant Dell incentives estimated at $242.5 million over 20 years. The largest chunk of the package was a new computer manufacturing tax credit of about $225 million, according to the governor’s office.
Senate approval followed a close vote on a measure that would have forced Dell to open its books to public inspection. Sen. Hugh Webster, R-Alamance, sponsored the amendment that would have required companies to waive the privacy of tax information related to their eligibility for credits or incentives. Senators rejected the amendment, 25-23, with a largely party-line vote. Nineteen Republicans and four Democrats supported the disclosure requirement, while one Republican joined 24 Democrats in voting against it.
Five days after the legislative vote, Gov. Mike Easley formalized a deal with Dell to build a computer manufacturing plant in the Triad. Then the region’s counties competed for the plant with their own local incentives packages.
During the siting process, news reports suggested that North Carolina offered far more incentive dollars than competing states had considered. A Dec. 5, 2004, News & Observer article suggested that Virginia officials had been prepared to offer up to $37 million in incentives, or 15 percent of the N.C. incentives package. Weeks later, reports revealed that Virginia expected the Dell plant to create half as many total jobs as North Carolina projected.
On Dec. 22, 2004, Dell chose Winston-Salem for its plant after city and Forsyth County leaders agreed to offer $37.2 million in local incentives. Davidson County had offered a $23.1 million incentive package, while Guilford County and Greensboro had pledged $12.4 million.
Traditional journalists and incentives critics were not alone in questioning the size of the Dell deal. In January 2005, Southern Business & Development publisher Mike Randle wrote that North Carolina had agreed to pay too much to land the Dell plant. Randle’s magazine targets economic development professionals.
On Jan. 18, 2005, CJ, later joined by the N.C. Press Association, filed a lawsuit to force the N.C. Department of Commerce to hand over all public records linked to the Dell deal. CJ Editor Richard Wagner had been seeking the records since Nov. 18, 2004. In e-mail correspondence with Wagner over the next two months, Commerce officials contended they were gathering and preparing the material for distribution. Within hours of the suit’s filing, Commerce officials agreed to make documents available later that day.
Less than a week before the Dell plant’s February 2005 groundbreaking, CJ reported that legislative staff and other state officials had shared concerns about the Dell legislation before the House and Senate votes. A “flurry” of e-mail correspondence among officials extended to the day of the incentives vote. CJ also noted: “Many legislators had complained before the bill was introduced that the administration did not give them enough time to study the bill.”
NCICL’s legal action started nearly two years ago. On June 23, 2005, the institute filed suit on behalf of seven plaintiffs across the state. The complaint argued that the Dell incentives violated the N.C. Constitution and the U.S. Constitution’s Commerce Clause.
“What we’re primarily concerned about is taking tax revenue and handing it out to a few large companies,” Orr said at the time. “I think the constitution was set up to keep that from happening.”
The lawsuit sought a declaratory judgment against Dell, the state and affected local government agencies, and the nonprofit economic development agencies that provided incentives. The suit contended that any funds paid to Dell or its agents should be refunded or reimbursed to the state and local governments that issued them.
The Dell plant opened in October 2005. It had been open for about seven months when Hobgood issued his ruling against NCICL.
“I would like to think within three to four months we could get a decision,” Orr said after Wednesday’s hearing. “But they have a large caseload. And it’s a challenging area.”
That ruling won’t end the case, Orr said. “Ultimately, I would assume in one form or another the state Supreme Court is going to have to decide it.”
Mitch Kokai is an associate editor of Carolina Journal.