Published: Jun 24, 2005
Modified: Jun 24, 2005 7:07 AM

Motion challenges Dell incentives

A former justice claims that incentives the state gave the company are unconstitutional

 By AMY MARTINEZ, Staff Writer

RALEIGH -- A former state Supreme Court justice took legal action Thursday to stop Dell from receiving $279 million in tax breaks and other incentives for building a 1,500-worker plant in Winston-Salem.

Bob Orr, who heads the N.C. Institute for Constitutional Law, a Raleigh nonprofit, filed the motion in Wake County Superior Court. He asked that Dell's deal be declared unconstitutional.

A victory for Orr could prevent the state from striking similar deals with other businesses planning a move or expansion. It also would force Dell to pay back any incentives it already has received and prevent it from getting more.

"We want to see North Carolina prosper, but you don't do that by selectively handing out millions of dollars in incentives to large corporations," Orr said during a news conference Thursday.

Orr argues that the incentives violate the state and federal constitutions by lining Dell's pockets at the expense of North Carolina taxpayers.

North Carolina now becomes one of five states nationally and the first in the Southeast facing a legal challenge over its use of incentives. Opponents of incentives said the motion is an important step toward ending the state's expensive battle for new businesses, while others warned that it hurts North Carolina by putting it at a disadvantage with rivals such as Georgia and South Carolina.

"The use of smart, targeted incentives enables North Carolina to compete against other states and other countries for quality jobs and investments," N.C. Commerce Secretary Jim Fain said in a prepared statement. "Without the ability to use these tools, North Carolina's economy will wither."

Fain is named as a defendant in the motion along with the state of North Carolina, the city of Winston-Salem, Dell and economic development groups in Forsyth County.

The General Assembly approved $242 million worth of incentives for Dell in a special one-day session last year. As a result, the giant Texas computer company does not have to pay any taxes on profits made in North Carolina for 15 years, Orr said. Winston-Salem and Forsyth County also offered Dell $37 million in land, cash grants and infrastructure improvements.

Orr filed the motion -- which is likely to take more than a year to reach a conclusion -- on behalf of seven plaintiffs who pay taxes in North Carolina. They include Kent Misegades, a Cary resident who owns a small software business, and Bryan Gossage, a member of the Apex Board of Commissioners, who owns Peak Media Group, a public relations firm.

Dell has begun construction on its Winston-Salem plant and expects to begin production by October. Michele Blood, a spokeswoman for Dell, said Orr's motion changes nothing about its plans. "We think we're a great corporate citizen by bringing 1,500 jobs and investing in the community," she said.

Orr opposed incentives

Orr's motion is the first challenge to the state's incentives since a 1996 state Supreme Court ruling that incentives were legal.

The court said then -- in response to a lawsuit by Winston-Salem lawyer William Maready -- that incentives served a public purpose by helping to create new jobs and could be used for business recruitment.

Orr, who served on the court from 1995 to 2004, wrote the dissenting opinion.

He makes a distinction between broadly accessible incentives, such as money for road improvements and worker training, and deals such as Dell's. He argues that Dell's deal fails to live up to the public-purpose standard, saying it merely boosts Dell's bottom line.

But Burley Mitchell, chief justice at the time of the 1996 decision, said Thursday's filing was "just a continuation of the same complaints that opponents of incentives have had for years."

Dell has hired Mitchell, now a lawyer with Womble Carlyle in Raleigh, to fight Orr's motion.

Mitchell said that decisions about incentives should be made by legislators, not judges. "We ought not to be judicial activists and take over the running of the economy from the governor and legislature," he said.

Others warned that the lawsuit will discourage businesses from coming to North Carolina. Donald Donadio, who negotiates incentives on behalf of businesses as a lawyer with Womble Carlyle, said deals came to a virtual halt in the mid-1990s while the Maready case was in litigation.

Donadio said businesses considering a move or expansion will bypass North Carolina for other states where incentives aren't being challenged.

"People in Virginia, South Carolina, Tennessee and Georgia will say North Carolina is temporarily out of business," Donadio said. "We really can't recruit effectively with the cloud of litigation hanging over our head."

Orr said he hopes Congress will pass legislation declaring incentives illegal for all states.

"I think the lawsuit will cause our congressional delegation to say, 'This could affect North Carolina, so maybe we ought to look at creating a system that levels the playing field nationally.' Everyone tells me that if we level the playing field, North Carolina will benefit."

Incentives in Ohio

Dell's deal is similar to an incentives package struck down last year by the 6th Circuit Court of Appeals in Ohio. Officials in Toledo had promised DaimlerChrysler nearly $300 million in tax breaks and other incentives for its plans to build a Jeep plant.

Small business owners and residents who were forced to move to make room for the plant filed suit and won. Ohio has asked the U.S. Supreme Court to review the 6th Circuit's decision. U.S. Sen. George Voinovich, a Republican from Ohio, has proposed legislation in Congress seeking to overturn the decision.

"I don't think we've slowed the amount of investment coming into Ohio," said Bill Teets, a spokesman for the state's economic development agency, discussing the lawsuit's effect on business recruitment.

"But just the uncertainty makes for a difficult sale. When companies are looking for a place to locate, they want to know with certainty what their tax structure is going to be," Teets said.

Lawsuits against incentives also have been filed in Nebraska, Oklahoma and Minnesota -- with more possibly on the way.

Peter Enrich, a law professor at Boston's Northeastern University, who filed the Ohio suit, said he's been approached by incentives opponents in five other states. He said all are seriously considering suing.

"We're still at a point in this where each case is very important," Enrich said. "My hope has always been that enough of these cases would get brought to start to bring all states back to a level playing field."

Orr said Dell's deal is the "poster child" for incentives in North Carolina, but he plans to go after others. Orr declined to name the target of his next legal challenge, but he gave a hint: Deals luring businesses from one part of the state to another are particularly troublesome, he said, because they shift jobs around, rather than bring new jobs in.

"Government has no business subsidizing highly profitable multinational corporations," Orr said. "It's bad public policy."

Staff writer Amy Martinez can be reached at 829-4884 or amy.martinez@newsobserver.com.