The News & Observer

Raleigh, N.C.

February 11, 1996

Court case threatens business incentives

John Wagner, Staff Writer

Copyright © 1996, The News & Observer

The lawsuit argues that giving companies tax breaks and other taxpayer-funded inducements to move here is not really in the public interest.

RALEIGH - When Southern National Bank was considering moving its headquarters to Winston-Salem in 1992, city and county leaders dangled a plump carrot in front of the company's executives: $947,000 in taxpayer money to help rent a downtown building, assist bank employees with parking expenses and find work for their spouses.

There wasn't much unusual about the offer. Local officials across the state routinely try to lure businesses with such incentives. But the handouts - and countless others like them - may have been illegal.

That, at least, is the contention of William Maready, a plain-spoken Winston-Salem trial lawyer who state officials say might wind up crippling economic development in North Carolina.

On Friday, the N.C. Supreme Court will start weighing Maready's claim that business incentives offered by local governments violate the state Constitution and should be outlawed.

The legal issues raised by the case are fairly straightforward: Maready says that giving taxpayer money to private companies is not a "public purpose," as required by the Constitution. State officials, citing the jobs that result from the new industries, say it is.

Aside from the legal arguments, Maready's challenge has stirred up an increasingly rancorous debate about whether business incentives are a smart way to spend government money.

In recent years, North Carolina cities and counties have spent money helping companies buy land, install water and sewer lines, build parking lots and train employees. In some cases, communities have even helped pay employee salaries for a while.

Like many government officials and economic developers, state Commerce Secretary Dave Phillips argues that such inducements are not only proper, but absolutely necessary to compete with other states for new industries.

"This one ruling could do enormous damage to our future," Phillips says. If Maready prevails, he says, "It would stop us dead in our tracks."

Nevertheless, Maready and a growing number of policy wonks and politicians believe that money spent on incentives could be better used repairing aging schools, hiring more police officers and filling more potholes. Communities need the money far more than big corporations, Maready argues.

"Corporate America has learned how to milk communities for all they can milk them for," he says. "It's morally wrong, and it's an abuse of government power."

Getting outbid

Ironically, in recent years North Carolina has been far less aggressive than many other players in the incentives game.

States such as Alabama and Virginia have used multimillion-dollar inducements unheard of here to lure major new auto plants and computer-chip manufacturers. In some recent bidding wars, North Carolina has pretty much watched from the sidelines as other states have offered to waive tens of millions of dollars in property taxes and other fees.

In 1992, for example, North Carolina lost a BMW plant to South Carolina, which reportedly offered a staggering $200 million in inducements.

The state has lost smaller skirmishes as well. In October, Wal-Mart chose to put a $53 million distribution facility in South Carolina rather than four miles away in Union County. South Carolina's far more generous incentives package included giving the company 120 acres of land.

As bids have increased elsewhere, so has the debate here about whether North Carolina should be doing more to compete - or quitting the incentives game altogether.

At the state level, Phillips' boss, Democratic Gov. Jim Hunt, has pushed leaders to be more aggressive since his return to office in 1993. Through the use of a new "competitive fund," Hunt has used close to $12 million in cash to entice 59 companies into moving to the state or expanding their operations.

While Hunt says some of North Carolina's competitors are giving away too much, he believes the state needs to continue looking for additional, more creative ways to use incentives.

"The competition is getting tougher and tougher every day," he says. "We're losing jobs right and left, and our people need jobs."

Whether the state will continue moving in the direction Hunt has set is unclear. One of Hunt's chief Republican challengers, former Charlotte Mayor Richard Vinroot, says he believes "Maready is right" and, if elected governor, would abolish many of the incentives Hunt has offered.

Their differences are not easily explained by partisanship. Many Republicans firmly back incentives, while Vinroot's position is nearly identical to that of the Orange County Commissioners - a board that includes some of the most liberal Democrats in the state.

Like many elected officials in the Triangle, Orange leaders think the area has so much else to offer - such as world-class universities, a well-educated work force and good roads - that other inducements aren't necessary.

Still, the Triangle is becoming more active in the incentives game. In the last 23 years, Wake County has agreed to spend nearly $1 million to reimburse five new companies for the cost of building water and sewer lines.

And Garner recently snagged Perstorp Flooring's $20 million plant with the promise of up to $192,000 in inducements. The incentives package for the Swedish company includes the waiver of an assortment of building and utility fees that other businesses typically pay.


A public purpose?

Maready is challenging the legality of more than $13.2 million in incentives offered by Winston-Salem and Forsyth County between 1990 and 1995.

A veteran lawyer whose clients have included both big corporations and families of those killed in the Challenger disaster, Maready says he has no personal stake in the incentives fight.

He says he grew increasingly appalled in recent years when reading about government handouts in the newspaper and finally decided that as a lawyer, he was well-equipped to do something about it.

"All of us can sit on our backsides and watch the world go by," he says. "But I felt I had an obligation to help my state."

Last August, a Forsyth County judge agreed with Maready that a state law allowing cities and counties to offer incentives violated the "public purpose" provision in the state Constitution. While the ruling applied only to Forsyth County, it raised serious questions about whether inducements offered by local governments across North Carolina are legal.


Major implications:

By most estimates, cities and counties pay for about 80 percent of incentives offered within the state. But the state's incentives - including Hunt's competitive fund - probably would be in jeopardy as well if Maready prevails, legal experts say.

Citing the high stakes of the case, the state attorney general's office has intervened and appealed to the Supreme Court to settle the issue.

In their written arguments to the court, Winston-Salem and Forsyth County officials say they started offering business incentives in 1990 after a devastating series of plant closings and layoffs that cost the community more than 9,000 jobs.

They say the strategy has paid off: The 24 companies that got the $13.2 million in incentives have created 5,500 jobs - 83 percent of which were filled by people in the area.

Forsyth officials argue that within three to seven years, most new companies already will have paid the government more in property taxes than they were given in incentives. In addition, they argue, local governments benefit from the property taxes that new workers pay on their homes and the additional sales taxes that they pay on food, clothing and a host of other items.

Maready says the economics of incentives aren't that simple. When new workers come to the area, he argues, they bring their children, creating the need for more schools. Communities typically will spend more on a range of other services, including police and fire protection. The only clear beneficiary, he says, is the new company.

Some analysts argue that North Carolina would be better off without incentives - but only if other states abandoned the practice as well.

"The best of all worlds would be for all states to stop incentives tomorrow," says Paul Lawler, executive director of the N.C. Economic Developers Association. "But that's not the nature of the market today. In 1996, you have to have them."

Phillips, the state's commerce secretary, says the best argument for continuing to offer incentives is what has happened in the months since Maready's initial court victory. Companies - and the economic development consultants they hire - are now thinking twice about coming to North Carolina, Phillips says.

"People have tacked up articles about Maready on their bulletin boards across the country," he says. "One person has really spooked business from coming to North Carolina."


Are incentives necessary?

Maready dismisses such claims as "simply nonsense." He and others contend that if multimillion-dollar corporations really want to locate in North Carolina, they'll come with or without incentives.

Some business executives admit as much. When NetEdge Systems, a maker of high-tech telecommunications hardware, decided to locate in Research Triangle Park in 1994, it received $75,000 from the governor's fund and got water and sewer help from Wake County.

But "the decision to come was made before we were aware incentives were available," says company President Al Bender. "When we found out about the incentives, we applied for them, and we were happy to take them."

John Hood, president of the conservative John Locke Foundation, argues that by doling out incentives, government is asking some taxpaying businesses to help subsidize their competitors. The new businesses that government lures to town may make the same product or need the same kind of workers as existing companies, he says.

Ideally, Hood says, only businesses that benefit from the arrival of new businesses, such as utility companies and banks, should be paying to help recruit them. If Maready prevails, Hood is confident that the private sector will step up its own recruiting efforts and North Carolina won't suffer.

Maready says that if politicians really want to use incentives, they're free to ask the public to pass a constitutional amendment making them legal. He doesn't believe voters would pass such a measure.

Phillips disagrees. "It would not be easy," he admits. "But properly explained, in terms of job creation, it could be done."

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Copyright © 1996, The News & Observer.

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