The Charlotte Observer

November 19, 1995

Whole hog for businss
Economic incentives: corporate welfare or prudent investment?

Jack Betts, Associate Editor

Copyright © 1995, The Charlotte Observer

Dave Phillips didn't start this war among the states to lure new plants with offers of cash on the barrelhead, but he believes he has to wage it. The state secretary of commerce, who outlines the arguments in favor of financial incentives for new and expanding industry, thinks North Carolina's got to have an array of financial incentives to compete with other Southern states. Otherwise, states like South Carolina, Virginia and Alabama will nab the kinds of plants that make the most impact on a state's economy - BMW, Mercedes-Benz, Motorola.

And Bill Maready, who defines the arguments against cash incentives, doesn't contend that the state has no business in economic development. He believes educational programs, infrastructure improvements that benefit the general public and aggressive promotional campaigns are appropriate roles for public agencies. But the Winston-Salem lawyer, who is leading the legal charge against using public funds for private purposes, is challenging a state statute called the Local Development Act, originally passed in 1925 but considerably amended in the 1980s and in 1993, that allows governments broad discretion in using public funds to attract industry.

Maready brought the matter to a head by suing Winston-Salem and Forsyth County for having spent more than $13 million in tax money on 24 economic incentive projects. He argued that the statute is unconstitutional because it violates the N.C. Constitution's requirement that all expenditures have a ``public purpose,'' and that the law itself is vague and arbitrary on how public money can be used.

Maready won his argument in Forsyth County Superior Court, where Judge Julius Rousseau found the statute unconstitutional. The state is appealing that verdict, but meanwhile Transylvania Superior Court Judge Forrest Bridges in a similar case upheld the law, finding that economic development resulting in more jobs and increased tax base is a legitimate public purpose in itself.

The state Supreme Court has agreed to review the cases early in 1996 partly because doubt over what's legal may interfere with the state's recruiting efforts. State officials say a number of prospects already have bowed out of the running because it is not clear whether the state will be able to fulfill its financial promises.

It's a timely issue from another standpoint. Just a week ago, the N.C. Economic Development Board recommended upping the ante in the state's economic development offerings. A clear interpretation of the law from the Supreme Court may be instrumental in helping the state decide what it can and cannot do in economic development.


What N.C. offers now

What does North Carolina offer now? The Department of Commerce outlines six key financial incentives for new and expanding industries. The list includes:

* Worker training programs through the community college system, including instructor salaries, travel expenses, classroom materials, even a training facility. The state will also custom-tailor a training program as part of its incentives.

* Repeal of the intangibles tax. The General Assembly this year ash-canned its tax on stocks and bonds, which benefits both companies and individuals to the tune of about $127 million.

* Reductions in unemployment insurance taxes. The state has lowered its rates for the third year in a row, and now has the lowest unemployment insurance tax rate in the country.

* The Industrial Recruitment Competitive Fund, which has provided about $12 million to help cinch the deal with companies considering locating or staying in North Carolina. The state says it has brought in 10,000 jobs and $1 billion in economic investment.

* The Jobs Creation Tax Credit, providing companies with $2,800 in tax credits over four years for each new job created in distressed counties.

* The Industrial Development Fund, which provides distressed counties up to $2,400 for each new job created, up to a maximum $250,000 for renovating buildings or providing infrastructure.


The next steps

If the N.C. Economic Development Board gets its way next year, the state would go further. It would grant tax credits of up to $4,000 for each job in the 25 most economically-distressed counties, extend tax credits to non-manufacturing firms that do 75 percent of their business out-of-state and give tax credits for research and development, among other things.

The board says those incentives may be necessary for North Carolina to compete with other states like Alabama and Virginia, which offered much larger incentives packages than North Carolina for recent industrial prizes. Gov. Jim Hunt called the N.C. offer to Mercedes-Benz a prudent package, but it surely looked like one giant giveaway to many who doubt the wisdom on special economic incentives.


An admirable position

Meanwhile, the state retains its admirable position as one of the best places to bring a company. The publication Plant Sites & Parks, after surveying more than 500 executives for their preferences, last week rated North Carolina first in the nation for overall attractiveness. That raises the question: If North Carolina is already the most attractive state for economic development, why does it need to expand its definition of ``public purpose'' to attract economic development?

When the N.C. Supreme Court in 1968 struck down the N.C. Industrial Development Financing Authority, then-Associate Justice Susie Sharp concluded that it was difficult to be precise about the term. But for an expenditure to be public, she wrote in the majority opinion, ``its benefits must be in common and not for particular persons, interests or estates; the ultimate net gain or advantage must be the public's. . . . ``

Twenty-seven years later, we're still arguing about what's a public purpose. Maybe the Supreme Court will come up with a better definition this time around.

Jack Betts is an Observer associate editor based in Raleigh.

Used with permission.
All rights reserved. No part of this article may be reproduced, translated, or transmitted in any form or by any means without permission in writing from the Charlotte Observer.

Copyright © 1995, The Charlotte Observer.

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