The News & Observer

Raleigh, N.C.

May 30, 1995

Business incentives under fire

The Associated Press

Copyright © 1995, The News & Observer

A suit challenges the use of tax money to lure industry. Meanwhile, Alabama might resort to bonds to pay for a Mercedes-Benz plant North Carolina sought in 1993.

WINSTON-SALEM - Local governments in North Carolina have continued to use tax money to attract businesses even as a trial nears in a lawsuit challenging the constitutionality of business incentives, state officials said.

William F. Maready, a Winston-Salem lawyer, has sued Winston-Salem and Forsyth County. Maready claims that using tax money to recruit new businesses or help existing industries violates the state constitution because public money cannot be used for a private purpose.

Local government officials say the grants do not violate the state constitution because they expand the tax base and create jobs, thus satisfying the public-purpose standard in the constitution.

The trial is scheduled for August.

Economic-development officials in North Carolina say cities and counties have continued giving grants since Maready sued in February. Forsyth County has since given two grants totaling $55,000.

But problems with incentive packages have surfaced elsewhere in the Southeast.

A report last year by officials with the Federal Reserve Bank of Minneapolis said incentives unfairly disrupt market forces, and urged Congress to take action to stop an "economic war among the states," The Winston-Salem Journal reported.

Since Maready's suit was filed, the attorney general of Georgia has concluded that an economic-development program violates the Georgia constitution.

Alabama plans to issue up to $145 million in bonds to meet payments promised to Mercedes-Benz -- a sign that the 1993 deal to bring the automaker to the state was too costly, as critics said.

North Carolina had fought hard to land the Mercedes-Benz factory -- a $300 million investment that would have created 1,500 jobs -- and offered an incentive package worth $109 million. State and local governments in Alabama promised more than $250 million worth of cash, tax breaks and other incentives.

Also in 1993, North Carolina voters rejected a proposed constitutional amendment that would have allowed cities and counties to issue bonds for industrial improvements without taxpayer approval. It lost by a 4-to-1 ratio.

"There is an increasing awareness on this board and among the public of the inherent injustice of economic-development-incentive programs," said Steve Arnold, a Guilford County commissioner. One part of Alabama's deal gave Mercedes-Benz a break on its corporate income tax by allowing the company to use its state tax payments to pay construction costs.

Fob James, Alabama's current governor, has said the tax break probably was illegal -- as the state's teachers association argued: Under Alabama law, corporate income taxes must be used for education.

James said this month that the state will have to issue up to $145 million in bonds to meet the payments promised to Mercedes.

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