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N.C. business incentives face new challenge

Last updated: September 19. 2004 11:34PM
Mark Schreiner | CAPITAL IDEAS

Nearly 10 years ago, North Carolina’s machinery for enticing businesses to relocate or expand here came to a dead stop.

The N.C. Supreme Court had to work out some cases, including one from a Winston-Salem attorney that persuaded a Superior Court judge that the laws allowing some kinds of economic incentives violated the state constitution.

In the end, the Supreme Court justices voted – along party lines, with Democrats in the majority – that North Carolina’s tax breaks and other incentives for business were OK.

The machinery of business incentives in North Carolina revved back to life.
In recent years, those efforts have been expanded. The General Assembly has handed out incentives to particular companies and created new programs that give cash, rather than tax credits, to businesses that create new jobs.

But as the supporters of the state’s film and television community prepare to ask the General Assembly for a new incentive to help their industry, a new round of lawsuits seeking to restrict incentives is under way across the nation.

If such litigation were to break out in this state, the results could be different than what they were a decade ago.

And overturning even part of North Carolina’s economic incentives system would have profound effects on the political landscape as well as the economy. Whether those changes would be good or bad depends on which side of the debate you’re on.

Earlier this month, judges for the Sixth Circuit of the U.S. Court of Appeals threw out one kind of Ohio incentive and preserved another.

The judges ruled, in a case that does not affect North Carolina, that the city of Toledo, Ohio, violated the U.S. Constitution when it handed out a corporate tax break in 1998 to DaimlerChrysler in exchange for building an auto plant.
That tax break interfered with interstate commerce by coercing a company already doing business in Ohio to do more business there and not in another state, the court said.

Incentives tied to a particular location or state violate the U.S. Constitution’s mandate that only Congress may regulate interstate commerce, the appeals court said. (The case is Cuno v. DaimlerChrysler Inc.; No. 01-3960).
Judges in that same case said a property tax exemption was OK because it had no effect on interstate commerce. A company could either stay and pay no Ohio property tax or move to another state, where Ohio tax laws have no effect.

Of course, that’s the legal view of it. Critics say the coercion works the other way, with the corporations making states compete with ever more lucrative incentives.

Article V, section 2, of the N.C. Constitution says the “power of taxation shall be exercised in a just and equitable manner, for public purposes only . . . ”
Some would like another crack at the legal interpretation of that sentence.

“We are very supportive of efforts to stimulate the economy – that’s a good thing,” said Robert Orr, director of the new N.C. Institute for Constitutional Law in Raleigh. “That’s not the question. Rather, it’s about whether these programs conform to the state constitution.”

In 1996, the state Supreme Court ruled 5-2 that business incentives served “public purposes.” Mr. Orr, who resigned his seat on the Supreme Court this summer to run the institute, was one of the court’s two Republicans who dissented in that case, Maready v. City of Winston-Salem.

Incentives are unfair, he said. “Don’t all companies create jobs? If so, then why should some industries get incentives and others none?”
Supporters of incentives for the film industry say the public purpose is obvious.

“If there’s a loss of jobs, isn’t creating an incentive to keep those jobs serving a public purpose?” asked Denis Ventriglia, a Wilmington attorney who sits on the N.C. Film Council. “We need an attempt to level the playing field relative to other states.”

Mark Schreiner is chief of the Star-News bureau in Raleigh.

Reach him at (919) 835-1434 or