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States Pay Steep Price
To Attract Industry
Local Taxpayers, Small Businesses Bear
The Burden, Say a Growing Chorus of Critics

By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
June 29, 2005; Page A4



RALEIGH, N.C. -- Worried about job losses in the textile and furniture industries, North Carolina officials went all out in persuading Dell Inc. to build a plant in the Winston-Salem area.

But the state's victory over rival Virginia came at a high price: $280 million in state and local incentives. Critics say the subsidies amount to corporate welfare that puts local taxpayers and small businesses at a disadvantage. Last week a nonprofit think tank funded by local conservative groups sued the state, challenging parts of the package as unconstitutional.

"People are starting to see through the façade," says Robert Orr, a retired state Supreme Court justice who runs the North Carolina Institute for Constitutional Law, which filed the suit. "Incentives are geared toward literally a handful of large, very wealthy and very powerful corporations at the expense of the other businesses."

Critics have also taken aim at incentive programs in other states, including Minnesota, Nebraska, Ohio and Wisconsin. And they are preparing challenges in at least another four states, says Peter Enrich, a law professor at Northeastern University in Boston and a leader in the anti-incentive movement. He declined to identify the states.

The anti-incentive forces have been buoyed by a favorable decision in an Ohio case now pending at the U.S. Supreme Court. In September, the Sixth Circuit Court of Appeals in Cincinnati struck down parts of an Ohio program that gave DaimlerChrysler AG land and $280 million in tax breaks for expanding a Jeep plant in Toledo. The court found that the plan violated the Constitution by interfering with the free flow of trade among states. The car maker has appealed to the Supreme Court, which will likely decide by the fall whether to hear the case.

States for years have been engaged in a kind of industrial arms race to lure job-producing employers. But as incentive packages for corporations have become costly, critics -- a philosophically diverse group of free marketers, consumer advocates and former state officials -- have become more organized and effective in pressing arguments that subsidies are wasteful and, perhaps, illegal.

In Minnesota, Alec Olson, a former lieutenant governor, filed a lawsuit to overturn the state's incentive program. Republican Gov. Tim Pawlenty has asked the court to dismiss the suit.

In Nebraska a similar suit, filed by former state Sen. John DeCamp was dismissed last year for technical reasons: The defendants weren't served with the complaint within a six-month deadline. The case became moot recently when the Nebraska legislature passed a revised program that allows more diverse business operations and multistate projects to qualify for incentives.

Some challenges are brought by companies unhappy that their competitors are getting economic goodies. In late 2003 Northwest Airlines, of Eagan, Minn., sued Wisconsin to try to block legislation creating $2.5 million annually in property-tax exemptions benefiting Air Wisconsin Airlines, of Appleton, and Midwest Airlines, of Milwaukee. Northwest argued that the incentives put it at a competitive disadvantage. A state court found the legislation unconstitutional; the state is appealing the decision.
[Battling Tax Breaks]

The debate over incentives also is taking place on a global scale. As an outgrowth of the rivalry between Boeing Co. and Europe's Airbus, the U.S. and European Union are pressing complaints with the World Trade Organization's trade court alleging illegal subsidies.

Business groups and state governments defend incentive packages as important tools for spurring economic growth, and they are watching the DaimlerChrysler case in the Supreme Court. If it upholds the lower court's ruling, they warn, that would be devastating for development in Ohio, Michigan, Kentucky and Tennessee -- the states under the appeals court's jurisdiction. The appeals-court decision blocking the incentives package has been stayed pending the outcome at the Supreme Court.

An anti-incentives decision by the high court would have broader implications as well, potentially endangering incentives for projects such as factories and sports stadiums across the country. An attack on incentives could encourage states to shift to other financial inducements, such as direct cash grants.

To protect states' authority to set incentives, two Republican lawmakers from Ohio, Sen. George Voinovich and Rep. Patrick Tiberi, last month introduced legislation to explicitly grant states the power to offer tax incentives for economic development. "The bill guarantees that we can keep using these tools to help grow our economy and put people to work," Mr. Voinovich said at the time.

People who oppose the Voinovich effort say that granting tax concessions to corporations unfairly shifts the burden of funding services such as schools and roads to individual taxpayers and small businesses. Greg Leroy, director of Good Jobs First, a nonprofit economic-development research organization in Washington, says the biggest breaks are awarded disproportionately to the wealthiest multinational companies.

In the case of Dell, the computer company threatened to move its planned $100 million facility offshore if state officials didn't waive corporate income taxes. When North Carolina balked, Kip Thompson, a Dell vice president, told the state commerce secretary: "If a state like N.C. can't get this, I'm worried for our country -- there's a certain amount of patriotism here," according to copies of handwritten notes released by the state.

After Dell secured a state-incentive package, which included $225 million in income-tax credits over 15 years, it began seeking additional breaks from municipalities. The city of Winston-Salem and Forsyth County got the plant by kicking in an extra $37 million in enticements, including 200 acres of land. The facility is expected to employ 1,500 people and pay an average annual compensation of $28,000.

Dell spokesman David Frink said the company doesn't discuss its negotiations. "North Carolina took a pragmatic approach to economic development," he said.

North Carolina Republican State Sen. David Hoyle looks at it differently. "It's out of control, like we're addicted and can't kick the habit," he said of state incentives for corporations. "The perfect scenario would be if incentives were outlawed nationally." Now, states have little choice but to continue competing for new jobs, he said.

Other North Carolina officials consider the cost of winning the Dell plant well worth it. "We have no apologies for incentives as long as there's a large return to the state," said Dan Gerlach, senior policy adviser to Democratic Gov. Michael Easley.

Mr. Gerlach, an economist, estimates the state will get $4 in new economic-development revenue for every $1 in tax breaks awarded to Dell. "This is a slam-dunk deal for North Carolina," he said.

Write to Michael Schroeder at mike.schroeder@wsj.com