Court Says Incentives Are Constitutional

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Court Says Incentives Are Constitutional

Special Report - October 16, 2007
In a long-awaited decision, the North Carolina Court of Appeals ruled today that economic incentives offered to Dell, Inc. in 2004 do not violate the North Carolina Constitution or the U.S. Constitution. In November 2004, the Legislature enhanced certain tax incentives to provide a tax credit for certain major computer manufacturing facilities (the "Computer Legislation”) and make them applicable to Dell in order to lure it to construct a $100 million computer manufacturing facility in Forsyth County. The City of Winston-Salem, Forsyth County, and several other groups joined in the incentives package that was offered to Dell.

On June 23, 2005, The Institute for Constitutional Law, led by former Supreme Court Justice Robert Orr, filed suit in Wake County on behalf of seven taxpayers who claimed that the incentives: (1) did not serve a “public purpose” in violation of the N.C. Constitution, (2) constituted “exclusive emoluments” (benefits exclusive only to one person or corporation) in violation of the N.C. Constitution, (3) were unauthorized local development, (4) were not uniformly applicable in violation of the N.C. Constitution, and (5) discriminated against interstate commerce in violation of the U.S. Constitution. Judge Robert H. Hobgood dismissed the lawsuit in May, 2006 ruling that the plaintiffs lacked standing to bring the claims and had failed to state a claim.

While agreeing with the lower court that the plaintiffs lacked standing to bring the other claims, the Court of Appeals ruled that the plaintiffs did have standing to bring claims for violating the Public Purpose and Exclusive Emoluments clauses of the N.C. Constitution. The Court then found that the N.C. Supreme Court’s 1996 decision in Maready v. City of Winston-Salem had already decided the question of the constitutionality of economic development incentives. The Court noted that Maready decided that economic development incentives serve a legitimate public purpose because, “they are directly aimed at furthering the general economic welfare of the people of the communities affected. While private actors will necessarily benefit from the expenditures authorized, such benefit is merely incidental.” Alleviating unemployment, creating new jobs, increasing the local and state tax bases, jump-starting economic development, and helping North Carolina transition from a traditional manufacturing base to a more modern manufacturing base, such as computer manufacturing, were all public benefits that justified economic incentive packages, the Court found. Furthermore, the fact that the economic incentives were only offered to Dell was not a constitutional violation, because the “aim” or “primary purpose” of the incentives legislation was to benefit the public, even though it incidentally benefited Dell also.

The opinion was written by Judge Geer, with Judges Wynn and Elmore concurring. Because all three appeals court judges agreed in the decision, it can only be appealed to the State Supreme Court on the basis that a substantial constitutional question is presented.