NC Justices Reboot Taxpayers in Dell Case

Dell came to North Carolina in 2005 following tough negotiations with the state for “economic development” incentives dollars. Fearing that the computer manufacturer would choose another state in which to base its operations, the North Carolina General Assembly convened two days after the November general election in 2004 for a special “emergency” legislative session to seal the deal. At a time when manufacturing job losses from the furniture and textile industries were crippling some Piedmont counties, lawmakers were told that unless it received more than $300 million in taxpayer dollars, Dell would take its thousands of manufacturing jobs elsewhere.

Dell received their commitments for the incentives and went on to build a $100 million facility in Winston-Salem. The 750,000 square foot facility, which opened in the fall of 2005, makes personal computers and servers and currently employs between several hundred.and 1000+ workers, depending on which report you're reading.

It didn’t take long for the Raleigh-based North Carolina Institute for Constitutional Law (NCICL) to file a lawsuit on behalf of seven taxpayers.

A look back at the Dell lawsuit
Former state Supreme Court Justice Robert Orr, now the NCICL’s executive director, filed the suit challenging the Dell incentives in 2005. He alleged that Dell used fear tactics and unfair bargaining to win $240 million in tax credits from North Carolina and another $37 million in local subsidies from the city of Winston-Salem and Forsyth County.  NCICL filed the lawsuit on behalf of seven individuals who want a court to decide if using tax revenue to fund such grants is constitutional.

"I think you know the ability for a large corporation to play around with the state," Orr said at the time of the 2005 filing. "People are desperate to bring in good companies, and [the companies] use this fear - this need of jobs in a state - to play one state off against another and literally to keep raising the ante until they max out - and in some instances [the company goes] ahead and makes the move they were going to make regardless of the incentives."

In exchange for North Carolina's tax dollars, Dell promised to bring between 1700 - 2300 jobs to the state. The incentives included a $15 per unit tax credit on every computer and consumer device produced in 2006 and a $6.25 per unit credit on products built between 2007 and 2019. In addition, the state vowed to build and widen local roads, have a local community college create a Dell specific training program, have an around-the-clock police presence at Dell's campus, and allow $10,000 per year tuition deductions for Dell employees at Wake Forest University, among many other things. To get such pork, Dell was asked to meet some very limited constraints – such as not firing half the plant's employees before a certain date and paying some worker health care costs. The agreement could ultimately result in Dell's not paying any state corporate income tax for more than 30 more years.

NCICL and the seven citizens who stepped forward to sue Dell in 2005 argued that this agreement violates both the North Carolina and the US constitutions. They charged that such deals create a hostile environment for local businesses that do not receive similar perks and for residents whose tax dollars are used for these handouts to bring jobs to North Carolina. The plaintiffs hoped a court would declare the existing contracts unconstitutional and force Dell to return any public money that had already been paid. In addition, NCICL hoped to establish a precedent regulating the scope of such subsidies.

Orr left no room to doubt his larger ambition, which is to stop companies from creating what he believes to be a vicious bidding climate. "What we are talking about and offended by . . . is that they are taking everybody's tax dollars and giving that money to an individual business," he said.

Orr noted that Virginia was thought to be in the running for the Dell plant and helped push North Carolina's bid higher. "North Carolina arguably offered up $200 million more than its closest competitor," Orr said.

“This matter has added a very public twist to the outsourcing, off shoring dilemma,” wrote columnist Ashlee Vance in The Register, a UK-based online publication that follows the global information technology industry. “How physical should states get to try and keep jobs at home? And is it healthy for large companies to use their leverage to bid states against each other? The Dell deal does seem a bit over-the-top, and North Carolina legislators appeared to have this feeling despite pushing the tax breaks through.”

In response to the NCICL lawsuit, in 2007, the state Court of Appeals backed a lower-court decision which upheld the legality of the incentives, saying the matter had been decided in North Carolina's courts more than 10 years ago in the case of Maready v Winston-Salem. In that case, Justice Willis Whichard, writing for the majority, said that incentives promoted the “public welfare.” If any private party gained from the millions of dollars in giveaways, he argued, this was "merely incidental."

Justice Orr was serving on the Supreme Court during the Maready case, and he wrote the dissenting opinion. “If a potential corporate entity is considering a move to Winston-Salem, but will only come if country club memberships are provided for its executives, do we sanction the use of tax revenue to facilitate the move?” he asked. Orr argued that incentives opened the door to virtually any use of taxpayer dollars. “[With this decision,] little remains of the public purpose constitutional restraint on governmental power to spend tax revenues collected from the public.”

Orr continued his fight to clarify the public purpose doctrine at NCICL, appealing the Court of Appeals decision to the state Supreme Court. But in April of 2008, NCICL’s three-year fight against the “economic development” incentives awarded to Dell came to an end, when the High Court refused to review lower-court decisions that said the Dell incentives package was constitutional.

“We don’t agree with the Court’s decision,” said Jeanette Doran, senior staff attorney with the NCICL. “They should have heard our appeal. We saw this case as a substantial constitutional question. They really need to elaborate on the ‘public purpose doctrine.’”

The future of “economic development” incentives
Doran said the Maready case has given the state courts cover to approve all incentive packages that get approved in Raleigh or at the local level. As far as the “Economic War Between the States” went, news reports later revealed that while Dell had engaged in threats and heavy-handed tactics during their negotiations with the administration, North Carolina’s only competition – the state of Virginia – had offered the company only $40 million.

The company built their Winston-Salem plant, but they never employed the thousands of workers originally promised. And less than four years later, Dell was looking toward shifting its production overseas – just as others have done before them.

Meanwhile, North Carolina-based employers continue to create and sustain the vast majority of jobs in the state – just as they always have – without taxpayer assistance. There’s a lesson to be learned here, but we’re not sure anybody’s getting it.

Updated September 8, 2008