N.C. May Lose a 'Rose' It Uses to Woo Firms

Superior court rules tax incentives are unconstitutional

LAST year, in an effort to create jobs, the city of Winston-Salem, N.C., built a $500,000 parking garage for the R. J. Reynolds Tobacco Company. Sure enough, the jobs came through - but so did a carton of trouble from William Maready. Angered by the city's gift to a company that has bigger annual revenues than some Central American countries, the hometown lawyer filed suit in superior court, charging that the use of taxpayer funds to benefit private companies is unconstitutional. This month, he won. If the state's Supreme Court upholds the ruling, Mr. Maready will be known as the man who dismantled every corporate incentive program in North Carolina - and set a precedent that may hound other states that rely on tax perks. Tax breaks are like roses to Don Juan - cities and states rely heavily on them to court new manufacturers. At a time when high-wage jobs are scarce, North Carolina's corporate recruiters say the verdict would make it nearly impossible for them to woo top-notch firms. Critics welcome it as a blow to ''corporate welfare.'' Either way, Maready's case marks the first victory for a growing national movement to change the way states compete for new business - a process so heated that some call it ''the civil war.'' ''I understand the need to create jobs, but this is not the way to do it,'' Maready says, citing the litany of tax breaks, infrastructure improvements, and worker training packages states offer. ''Have you ever been to an auction and seen things sell for more than they're worth? That's what's happening here.'' Indeed, some of the states most successful at luring firms with perks may have overextended themselves. The foremost example is Alabama, which offered Mercedes an incentive package worth $253 million to build a new truck plant there. The package, which amounts to a per-worker subsidy of $168,000, has become a burden that the state is struggling to bear. The new governor, Fob James, reportedly admits the state went too far. While competition among states is nothing new, Jim Breagy, an analyst at the National Council for Urban Economic Development in Washington, says the stakes have risen in recent years. Due to a decline in good jobs, Mr. Breagy explains, some states have launched aggressive campaigns to lure companies or even steal them from other states. Southern states have had particular success coaxing northern companies out of the snow, he says, by offering generous incentives, cheap land, union-free labor, and closer proximity to emerging markets like Mexico. While drawing a big-name company to a state is still a coup for elected officials, some of the political luster has faded in recent years. Carl Rist, a policy analyst at the Corporation for Economic Development (CED) in Chapel Hill, N.C., warns that too many incentives can erode a community's tax base to the point where it cannot provide acceptable services, such as good schools. Some critics, he says, contend that incentives don't usually matter much in a company's final decision, but function instead as a ''pure subsidy.'' Maready agrees. Incentive programs only encourage corporations to treat their host communities like servants, he says, and to keep asking for more concessions as they expand - essentially holding a community hostage. ''Some people call it corporate welfare, but I call it corporate extortion,'' he says. ''Companies have come to expect these perks.'' Maready argues that the best thing any state can do to attract companies is to invest in education and lower taxes as much as possible for all firms, not just the biggest and newest. While some companies might go elsewhere, he argues, ''the good ones will still come.'' Maready is not alone in his assessment. The National Governor's Association has taken a position against ''bidding wars,'' and the Federal Reserve Bank of Minneapolis has issued a report that recommends federal controls on state incentive programs. In recent years, Standard and Poors has downgraded the bond ratings of some of the more aggressive states and municipalities. While they say they would welcome federal intervention, North Carolina's corporate recruiters say Maready's suit will render the Tarheel state shoeless in the race to win new business. ''People are worried all over the state,'' says Angie Harris, spokeswoman for the North Carolina Department of Commerce. Several companies who were considering North Carolina for expansion, she says, have scratched the state off their lists since the ruling. ''Who can blame them?'' she says. ''They're just looking for the best bargain.'' Ms. Harris argues that in recent years North Carolina has imposed more conditions on its incentives, and worked to invest in workers and infrastructure, rather than simply spitting out tax abatements. Using a network of community colleges, the state provides free worker training for any firm that moves here, she says.