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A watchdog blasted Dell and the North Carolina today in a lawsuit aimed at rolling back huge incentives designed to lure the computer maker to the state.

Robert Orr, executive director of the North Carolina Institute for Constitutional Law (NCICL), alleged that Dell used fear tactics and unfair bargaining to win $240m in tax credits from North Carolina and another $37m in local subsidies from the city of Winston-Salem and Forsyth County. The state and local bodies hoped such perks would entice Dell to build a new PC manufacturing plant in North Carolina - an area punished a loss of manufacturing, textile and farming jobs. 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, during a conference call. "People are desperate to bring in good companies, and (the vendors) use this fear - this need of jobs in a state - to play one state off against another and literally to keep raising the ante and 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 2004, North Carolina agreed to hand Dell a number of perks in the hopes of bringing 1,700 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 must meet very limited constraints such as not firing half the plant's employees before a certain date and paying some worker health care costs.

(A copy of Dell's plush package can be found here.)

NCICL and the seven citizens who stepped forward to sue Dell argue that this agreement violates both the North Carolina and the US constitutions. They charge that such deals create a hostile environment for local businesses that do not receive similar perks and for residents who must pay to bring jobs to North Carolina. The plaintiffs hope a court will declare the existing contracts unconstitutional and force Dell to return any public money that has already been paid. In addition, NCICL would like 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," Orr said.

Orr noted that Virginia was thought to be in the running for the Dell plant and helped push North Carolina's bid higher. In the end, it turned out that Virginia was only willing to offer $40m. "North Carolina arguably offered up $200m more than its closest competitor," Orr said.

Dell declined to comment on pending litigation, as is company policy. It did, however, say that it will continue building the factory and plans to be in production by September. It will put more than $100m into the facility and employ 700 people in the first year of business and 1,500 people within five years.

"Regarding the incentive package itself, North Carolina has taken a pragmatic approach to its economic development with incentives created tied to job creation - a big priority for the state," said David Frink, a Dell spokesman. "The incentives – tax credits – are performance based and Dell will not receive the credits unless we create the jobs."

This matter has added a very public twist to the outsourcing, offshoring dilemma. 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.

"Think we're on the brink of a crisis ... other countries get it," North Carolina Secretary of Commerce Jim Fain wrote after meeting with a Dell executive, during the bidding process. "We're going to get whipped in econ. - not in a war. We truly want to continue in this country. If we can't get states to get creative - or the fed gov't. . . And if we can't make it, who can - we're all about productivity. We need to get to where something happens at the fed level."

Orr too suggested that the federal government take a more active role in setting parameters for this type of bidding and in creating policies to protect jobs.

One thing here is for certain, the longer this legal challenge goes on, the more Dell will suffer in the public's image. The rather uncontroversial company tends to stay out of the limelight, avoiding tit-for-tit squabbles seen between rivals such as HP, IBM and Sun Microsystems. But when something such as PC recycling or using cheap prison labor crops up, Dell takes an especially bad beating. Its incredible success and money-making prowess make it an obvious target.

Everyone wants the wholesome Texan manufacturer founded by a pleasant college dropout to live up to the American Dream it represents instead of being seen as a cancer on the rest of us. ®

Related stories

Legal watchdog investigates Dell sweeteners
Foreigners gain thousands of jobs on Dell US staff
IBM finds misconduct, earnings abroad
How Dell made North Carolina beg for business

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