ALBANY — New York’s top court on Monday rejected a challenge to economic development grants brought by a taxpayer group, led by a Lockport man, that wanted companies to return billions of dollars to the state.

A divided Court of Appeals concluded that New York’s Economic State Development Corp. is a public benefit corporation and separate from the state. It isn’t subject to the constitutional prohibition against giving state funds to private companies, the court decided.

Such corporations are created by the state, but it is “well settled” that they exist independently with greater flexibility and can use state money for designated public purposes, Judge Theodore Jones Jr. wrote for the five judges who rejected the challenge. In this case, that means providing state grants and loans to private companies like IBM and Global Foundries for economic development.

Jones noted that the Legislature created the New York State Urban Development Corp., doing business as ESDC, in 1968 to promote a vigorous economy, prevent stagnation and create new job opportunities to protect against the hazards of unemployment. He said the court has previously recognized “public funding programs essential to addressing the problems of modern life” unless they are “patently illegal.”

The majority also upheld grants to agricultural nonprofit associations to promote wine and fruit, concluding that is a predominantly public purpose.

Chief Judge Jonathan Lippman and Judges Carmen Beauchamp Ciparick, Victoria Graffeo and Susan Read agreed with Jones.

In one dissent, Judge Eugene Pigott Jr. said the state constitution expressly forbids giving or loaning state money to any private corporation, association or undertaking, even when a public benefit corporation is used as an intermediary. The provision has specific exceptions for educational and mental health funds.

“Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time,” Pigott wrote. He noted that New York voters in 1967 rejected a proposed constitutional amendment that would have allowed the state to distribute funds to private businesses for economic development in the same way ESDC is doing it now.

In a second, blistering dissent, Judge Robert Smith wrote that the Legislature’s “devotion to this self-destructive practice is no small matter,” including $140 million to support a joint venture in wafer packaging that includes IBM, $300 million to help a consortium of semiconductor manufacturers expand research and development and $650 million to subsidize Global Foundries’ semiconductor manufacturing. Based on projections of new and retained jobs, the state costs range from $60,000 to $400,000 per job, he wrote.

“I have defended before, and will no doubt defend again, the right of elected legislators to commit folly if they choose,” Smith wrote. “But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed. ... I seem to remember a time when IBM could make money by selling its products for more than it cost to produce them. I would have thought semiconductor manufacturers could do the same. If they cannot, a bail-out for their shareholders is not a prudent use of more than a billion dollars in taxpayer funds.”

Lee Bordeleau of Lockport, who loaned his name as one of 50 plaintiff taxpayers in the suit, is thoroughly disgusted with the majority ruling. When a state appellate court rescued the suit from dismissal on technical grounds in mid 2010, on a 5-0 ruling, he said Monday, “I thought we had cracked the code, but I guess not; (the Court of Appeals) had a chance to make a statement and they chose not to. ... Politics might have played a role. The state doles out $4 to $6 billion a year in corporate welfare, and that buys a lot of influence. You can’t fight City Hall.”

Attorney James Ostrowski, who represented the taxpayers group, said he knew this was an uphill fight but thought court arguments showed the state “was utterly unable to defend its position in rational terms,” and he thought his group had finally won a victory for taxpayers.

“Perhaps time will reveal a larger purpose to this bitter defeat,” he said.