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Court ruling jeopardizes state tax-incentive packages
Scripps Howard News Service


August 13, 2005

To opponents, tax breaks that states and cities use to woo and win multinational companies' business are nothing short of corporate welfare and a waste of time and money that communities can ill afford.

Proponents call investment tax incentives the life's blood of economic development that's needed to pump up national, state and local economies with high-paid jobs that could go overseas.

Now the 6th U.S. Circuit Court of Appeals has threatened the whole system of U.S. investment tax incentives, holding that they "hinder free trade among the states."

The appeals court ruling came in the case of a $281 million investment tax credit that Ohio gave DaimlerChrysler for a $1.2 billion Jeep assembly plant in Toledo. The court said that violates the U.S. Constitution's commerce clause and the power it vests in Congress "to regulate Commerce ... among the several states."

Technically, the ruling applies only to Ohio, Kentucky, Michigan and Tennessee - the states under the Cincinnati-based 6th Circuit - but it affects incentives used by virtually every state.

Until now, the academic debate has centered on whether state and local tax incentives grow the economic pie or amount to a zero-sum game of smokestack-chasing.

Now the debate is about the constitutionality of investment incentives. That's why DaimlerChrysler, the state of Ohio and their allies have appealed to the Supreme Court, which could say as soon as next month if it will hear the case when the new term starts Oct. 3.

Meantime, the commerce clause will figure large in Senate confirmation proceedings for Supreme Court nominee John Roberts. As a federal appeals court judge in Washington, Roberts cited the commerce clause in an opinion questioning whether the Endangered Species Act applies to a "hapless toad" that lives in California and never crosses state lines.

Senate Judiciary Committee Chairman Arlen Specter, R-Pa., served "advance notice" to Roberts in a three-page letter this week that Specter will use the confirmation hearings to ask if Roberts believes the commerce clause gives Congress broad power to pass nationwide economic and social regulation.

Specifically, Specter wants to know what Roberts thinks of high-court rulings that struck down the Gun-Free Schools Act and Violence Against Women Act for exceeding Congress' power to regulate interstate commerce. Specter said both holdings "overturned almost 60 years of Congress' powers," and in both 5-4 cases, Sandra Day O'Connor - the justice Roberts would replace - cast the tie-breaking vote.

"I'm not suggesting we pack the court, but at a minimum, the Senate is determined to confirm new justices who respect their role," Specter wrote to Roberts.

Nobody expects Roberts to commit himself on pending cases, let alone pre-judge the appeal by DaimlerChrysler and Ohio. But DaimlerChrysler v. Cuno (as the case is known) could be the commerce-clause test case for a Justice Roberts.

It's been a "test case" all along to consumer activist and longtime corporate welfare critic Ralph Nader and Northeastern University law professor Peter Enrich.

Nader recruited Enrich after reading a 1996 law-review article in which Enrich theorized that commerce-clause limits could "save the states from themselves" in the tax-break bidding war to capture corporate investment.

The two initially challenged tax breaks that Hartford, Conn., used to lure the NFL's New England Patriots, but the case died when the team chose to stay in Foxboro, Mass. So Nader and Enrich took aim at Ohio's DaimlerChrysler deal, enlisting homeowner Charlotte Cuno, Kim's Auto & Truck Service and other Toledo property owners to challenge it.

Enrich argued and won the 6th Circuit case, which he says "casts a dark cloud over incentives all across the country." Nader calls it a "blow to corporate welfare ... and the extortionate demands by large companies for subsidies from cowering cities and states."

DaimlerChrysler counsel-of-record Charles Rothfeld says the ruling has chilled the tax-incentive climate far beyond Ohio, Kentucky, Michigan and Tennessee. Elsewhere:

- Kmart executives cited the legal limbo when Michigan offered $45 million in tax incentives to keep their corporate headquarters in Troy, Mich., when Kmart and Sears merged. Instead, Kmart relocated to Sears' suburban Chicago headquarters.

- North Carolina's award of $240 million in tax breaks to Dell Computer for a manufacturing plant in Winston-Salem is under state-court challenge.

- Northwest Airlines is fighting $2.5 million a year in Wisconsin property-tax exemptions for Midwest Airlines and Air Wisconsin.

- Minnesota is fending off lawsuits attacking tax incentives for its JOBZ training program and the biotech industry.

Tax breaks and outright subsidies also are at issue in new twin World Trade Organization probes of government aid to aviation giants Boeing and Airbus.

Closer to home, Nissan North America officials worry that the 6th Circuit ruling could apply retroactively. Nissan executives ask: Could the decision jeopardize tax incentives Tennessee granted years ago to expand the Smyrna manufacturing plant and Decherd power train plant when Nissan could have expanded plants in Mexico instead?

"This effort by the Cuno plaintiffs to 'level the playing field' among the 50 states ignores the reality that the playing field is global, not national, and their attempt to level the playing field can only result in tilting it in favor of other countries," Nissan counsel-of-record Charles Trost told the Supreme Court, urging it to take DaimlerChrysler's case.

"DaimlerChrysler had to locate its $1.2 billion facility somewhere," Ohio's solicitor, Douglas Cole, said in his appeal. "But under the 6th Circuit decision, any efforts by Ohio to secure that investment would ostensibly violate the Constitution."

With so much at stake, business groups, unions and state and local government groups are urging the Supreme Court to reverse the 6th Circuit.

But these same groups also are asking Congress to flex its interstate-commerce powers with legislation to clarify that states can adopt tax incentives for economic development.

Legislation to do just that has been introduced by Republican Sen. George Voinovich, who was the Ohio governor who helped win the Toledo Jeep plant. His bill has bipartisan backing in both houses from the Michigan, Ohio, Kentucky and Tennessee delegations, along with members from other states.

"As a former governor who had to compete against Japan, Canada, China and Europe for new business projects, I know just how important a role tax incentives can play," said Voinovich. "I can assure you that our competitors are certainly not going to stop using tax incentives. Neither should we."


Contact Mary Deibel at DeibelM(at)

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