Sunday, February 19, 2006

 

Cuno v. DaimlerChrysler - can the States compete?


On March 1, the Supreme Court will be hearing the rather interesting case of Cuno v. DailmlerChrysler (Cuno). The case is about the constitutionality of a state (in this case, Ohio) granting a business (in this case, DaimlerChrysler) Investment Tax Credits (ITC) for certain investments within the state.  Cuno et al. claimed this violated the Commerce Clause and remarkably, the Sixth Circuit agreed with them. On appeal to the Supreme Court, Ohio is arguing that Charlotte Cuno and her fellow (now) Respondents lacked standing to initiate the case and, more importantly for the rest of us,  that “this long-standing, widespread and well established state economic development practice [did not] violate the negative Commerce Clause’s anti-discrimination principle.” (petitioner's Supreme Court brief)

The Ohio law firm of Bricker & Eckler has put together a concise timeline of the case and provides links to the applicable briefs and court decisions:

Bricker & Eckler LLP: Briefs, Decisions and Orders in Cuno v. DaimlerChrysler Case

Bricker & Eckler LLP: Current Information on Cuno v. DaimlerChrysler

The matters here are not trivial. DaimlerChrysler already had a presence in the Toledo area when it agreed to invest approximately $1.2 billion in a new Jeep plant. In return it received a 10-year 100% property tax exemption as well as a 13.5% ITC which could be used against their Ohio franchise tax. The lower court noted that the value of these incentives was around $280 million.

Cuno et al. argued, on state and federal grounds, that the ITC and property tax exemption violated the Commerce Clause because it “encourage[s] further investment in-state at the expense of development in other states and that the result is to hinder free trade among the states.” (from the 6th Circuit opinion). The federal district court rejected both claims and Cuno appealed. The 6th Circuit agreed with Cuno on the ITC but rejected the property tax exemption challenge.

The interests of Cuno et al, the original plaintiffs in this case, are of a varied nature. Most assert standing as Ohio taxpayers, arguing that the ITC “depletes the funds of the State of Ohio to which the Plaintiffs contribute through their tax payments, thereby diminishing the total funds available for lawful uses and imposing disproportionate burdens on the Ohio Plaintiffs.” Some Michigan residents asserted standing alleging they were harmed as a result of the Jeep plant locating in Ohio vice Michigan. Finally, one business, which was the subject of eminent domain proceedings, claimed that absent the ITC it never would have lost its business site.

I offer no opinion here as to whether a state offering an ITC is a good idea or not. I’m generally sympathetic to tax breaks but am suspicious of a government’s ability to efficiently fine-tune its arsenal of business incentives. And I instinctively do not like the use of eminent domain to benefit one private party over another.

But the issue here is not one of “should” but rather “could”. Could Ohio offer the ITC to businesses making appropriate investments within Ohio?  Most states offer some kind of tax credit as part of a general encouragement to get business into the state. These tax credits are not of recent vintage. Yet remarkably, it seems, nobody seemed to realize that these credits were unconstitutional – nobody that is until the 6th Circuit.

(Criticism of state ITCs is not new and some state and local tax policy wonks have included Commerce Clause issues amongst their arguments against the credits. However these criticisms have generally originated as critiques of tax credits from a policy viewpoint. Through my admittedly limited readings of these critiques, I have yet to come across one that reluctantly calls for the termination of these credits solely on constitutional grounds and in spite of their benefits.)

The standing issue is important because if the respondents here fail on that matter, the bar to future challenges on this matter would be enhanced. Conversely, allowing for the standing would seem to significantly increase the pool of future plaintiffs for challenges on a variety of state business incentives.  I leave such analysis to another day and those perhaps better versed in such procedural matters.

If the Court does reach the merits of the case though, I predict, without any record of expertise in such an endeavor, that the Supreme Court will overturn the 6th Circuit here. In an opinion by Justice Thomas, I think the Court would agree with Ohio that “[w]hat the court below failed to appreciate is that the negative Commerce Clause prohibits barriers, not welcome mats.”  (from Ohio’s brief to the Supreme Court)


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