In a unanimous 9-0 ruling, the U.S. Supreme Court on May 15 dismissed a lawsuit over the constitutionality of Ohio’s investment tax credit.
The case, known as Cuno v. DaimlerChrysler AG, centered on $70 million in tax incentives Ohio gave to DaimlerChrysler in 1998 to build a Jeep manufacturing plant in Toledo. The incentives were part of a total package of incentives worth $281 million, including local property tax abatements.
The court ruled the plaintiffs did not have federal standing to bring a lawsuit over the constitutionality of the investment tax credit. In writing for the unanimous Court, Chief Justice Roberts said:
“[B]ecause state budgets frequently contain an array of tax and spending provisions, any number of which may be challenged on a variety of bases, affording state taxpayers standing to press such challenges simply because their tax burden gives them an interest in the state treasury would interpose the federal courts as virtually continuing monitors of the wisdom and soundness of state fiscal administration, contrary to the more modest role Article III envisions for federal courts.”
Plaintiffs in the case included one dozen taxpayers and three small businesses. They had the backing of Ralph Nader, the consumer advocate and 2004 independent presidential candidate who has long criticized corporate welfare.
Plaintiffs Will Fight On
“Nothing the Supreme Court says [in the Cuno decision] casts any doubt on the constitutional theory we are advancing,” said Peter Enrich, a professor at Northeastern University School of Law in Boston, who represented the plaintiffs. “The Supreme Court ruling is entirely about standing in the federal courts. We tried hard to keep this out of the federal courts. Daimler and Ohio moved it to the federal courts. Most states have more permissive rules about standing, so we’re heading back to Ohio state courts and expect to be fully vindicated.”
Enrich said he has worked with lawmakers who admit targeted tax incentives are unnecessary and harmful from tax, fiscal, and market standpoints, yet they support incentives for political reasons.
“They say the people we hear from all the time support this,” Enrich said. “When you look at the groups that are supporting federal legislation to protect targeted tax incentives–the National Governors Association, the National Conference of State Legislatures, the U.S. Chamber of Commerce, the Council on State Taxation–it feels like the deck is a little bit stacked. But it is something that people who don’t have a vested interest in business as usual are recognizing doesn’t make sense.”
Protects Tax Competition
Chris Atkins, staff attorney for the Tax Foundation, said the ruling “is a victory for the concept of tax competition.” However, he added, the Tax Foundation believes targeted tax incentives are bad economics and poor public policy.
“We are very sympathetic to attempts to get lawmakers to stop these things,” Atkins said. “But we haven’t seen a judicial solution that doesn’t cause more problems than it solves. The court cannot strike down the kind of incentive that was at issue here without endangering the concept of tax competition.”
Enrich said there is no reason to worry about losing tax competition.
“There is no suggestion, no basis for a suggestion, that for a state to cut its tax rates, for instance, would in any way be constitutionally problematic,” Enrich said. “A state can decide it doesn’t want a corporate income tax. There’s nothing problematic about that. The problem is discriminatory tax breaks based on where a business locates, on how much activity it must do. If what the Tax Foundation wants is a clear and level playing field, they should be on our side.”
Avoided Constitutionality Ruling
Kevin Thompson, legislative counsel for the Council on State Taxation (COST), was disappointed by the ruling because it did not address the constitutionality of Ohio’s investment tax credit. The Tax Foundation and COST were among more than one dozen organizations that filed amicus briefs in the case in defense of the credit. DaimlerChrysler is a COST member.
“The dismissal by the Court for lack of standing is unfortunate, although not surprising, given that the Court specifically asked to be briefed by both parties on the standing issue, in addition to the constitutionality of Ohio’s investment tax credit,” Thompson said. “It is unfortunate because by not getting to the merits of the case–that is, the constitutionality of the credit–state governments and businesses lost an opportunity for greater clarity in this area.”
A particularly interesting aspect of the ruling, Atkins said, was the Court saying the incentive tax credits themselves had not necessarily decreased government revenues.
“Roberts basically said if the credit is designed to increase economic activity and it does, that could raise revenues,” Atkins said. “It’s nice to see the Court say if we lower taxes and increase economic activity, there could be more revenue to spend.”
Economic Coercion Disallowed
The ruling partially vacated a decision issued in 2004 by the 6th Circuit Court of Appeals in Cincinnati. That court struck down the investment tax credit offered by Ohio but upheld local property tax abatements.
The plaintiffs in that case argued a targeted investment tax credit “discriminates against interstate economic activity by coercing businesses” already in Ohio to expand locally rather than out-of-state. “The result is to hinder free trade among the states,” the plaintiffs claimed.
The 6th Circuit agreed with the plaintiffs on the state investment tax credit but disagreed regarding local tax abatements because they did not require a beneficiary “to engage in an additional form of commerce independent of the newly acquired property.”
Steve Stanek ([email protected]) is managing editor of Budget & Tax News.
For more information …
The U.S. Supreme Court’s May 15 decision in DaimlerChrysler Corp. v. Cuno is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.heartland.org, click on the PolicyBot™ button, and search for document #19177.