View Full Version : Are Corporate Tax Breaks Illegal?

03-02-2006, 10:51 PM
Are Corporate Tax Breaks Illegal?


By Aaron Bernstein Thu Mar 2, 9:38 AM ET

Every year, U.S. companies collect billions of dollars worth of tax breaks from states and cities anxious to lure jobs and investment to their regions. Now a good chunk of this largesse may be threatened by a U.S. Supreme Court case coming up for a hearing on Mar. 1. The suit involves investment tax credits Ohio granted Chrysler (now DaimlerChrysler) (NYSE:DCX - News) in 1998 to build a Jeep plant in Toledo, Ohio. The state's taxpayers sued, and in 2004 the 6th Circuit Court of Appeals ruled that the deal violates the U.S. Constitution's Commerce Clause because it puts up a protectionist barrier to interstate commerce.

The Supreme Court won't rule until later this year, but a victory for the Ohio taxpayers would put a major dent in states' ability to offer such tax breaks. States wouldn't be required to recapture tax breaks already granted, but they would have to kill those now on the books and not offer more in the future.

CLIMATE CONTROL. "We need to stop the race to the bottom that subsidizes the largest businesses at the expense of small companies and taxpayers," said Robert Orr, the head of the North Carolina Institute for Constitutional Law. He spoke at an unusual Feb. 24 briefing at the right-wing Heritage Foundation in Washington, D.C., that included other conservatives as well as left-leaning groups such as Good Jobs First and the Center on Budget & Policy Priorities. This strange-bedfellows coalition decries companies playing states against each other to extract tax breaks that allegedly have nominal impact on actual investment decisions.

Corporate groups and some Ohio politicians counter that states and cities have every right to create a business climate conducive to investment. They also argue that the 6th Circuit's decision is so sweeping that it would invalidate a broad range of economic-development policies practiced by nearly every state.

"The ruling puts states at a disadvantage and means that they can no longer control this element of their financial future," says Diann Smith, the general counsel of the Council on State Taxation. The Washington lobbying group includes DaimlerChrysler, the other Detroit auto makers, and some 500 other large companies from various industries.

LONG-TERM DAMAGE? The case, DaimlerChrysler v. Charlotte Cuno (she's one of the Ohio taxpayers), strikes at the nerve of an increasingly contentious debate about local investment subsidies. Ohio's tax credit was part of a $280 million package the state and city of Toledo coughed up in a bidding war with neighboring Michigan to snare 4,000 high-paying unionized jobs at the Jeep factory.

Critics on the right and the left say that such bidding wars, which have become standard practice across the U.S., are simply give-aways to companies that drag on the national economy. Because any economic gain is offset by losses to other states, they argue, local tax breaks are largely a zero-sum game that distort business locations decisions. Such subsidies, say Orr and others, actually wreak long-term damage on local business climates by undercutting the tax base that supports good schools, roads, and other infrastructure.

In fact, 96% of state and local investment tax breaks go to companies that locate their new facilities right where they had chosen in the first place, according to studies by Peter S. Fisher, a professor of urban planning at the University of Iowa. The implication: States are doling out millions to influence a minute number of job shifts. "I think of it as using dynamite to catch fish," wrote Greg LeRoy is a 2005 book The Great American Jobs Scam. LeRoy, executive director of Good Jobs First, also attended the Heritage session.

KEEPING IT LEGAL. Defenders such as Smith say even if that is true, such tax breaks aren't illegal. The "Commerce Clause prohibits barriers (to interstate commerce), not welcome mats," states the Ohio brief to the Supreme Court. "Tax breaks are incentives, not economic coercion like tariffs and other barriers the law is aimed at," says DaimlerChrysler's brief, written by a team headed by former Solicitor General Theodore B. Olson, now in private practice at Gibson, Dunn & Crutcher.

While the Court ponders the matter, a group of politicians headed by Ohio Senator George Voinovich hopes to head it off at the pass. They've sponsored legislation, The Economic Development Act of 2005, that would explicitly safeguard many tax incentives from Commerce Clause challenges. The bill is sponsored by every senator from both parties in all four states in the 6th Circuit: Ohio, Michigan, Kentucky, and Tennessee, as well as the National Governors Assn. and the National Conference of Mayors.

A victory for Cuno and the other plaintiffs wouldn't stop investment subsidies altogether. LeRoy's book found some 30 different kinds of methods states and cities use to lure jobs, and not all would be affected by a Supreme Court ruling. But the largesse would be much harder to come by.