I. Introduction
The
Supreme Court heard arguments on March 1st concerning the
constitutionality of an Ohio investment tax credit offered to the
DaimlerChrysler Corporation. The credit, entitling DaimlerChrysler to
a "ten-year 100 percent property tax exemption, as well as an
investment tax credit of 13.5% against state corporate franchise tax
for certain qualifying investments," is meant to encourage a $1.2
billion Jeep plant project in Toledo.[1] The investment tax credit is
being attacked on the grounds that, as a state action, it
unconstitutionally burdens interstate commerce in violation of the
Commerce Clause.[2] This sort of tax incentive is hardly anomalous;
indeed, 49 states offer similar tax incentives for the purpose of
encouraging in-state economic activity, thereby benefiting the citizens
of the state.[3] Given that attracting valuable in-state commercial
growth is a fixture of policy in most states, a ruling consistent with
the claim of unconstitutionality from the nation's highest Court could
have substantial repercussions.
II. Arguments
What
are the merits of this claim? It is the respondents'[4] position that
the investment tax credit is "a paradigm of a state tax provision which
facially discriminates against interstate commerce."[5] Underpinning
the justification of the preemptive powers of the Commerce Clause is
the notion that it is beneficial to "create and preserve a 'national
common market' in which economic actors could allocate their activities
. . . without interference from preferential state . . . taxation."[6]
When a state manipulates its taxing structure to woo corporate
investors, it is behaving no differently than when it subsidizes its
milk industry to promote sales of local dairy[7]; the net effect is to
disrupt pluralistic economic competition.
The Tax Commissioner for the State of Ohio maintains that state tax
incentives are part of the climate of the free market. Whereas the
Commerce Clause precludes state actions granting preference to
intra-state transactions, corporate tax incentives act to directly
benefit companies with national presence. The offering
state's economy is benefited without any direct discrimination against
interstate commercial activity. As a matter of policy, the petitioner
argues that preventing states from being able to offer these incentives
to national and global corporations will significantly hinder the
ability of the United States to compete in the international business
market.[8]
The 6th Circuit came to the conclusion that, although the Supreme
Court has "intimated that attempts to create location incentives
through the state's power to tax are to be treated differently from
direct subsidies," this distinction rested on the presumption that tax
incentives "do not 'ordinarily run afoul of [the Commerce Clause]'
because they are not generally 'connect[ed] with the State's regulation
of interstate commerce'."[9] Based on this, the 6th Circuit determined
that because the investment tax credit acted the same as would a direct
subsidy to the corporations, such discriminatory treatment in favor of
intra-state investment activity was indeed unconstitutional.
A skeptical Justice Souter, during oral arguments, remarked that
what Respondents were characterizing as "discrimination" was really
"differentiation," and that because any corporation based in any state
could take advantage of the differential incentive, it was not facially
discriminatory.[10] In addition to having an uphill battle on the
issue of constitutionality, the Commissioner has also appealed the
issue of standing, arguing that Respondents are not particularly
adversely affected by the tax incentive, and therefore have no
colorable claim.[11] While it is unlikely that the current Court will
affirm the 6th Circuit and hold that these sorts of tax incentives
facially discriminate, it is important to consider under what
circumstances these sorts of state-funded, indirect subsidies could
work mischief on the national economy. It is possible that these
credits only strengthen flourishing state economies, economies which
can afford the investment cost of the credit. Taken to its logical
(though extreme) conclusion, these incentives might create state
sub-economies of such varying degrees of strength so as to constitute
the sort of "economic balkanization" of the nation that the Commerce
Clause exists to prevent.[12]
III. Conclusion
At the end of the day, however, it is very unlikely that this sort
of melodramatic argument will hold any sway in a situation in which the
challenged practice is so widely used as this. For now, we wait.
[1] Cuno v. DaimlerChrysler, 386 F.3d 738, 741 (6th Cir. 2004).
[2] Wilkins v. Cuno, 126 S.Ct. 36 (2005) (Mem.).
[3] See DaimlerChrysler, 386 F.3d at 741.
[4] Respondents are individual and small business taxpayers of Ohio
and Toledo. Respondent's Brief at 4, Wilkins v. Cuno, 126 S.Ct.
36(2005) (No. 04-1724).
[5] Id. at 8.
[6] Id. at 28-29.
[7] See generally West Lynn Creamery v. Healy, 152 U.S. 186 (1994).
[8] Id. at 19-20.
[9] DaimlerChrysler, 386 F.3d at 746, quoting New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278 (1988).
[10] Stephen Henderson, Ohio Tax Incentives Seem Safe Before U.S. High Court (Mar. 2, 2006), KNIGHT RIDDER NEWSPAPERS, available at www.ohio.com/mld/ohio/news/state/13998644.htm (Mar 16, 2007).
[11] Reply Brief for the Petitioner at 3, Wilkins v. Cuno, 126 S.Ct. 36 (2005) (No. 04-1724).
[12] Respondent's Brief at 29, Wilkins v. Cuno, 126 S.Ct. 36 (2005) (No. 04-1724).