Carolina Journal News Reports
RALEIGH — If a 6th U.S. Circuit Court of Appeals decision that disallows certain Ohio tax breaks withstands possible Supreme Court scrutiny, incentives such as those offered by North Carolina to Dell Corp. would likely be struck down as well, according to a law professor whose legal theories formed the basis for the case.
Peter Enrich, professor at the Northeastern University School of Law in Boston, successfully led the lawsuit on behalf of taxpayers and three small businesses against DaimlerChrysler, the State of Ohio, and the City of Toledo. Enrich argued before a three-judge panel in Cincinnati that economic development incentives given by the city and state to the automobile manufacturer violated the interstate commerce clause of the United States Constitution. A district court had ruled that tax reductions based on corporate investments in equipment were legal, but the appeals panel overturned those breaks while allowing property tax abatements to stand.
Yesterday Enrich, speaking at a symposium in Raleigh on the legality of economic incentives, said North Carolina’s $242 million in tax breaks for Dell contained elements similar to those that the 6th Circuit found unconstitutional. The court’s decision is not binding here, but interested parties in other jurisdictions would likely file similar suits if the Supreme Court allows the case to stand.
In 1998 DaimlerChrysler struck an agreement with Ohio and the City of Toledo to build a Jeep assembly plant near an existing facility in exchange for incentives, which included a 10-year, 100 percent property tax exemption and a tax credit of 13.5 percent against the state corporate franchise tax for certain investments. The total value of the tax incentives – usable against purchases of new manufacturing machinery and equipment installed in the state -- was estimated at $280 million.
Two years later a lawsuit was filed against the city, state, and DaimlerChrysler over the constitutionality of the incentives, based on the commerce clause. Plaintiffs in Cuno v. DaimlerChrysler included two Michigan residents, because the company’s alternative to expanding in Ohio was building a new plant across the state line.
Likening the case to previous Supreme Court decisions, the three-judge panel determined in September that Ohio’s investment tax credit “is to encourage further investment in-state at the expense of development in other states, and the result is to hinder free trade among the states.”
“What seems clear is that under the Cuno rule, states cannot use incentives which provide reductions in generally applicable taxes…which are calculated based on the in-state location,” Enrich said yesterday at the forum hosted by the N.C. Institute for Constitutional Law. The institute has been considering a lawsuit against the state over its incentives policies.
“The Dell case is precisely such an example of this provision,” Enrich said yesterday. He said because North Carolina’s deal with the computer maker is based upon investment within the state, “If the Cuno case is precedent, the Dell incentives cannot stand.”
The North Carolina General Assembly convened a special session in November that created the package of incentives for Dell, which is based in Texas and also has a plant in Nashville. The company plans to begin construction on an assembly plant somewhere in the Triad in the next few months.
Enrich hopes the Cuno case, if upheld, will help stem the tide of states’ upward-spiraling bids to offer targeted financial incentives to specific corporations. He said because virtually all states offer such deals, politicians can’t bring themselves to stop the practice for fear of appearing uncompetitive with other jurisdictions for jobs and private investment.
“No one state is in a position to say we’re getting off the train,” he said. “It’s very tough for legislators to stand up to these things. I’m not terribly hopeful that states are going to turn back from this pattern.”
Enrich said Congress could restrain the incentives race, but likely wouldn’t have the political will to do so. He said the federal court system, and to a lesser extent state courts, would be most likely to strike down tax breaks targeted towards individual companies. He said citizens in many other states are interested in similar litigation should the Cuno decision stand.
Enrich wrote in a 2002 article for Urban Lawyer that success with the Ohio case could have far-ranging implications not just for other states, but for other types of incentives.
“The suits do have the potential to take out of the hands of state and local officials some of the most pervasive and pernicious tools of interstate economic rivalry, while raising cautionary doubts about many others,” he wrote.
“If litigation can also serve to raise public awareness of the high costs and negative consequences of the unconstrained use of business tax breaks, then it promises to be a powerful strategy for combating subsidy abuse.”
Paul Chesser is associate editor of Carolina Journal. Contact him at email@example.com.