News: CJ Exclusives

Federal Incentives Ruling Will Stand

“If the Cuno case is precedent, the Dell incentives cannot stand,” attorney says

The U.S. Sixth Circuit Court of Appeals in Cincinnati last week declined to reconsider a decision by its own three-member panel of judges, who in September struck down certain targeted tax credits as unconstitutional. The next stop for the case appears to be an appeal to the U.S. Supreme Court.

The State of Ohio and the City of Toledo had petitioned the full 12-member court to rehear the Cuno case after the panel declared that economic development incentives given to automobile manufacturer DaimlerChrysler violated the interstate Commerce Clause of the United States Constitution. Fourteen other businesses and organizations filed amicus briefs supporting the petition, which plaintiff attorney Peter Enrich, a professor at the Northeastern University School of Law, said was an unusually high number.

“This is something of a milestone in the case,” Enrich said in an e-mail.

Among those supporting the state, city, and DaimlerChrysler in the case were automobile manufacturers Ford and Nissan; the United Auto Workers union; the states of Michigan, Kentucky and Tennessee; chambers of commerce from various states and cities; and various manufacturing and automobile trade associations.

The three-judge panel in September unanimously overturned a significant part of a district court’s judgment, which had found that $280 million in state corporate franchise tax credits complied with the Commerce Clause.

Likening the case to previous Supreme Court decisions, the panel determined 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.”

In 1998 DaimlerChrysler agreed with Ohio and the City of Toledo to build a Jeep assembly plant near an existing facility in exchange for the 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 was usable against purchases of new manufacturing machinery and equipment installed in the state.

According to a report in the Toledo Blade newspaper, the State of Ohio plans to continue to offer the types of incentives that the Sixth Circuit struck down.

“If I were a business,” Enrich told the Blade, “I would be discounting that credit very heavily in my financial analysis.”

Enrich, speaking at a symposium in Raleigh in December on the legality of economic incentives, said North Carolina’s $242 million in tax breaks for Dell Computer Corp. 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.

“The Dell case is precisely such an example of this provision,” Enrich said in December. 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.”

First Ohio, the City of Toledo, and DaimlerChrysler must file their appeal, and then the Supreme Court will have to decide whether to hear the case.

Former North Carolina Supreme Court Justice Robert Orr, director of the N.C. Institute for Constitutional Law, said the U.S. Supreme Court may wait and see if similar cases appear in other circuits before they consider the subject matter. The institute has been considering a lawsuit against the state over its incentives policies, especially as they relate to the Dell tax breaks.

“It may be that this will pop up in other circuits,” Orr said. “Sometimes the (Supreme) Court waits to see what other circuits are doing to see if there’s inconsistency (in their decisions).”

Paul Chesser is associate editor of Carolina Journal. Contact him at [email protected]