Ruling on Jeep could end tax credit 'one-upmanship'

9/4/2004

A federal court's ruling that nixed a tax credit DaimlerChrysler AG received to build its three-year-old Toledo Jeep Assembly plant could force a fundamental change in how Ohio and other states lure companies.

The ruling this week might put an end to the economic-incentive war among states, one critic said. Others said it could pare some incentive programs but result in increased use of others. Another expert said the decision could lead to broad business tax cuts and regulatory reform.

Said Sam Staley, senior fellow at the Buckeye Institute for Public Policy Solutions: "This is huge."

A three-judge panel of the 6th U.S. Circuit Court of Appeals in Cincinnati ruled Ohio's investment-tax credit violates the constitutional prohibition on interfering with interstate commerce. A dozen Toledoans and three businesses had filed the lawsuit in U.S. District Court in Toledo.

Used as part of Chrysler's $280 million incentive package in 1998, the state's tax credit rewards companies making significant investments in Ohio but offers no break if they make the same investments elsewhere, which is unfair, the appeals court decided.

Michigan is among about 40 states with similar tax credits that could be affected. The court's ruling affects the states in its jurisdiction: Ohio, Michigan, Kentucky, and Tennessee.

Ohio officials plan to appeal the decision, which could be decided by the U.S. Supreme Court. DaimlerChrysler plans to seek a hearing before the appeals court's entire 12-judge panel, a spokesman said yesterday.

In the meantime, Ohio must stop offering companies investment-tax credits as part of economic development packages, but many other incentives are available, said Bruce Johnson, director of the Ohio Department of Development.

"We will continue to do what we think is in the best interest of working people in the state," he said. "We want companies to make the investments so people can continue to work."

The tax credits also were part of recent negotiations with DaimlerChrysler and three suppliers to build a $900 million multishop factory at the Toledo Jeep Assembly complex. Plans for that expansion project, however, will not be hindered by their absence, DaimlerChrysler spokesman Mary Gauthier said.

DaimlerChrysler has received just a small fraction of the investment-tax credits that were awarded for the first, $1.2 billion Toledo Jeep project, she said. She declined to elaborate on how much. The credit, when issued, was valued at up to $90 million over seven years.

The court's decision is fairly narrow and will not affect Ohio's other incentive offerings, although "it certainly doesn't help us with competitiveness," Mr. Johnson said.

What will happen with tax credits already awarded to DaimlerChrysler and other companies is unclear, he said.

In Michigan, officials depend on single-business tax credits as a key component of the state's strategy and will continue to use that program while appeals on the Toledo Jeep case are decided, said Paul Krepps, a spokesman for the Michigan Economic Development Corp.

The case's ultimate outcome may have a wider impact on economic development offerings, he said. If Ohio and Michigan can't offer the tax credits, others won't be able to either, he said.

"We're always interested in a level playing field," Mr. Krepps said.

The ruling could put a stop to the incentive one-upmanship that states engage in to snare businesses, particularly big manufacturing projects with lots of high-paying jobs, said Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy. Instead of giving breaks to select companies, Michigan and probably Ohio need broad tax cuts, regulatory reform, and right-to-work legislation, he said.

"This will give states the impetus to reform," he said.

Mr. Staley of the Buckeye Institute agrees. Ohio needs to change its tax system so all businesses are treated fairly because incentives mask problems with the tax system, he said.

Gov. Bob Taft and other officials support tax reform, including lowered rates, and the court's decision may help spur action, Mr. Johnson said.

However, if some state incentives are ended, then property and other tax benefits might be increased to offer a lucrative package, some experts said.

Contact Julie M. McKinnon at:

jmckinnon@theblade.com

or 419-724-6087.