U.S. court overturns Jeep plant tax credit

9/3/2004

COLUMBUS - A federal appeals court yesterday struck down a manufacturing tax credit that Ohio used in 1998 to help convince DaimlerChrysler to build its new Jeep assembly plant in Toledo.

The Investment Tax Credit is also part of negotiations with the auto manufacturer and three related companies for another expansion.

A three-judge panel of the Cincinnati-based 6th U.S. Circuit Court of Appeals ruled that the tax credit violates the U.S. Constitution's prohibition against interfering with interstate commerce.

It determined that the credit rewards companies that make significant investments in Ohio while offering no break if the same company makes the same investment elsewhere.

Gov. Bob Taft and his director of development, Bruce Johnson, have decided to seek an appeal before the court's entire 12-judge bench or before the U.S. Supreme Court.

The lawsuit was brought by 12 Toledo individuals and three businesses, including Kim's Auto, which fought its relocation to make room for the latest plant expansion.

Some 40 states, including Michigan, have similar tax credits that could be endangered by the ruling.

"While we may be sympathetic to efforts by the city of Toledo to attract industry into its economically depressed areas, we conclude that Ohio's investment tax credit cannot be upheld...," wrote Judge Martha Craig Daughtrey for the court.

The program, enacted in 1995, allows companies that increase their investment in manufacturing machinery and equipment to seek a credit against their corporate franchise taxes.

The credit is 7.5 percent, 13.5 percent if the investment is made in a distressed area like Toledo.

The credit was just one part of a $280 million incentive package provided by the city, state, and two school districts in 1998 in exchange for a total investment of $1.2 billion on DaimlerChrysler's part in the project.

At the time, the tax credit's value was estimated at about $90 million over seven years, if fully exploited.

The plant opened in 2001 and employs about 3,800 workers.

The program was set to expire at the end of next year, but lawmakers have proposed extending it as part of a controversial overhaul of Ohio's tax system.

''This decision is a major blow against the most insidious form of corporate welfare - the extortionist demands by large companies for subsidies from cowering cities and states, all desperate to attract or retain investment in troubled economic times, presidential candidate and consumer advocate Ralph Nader said.

"The reality is that DaimlerChrysler is just doing what any other business does in an environment that pits states against one another," said Peter E. Enrich, professor at Boston's Northeastern University School of Law. He was recruited to argue the case by Mr. Nader.

"The point of the lawsuit was to make it clear that, under the Constitution, states can't be put in that position," Mr. Enrich said. "It protects the state from DaimlerChrysler doing what the DaimlerChryslers of this world do in their own interests."

Since the program's inception under then-Gov. George Voinovich, nearly 16,500 businesses have been eligible to claim a total of $1.9 billion in credits toward $31.6 billion in new equipment investments.

The full $1.9 billion was not claimed, however, since the accounting of some Ohio corporations have allowed them to pay the bare minimum of $50 in corporate franchise taxes allowed under law.

In 2001, corporations claimed $72 million in credits even through their equipment purchases could have made them eligible for $131 million.

"This [decision] doesn't help Ohio remain competitive," said Mr. Johnson. "It might sharpen our opportunity to encourage comprehensive tax reform. Ohio's tax code penalizes capital deepening. This is one tool created in the 1990s that would reduce that penalty."

DaimlerChrysler spokesman Mary Gauthier said the automaker was still reviewing the decision to determine its financial impact on the company.

She could not provide an estimate on how much DaimlerChrysler has saved through the tax credit, or whether the lack of a similar credit would make a difference in current negotiations for another plant expansion.

Terry Lodge, Toledo attorney for the individuals and businesses challenging the DaimlerChrysler deal, said Mr. Nader was looking for the perfect test case and found it in Toledo.

"Nader has long argued against corporate welfare, particularly an odious package of $281 million to basically keep a manufacturing activity that actually now employs 1,400 fewer people than before the new plant was built," Mr. Lodge said.

Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy, a libertarian think tank in Midland, Mich., said he believes that his state's law is in as much danger as Ohio's after the decision.

"These targeted tax incentive programs are kissing cousins," he said. "They are so similar that this ruling is going to apply across many states."

Contact Jim Provance at:

jprovance@theblade.com

or 614-221-0496.