COLUMBUS - Eight years ago, Ohio, Toledo, and two school districts dangled a $280 million carrot in front of DaimlerChrysler and walked away with the promise of a $1.2 billion Jeep plant.
Thirty-five states, Puerto Rico, Guam, the Northern Marianna Islands, numerous business organizations, and unions will anxiously watch Wednesday as Ohio and the auto manufacturer defend about one third of that carrot before the U.S. Supreme Court.
Ohio is vigorously defending the tax credit struck down by the Cincinnati-based U.S. 6th Circuit Court of Appeals despite the fact that the credit is being phased out along with the tax to which it is applied.
"This is about the ability of states to use local tax credits to attract new investment and jobs, and to improve the economy to the benefit of the state," said Douglas Cole, state solicitor with the Ohio attorney general's office.
"Even though this tax credit program is on its way out, it's important to states, particularly Ohio, that use these types of credits," he said. "It isn't just this tax credit or the tax to which it is applied."
The case was inspired by consumer advocate and former presidential candidate Ralph Nader as an example of what he characterizes as "corporate welfare." Plaintiffs argue that corporations have learned to play states against one another, ultimately shifting state tax burdens from corporations to individuals.
The debate occurs even as Ohio is considering new and expanded credits targeting the auto and auto-parts manufacturing industry after a series of layoffs and plant closings.
"If we win, the narrow effect is to strike down this Ohio scheme as well any comparable schemes in three dozen or so states," said Toledo attorney Terry Lodge, one of the attorneys who filed the case.
"It would be a very huge precedent that would hopefully give future legislatures and executives at the state level a little pause when it comes to giving away gaping hunks of taxpayer largess," he said. "It will slow the race to the bottom, but it won't end it."
The 6th Circuit ruled in 2004 that Ohio's Machinery and Equipment Investment Tax Credit unconstitutionally interferes with interstate commerce, lowering the tax burden for a business that makes an investment here while offering no such advantage to a similar company that makes the same investment elsewhere.
Participating manufacturers may apply 7.5 percent of the costs of new equipment costs, up to 13.5 percent in economically distressed areas such as Toledo, against their corporate franchise tax bills over seven years.
According to Ohio Department of Development spokesman Merle Madrid, DaimlerChrsysler's expected machinery and equipment purchases associated with the plant expansion was $715.6 million. Assuming that the corporation took full advantage of the credit, it would have been worth $96.6 million.
Since 1995, there have been 18,100 filings for the credit against total investment of $34 billion. The calculated value of that credit was $2 billion.
Manufacturers continue to apply the credit to their tax bills, but the doors to the program have been closed to any corporation that made equipment purchases after June 30, 2005.
The corporate franchise tax against which the credit is applied will be phased out by 2010 as the state shifts to a new business tax on gross sales.
The Tax Foundation, a Washington-based tax information group founded in 1937, does not usually come to the defense of tax credits, generally considering them a poor substitute to lower tax rates. But it has come to Ohio's defense here.
"We are in favor of tax competition between states because we think competition is good," said staff attorney Chris Atkins. "The 6th Circuit's reasoning is too overbroad.
"It said the tax credit discriminates because it encouraged Daimler to invest in Ohio," he said. "But so do good tax rates. Ohio's school system or road system can encourage or discourage investment."
The case was brought by 12 individuals and three businesses in Ohio and Michigan. Among other arguments, the state is trying to have the case dismissed on the grounds that the plaintiffs can't show that they've been directly harmed by the tax credit.
"The extent that states have to rely on these types of programs shows that the states don't have their business climate - taxes and regulation - right," said Jack McHugh, legislative analyst with the Mackinac Center of Public Policy. The free-market think-tank in Midland, Mich. contends that a similar tax credit in Michigan hasn't created jobs.
"States should make themselves a place where businesses would want to come, so that they don't need to bribe them to come," said Mr. McHugh.
Contact Jim Provance at: email@example.com or 614-221-0496.
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