In a victory hailed by states, the U.S. Supreme Court yesterday barred a dozen taxpayers in Ohio and Michigan from challenging a tax credit used eight years ago to entice DaimlerChrysler AG to build its $1.2 billion Jeep plant in Toledo.
With its unanimous vote, the high court sidestepped the question of whether such tax breaks violate interstate commerce protections under the U.S. Constitution by giving preferential treatment to businesses making in-state investments as opposed to those making similar investments elsewhere.
Chief Justice John Roberts wrote that the taxpayer plaintiffs failed to demonstrate they'd been harmed, and that they seemed to contradict each other when it came to claims that such corporate tax breaks rob the state's treasury and shift the tax burden to individuals.
"[It] is unclear that tax breaks of the sort at issue here do in fact deplete the treasury: The very point of the tax benefits is to spur economic activity, which in turn increases government revenues," he wrote. "In this very action, the Michigan plaintiffs claimed that they were injured because they lost out on the added revenues that would have accompanied DaimlerChrysler's decision to expand facilities in Michigan."
Ohio, Toledo, and two school districts had dangled a total $280 million carrot before DaimlerChrysler to persuade it to build the Stickney Avenue plant. The value of the Investment Tax Credit at issue in this case represented as much as $90 million of that package, assuming DaimlerChrysler took full advantage of it. The plant opened in 2001, employing about 3,800 people.
"The Supreme Court's ruling is a big win for America because it sends a clear message that states will not be held hostage to lawsuits brought by individuals or groups with no direct connection to the issue at hand," said W. Frank Fountain, senior vice president with DaimlerChrysler.
The stage will likely shift to Ohio courts, where the rules are less stringent, Peter E. Enrich said. He was recruited to argue the case by consumer advocate and former presidential candidate Ralph Nader.
"First, the plaintiffs' properties were taken for Daimler's benefit, and now, each year, their taxes are being taken to provide tax breaks for Daimler, while the state and city provide woefully inadequate funding for local schools and other services on which the plaintiffs rely," Mr. Enrich said. "They, like ordinary taxpayers everywhere, are the losers in the states' counterproductive competition to give ever-larger tax breaks to big businesses."
Ohio's incentive, enacted in 1995, allows participating manufacturers to claim a credit of 7.5 percent of new equipment and machinery costs, up to 13.5 percent in distressed areas like Toledo, against their annual Corporate Franchise Tax bills.
That credit, however, is being phased out over five years along with the tax, which is being replaced with a new tax on business gross receipts. No new applications for the program are being accepted.
Despite this, Ohio aggressively defended the credit, reasoning that other credits, here and elsewhere, could also be at risk if the lawsuit was successful.
During the life of this credit, 7,800 corporations have told the state they intended to claim nearly $40 billion, according to the Ohio Department of Development.
"This lifts a cloud that's been hovering over Ohio's economic incentive packages," said Lt. Gov. Bruce Johnson, who doubles as the state's development director.
He noted that the credit's value to Ohio is fading because the state is also phasing out its personal property tax on business machinery and equipment, a tax that critics had long claimed discouraged business investment here.
"If they got rid of all tax advantages, Ohio would have been fine because we have fewer than most other states," Mr. Johnson said. "It is important to be able to demonstrate that you can be price competitive. Today, with our current tax code and the handful of incentives we do have, we are more than competitive."
The high court's ruling reverses a 2004 decision by the 6th District Court of Appeals in Cincinnati, which not only held that the dozen taxpayers had standing to sue but went on to find the tax credit was unconstitutional.
Michigan and 35 other states came to Ohio's defense, as did the U.S. Chamber of Commerce, several major auto manufacturers, labor unions, and the U.S. territories of Puerto Rico, Guam, and the Northern Marianna Islands.
"At no point did the plaintiffs focus on anything unique in Ohio's tax credit," said state Solicitor Douglas Cole.
"It looks very similar to those in other states across the country. This was a broadside attack on the use of tax systems by states to try to attract business and compete with each other and other sites across the world. They all recognize this as an important win," Mr. Cole said.
A statement from Toledo Mayor Carty Finkbeiner's office said, "This ruling affirms that the city of Toledo acted properly by offering incentives to DaimlerChrysler. [DaimlerChrysler's] $1.2 billion investment has made Toledo a shining example of new-age automotive production, and assured Toledoans of [DaimlerChrysler] presence for years to come."
"Our research shows that these target incentives at best do no damage," said Mike LaFaive, fiscal policy director for the Mackinac Center for Public Policy, a libertarian think-tank in Midland, Mich.
"They at the very least do damage by distracting from the fundamentals," he said. "When programs exist for politicians to hand out favors left and right, it takes pressure off of them to appear that they're doing something, like cutting taxes for all businesses and not a favored few."
Herman Blankenship's business, Kim's Auto and Trust Service, was taken during a separate eminent-domain case connected with the Jeep plant. As one of the plaintiffs in this lawsuit, he objected to the suggestion they couldn't show they'd been harmed.
"They give all these tax abatements, and then the schools come back with all these levies on the ballot," he said. "That harms you. That's less money you have to live off."
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