Court ruling questions legality of incentives for firms
By SARAH A. WEBSTER
DETROIT - A federal appeals court Thursday threw into question the arms race among states to secure new business investment and jobs through incentives, when it ruled that an investment tax credit Ohio gave DaimlerChrysler AG in 1998 to build a Jeep plant was unconstitutional.
The 6th U.S. Circuit Court of Appeals in Cincinnati, which also has jurisdiction over Michigan, Kentucky and Tennessee, said Ohio's investment tax credit gives preferential treatment to companies to locate in Ohio rather than in other states and therefore violates the interstate commerce clause of the U.S. Constitution.
The goal of that clause is to create a level playing field among states to promote national economic growth and it is guided by a well-established anti-discrimination principle, which discourages states from giving favorable treatment to local business or unfavorable treatment to out-of-state businesses.
The court found that part of the $281 million incentive package given to DaimlerChrysler in 1998, estimated to be worth about $70 million, was biased. The plant, which builds the Liberty sport utility vehicle, opened in 2001 and employs about 3,800 workers.
"In short, 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 can not be upheld," Judge Martha Craig Daughtrey wrote for the unanimous three-judge panel.
"The business that chooses to expand its local presence will enjoy a reduced tax burden, based directly on its new in-state investment," she wrote, "while a competitor that invests out-of-state will face a comparatively higher tax burden because it will be ineligible for any credit against its Ohio tax."
It is unclear how the ruling might affect corporate attraction and retention practices in Western New York. A variety of tax abatement and incentive programs are used in the region to lure businesses.
For example, in 2000, General Motors was awarded a package of incentives worth more than $35 million to support the $500 million plant expansion to make "inline' four- and five-cylinder engines at the powertrain plant in the Town of Tonawanda. The state supplied $13 million of that amount.
The Ohio lawsuit was filed by a dozen taxpayers and three small businesses, and initiated by independent presidential candidate Ralph Nader. The group's aim is to attack what it views as "corporate welfare," said Toledo attorney Terry Lodge, who served as co-counsel on the case.
Lodge says he hopes DaimlerChrysler and its co-defendants would appeal to the U.S. Supreme Court, so they might get a broad "declaration that the Constitution forbids certain kinds of corporate welfare."
DaimlerChrysler spokeswoman Mary Gauthier said the company was trying to determine the impact of the ruling and whether it would appeal. Bill Teets, spokesman for the Ohio Department of Development, said the state plans to appeal.
Experts disagreed on the potential impact of the case.
While the appeals court declared Ohio's use of the investment tax credit unconstitutional, it upheld the government's use of personal property tax exemptions for the project.
The conservative Mackinac Center for Public Policy quickly concluded that the ruling would jeopardize the MEGA program, which offers targeted tax relief in the hopes of spurring economic development.
"The MEGA incentive program is similar enough to the program in Ohio so that this decision can be used to challenge the MEGA program in court just as the Ohio investment tax credit has been," said Michael LaFaive, director of fiscal policy of the Mackinac Center.
He views MEGA as "unnecessary and unfair" and his organization has opposed the program since its inception in 1995.
Robert Sedler, a professor who specializes in constitutional issues at Wayne State University School of Law, said governments will still be able to give incentives to companies "but they have to be careful . . . they have to do it in a constitutionally permissible way - a way that does not discriminate."
After reviewing the ruling, he could not immediately tell whether the ruling might have impact outside of Ohio.
Lodge said the lawsuit challenging Ohio's incentive package for DaimlerChrysler is part of a broader effort by Nader and his supporters to challenge financial breaks for corporations.
"Individuals and small businesses bear the burden when big dogs don't pay," said Lodge, who is representing a small business, Kim's Auto & Truck Service, in another lawsuit that challenges the way the City of Toledo claimed some property it provided to DaimlerChrysler for the plant.
"The whole matter of corporate welfare is a race to the bottom, where states are in horrific competition to give away gaping hunks of largess to keep or attract business," Lodge said. "In the last 30 years, the competition has been wild and very, very disturbing because it has caused serious damage to the tax base, from which we finance our schools, libraries, hospitals, schools and police."