DaimlerChrysler Corp., et al. v. Cuno Charlotte, et al. / Wilkins (Ohio Tax Commissioner), et al. v. Cuno, Charlott (05/15/2006)

Questions presented: (1) Whether Ohio's investment tax credit, Ohio Revised Code, sec. 5733.33, which seeks to encourage economic development by providing a credit to taxpayers who install new manufacturing machinery and equipment in the state, violates the Commerce Clause of the U.S. Constitution? (2) Does the dormant Commerce Clause allow a state to attempt to attract new buisness investment in the state by offering credits against the state's general corporate franchise or income taw, where the amount of the credit is based on the amount of the business' new investment in the state? (3) Whether Cuno has standing to challenge Ohio's investment tax credit law?

BY LAURA McGANN & AMY HELD, MEDILL NEWS SERVICE

While many Midwesterners might be glad to hear that their state representatives are encouraging Daimler-Chrysler to expand in their states, some taxpayers in Ohio and Michigan are not.

A group of Ohio and Michigan citizens opposes a tax-incentive policy that offers Chrysler, and other corporations, millions in tax incentives to expand in Ohio.

Ohio leaders who embrace these policies argue that tax breaks encourage companies to invest in their state. The investments, they argue, create jobs and produce more revenue than is lost through tax incentives.

Specifically, the legislature enacted an investment tax credit law that allows a non-refundable credit against the state's corporate franchise tax for the purchase of "new manufacturing machinery and equipment" provided the machinery and equipment are installed in Ohio. It also allows cities to offer personal property tax exemptions to an enterprise that "agrees to establish, expand, renovate, or occupy a facility and hire new employees, or preserve employment opportunities for existing employees" in economically depressed areas.

The citizens argue that such tax breaks are futile because almost all states offer them. The competition amongst states to create the best deal needlessly diminishes much-needed state revenue without benefiting the state.

Taxpayers are left shouldering the burden, the group argues.

In 1998, Chrylser planned to build a new vehicle-assembly plant in Toledo in exchange for a package of city-and state-tax incentives worth about $280 million. Chrysler's new plant was slated to cost $1.2 billion to build and was supposed to create several thousand new jobs.

Among the incentives were a ten-year 100 percent property tax exemption and an investment tax credit of 13.5 percent against the state corporate franchise tax for some of its investments. The group filed suit in state court, arguing, among other things, that the state's investment tax credit and the property tax exemption violate the U.S. Constitution's Commerce Clause. After the case was removed by Daimler-Chrysler to a federal court in Toledo, the district judge found that the incentives are constitutional. A unanimous 6th Circuit Court of Appeals panel reversed, siding with the taxpayers in September 2004 in invalidating the investment tax credit given to Ohio companies that use machinery purchased in the state. The court did approve the Ohio property-tax incentive program, however.

"While we may be sympathetic to efforts by the City of Toledo to attract industry into its economically depressed areas," wrote Judge Martha Craig Daughtrey, "we conclude that Ohio's investment tax credit cannot be upheld under the Commerce Clause of the United States Constitution."

The commerce clause allows Congress "to regulate commerce… among the several States," which the U.S. Supreme Court has interpreted to mean that states are limited in their ability to tax interstate commerce. This interpretation of Congress' power limiting the states' power over interstate commerce is called the dormant commerce clause, a doctrine that requires a court to evaluate whether a state's actions "unduly burden interstate commerce" in deciding if a law is constitutional.

The 6th Circuit said the Ohio tax passed three prongs of a four-prong test enunciated in 1977 by the U.S. Supreme Court in Auto Transit, Inc. v. Brady, but failed one. The court invalidated the tax-credit law because it discriminates against interstate commerce by treating in-state and out-of-state investors differently.

Under Ohio's tax-credit law, companies that invest in the state end up paying a lower franchise tax than a similar business that invests out of state.

The 6th Circuit decision compared two Ohio businesses, saying that "the business that chooses to expand its local presence will enjoy a reduced tax burden," but "a competitor that invests out-of-state will face a comparatively higher tax burden."

Advocates for Chrysler worry that the 6th Circuit opinion will have a significant impact on how states apply taxes.

"Handing out tax incentives to lure companies may be poor tax policy, but [this case's] ruling imperils all forms of state tax competition, not just tax incentives," said Chris Atkins, a staff attorney for the non-partisan research group, The Tax Foundation, in a written statement.

Chrysler and the state of Ohio petitioned the Supreme Court, and on Sept. 27, 2005, a few days before the start of its 2005-06 term, the Court accepted both cases and consolidated them for review. The Court instructed the parties to address the following question in addition to the questions raised by the parties: Whether the taxpayers have standing to challenge Ohio's investment tax credit law.

In order to establish standing, attorneys for the taxpayers must show that the tax-credit law directly harms their clients. If a court decides the taxpayers do not have proper standing, it can dismiss the case on those grounds and not consider the merits.

Kyle Sollie, a lawyer who co-authored an amicus brief with the Tax Foundation in support of Chrysler, argues that the taxpayers have not established that the incentives diminish state income and therefore cannot show that the law hurts them.

Even if the taxpayers could demonstrate diminished revenues, he maintains, the Supreme Court has previously found that higher taxes alone do not grant taxpayers standing.

Sollie argues the taxpayers should try to get the law changed through elected representatives, not the courts.

"Those kinds of decisions have to be made by the legislature, not the courts," Sollie says.

The Ohio taxpayers say that they have standing because the tax-credit program forces them to shoulder a heavier tax burden than they should. They also suffer a loss in state services because of the loss in revenue.

Michigan citizens involved in the case argue that the Ohio-investment program discourages Ohio businesses from investing in Michigan, so their state loses the tax benefits it would otherwise receive.

The lead attorney for Daimler-Chrysler Corp. began oral arguments before the Court on March 1, 2006, by seeking to knock down Ohio taxpayers' claims of standing.

Former U.S. Solicitor General Theodore B. Olson said Ohio taxpayers have no standing to oppose the state's investment tax credit because they can't demonstrate any monetary loss or other type of damage the credit inflicts.

Further, Olson said the tax breaks actually help taxpayers by stimulating inter-state-commerce as out of state companies seek to invest in Ohio to take advantage of the incentives.

Olson added that the additional business can't hurt Ohio taxpayers because they don't compete with the out-of-state corporations that benefit from the tax breaks and don't shoulder any burden from the money these companies save.

Justice Ruth Bader Ginsberg asked Olson who would have standing to oppose the tax credit if not Ohio taxpayers.

Olson responded that perhaps only those companies that do not invest in Ohio and can therefore not benefit from the tax credit are hurt by the state's tax credit program.

And yet it is okay if one state's program is more beneficial than another's, Olson argued, because uniformity is not the goal of the dormant commerce clause, and is, in fact, the "very antithesis of federalism," he said.

The dormant commerce clause aims to facilitate inter-state commerce by prohibiting any state from establishing a tax that hinders competition with other states by discriminating against them.

Olson said that because the investment tax credit is available to all companies whether located in state or not, it therefore cannot be deemed discriminatory.

Douglas R. Cole, lawyer for the state of Ohio, said of the taxpayers, "They're trying to attack a statute which they haven't shown causes them any harm."

Cole reinforced Olson's argument by saying that the tax credit revitalizes Ohio's economy by drawing out-of-state investors.

Chief Justice John Roberts questioned Cole on his claim that Ohio incentives encourage out-of-state companies to invest there because he said they may be doing so at the expense of citizens in their own and other states who are consequently deprived of the companies' investments.

Cole argued that Ohio's tax program actually promotes new business and investments which would not otherwise have been generated.

Peter Enrich, lawyer for the Ohio taxpayers, focused on a prior Supreme Court case, Flast v. Cohen, which he said set precedent for the taxpayers' cause and gave them standing.

In 1968, the Court ruled that Florence Flast and a group of taxpayers had the constitutional right to sue the federal government for buying secular books for religious schools, an action they labeled a misuse of their tax dollars.

Ginsburg challenged the argument, noting that in Flast, "you were dealing with the same spending on the part of the federal government. Here you have apples and oranges. The property tax is quite discrete from the investment tax credit."

As to whether the tax credit violates the Commerce Clause, Enrich said the credit discriminates against other states by favoring in-state business activity above inter-state competition.

Justice David Souter attempted to discredit Enrich's argument, asserting that anybody is free to profit from the tax credit.

"Your argument boils down to saying that there's discrimination whenever the state offers a quid pro quo for an advantage and somebody decides not to take advantage of it," Souter said. "That's not discrimination. That is simply free choice, and any business is free to make that choice."

On May 15, 2006, the Court issued its opinion, holding that Ohio taxpayers did not have standing to challenge its state's tax credit for violating the Constitution's Commerce Clause. Chief Justice John Roberts wrote the Court's lead opinion.