Tax credit incentive in Ohio not valid
By Sarah A. Webster
Detroit Free Press
A federal appeals court yesterday threw into question incentives used by states to secure new business investment and jobs, when it ruled that Ohio acted unconstitutionally when it gave an investment tax credit to DaimlerChrysler AG in 1998 to build a Jeep plant.
The 6th U.S. Circuit Court of Appeals in Cincinnati 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 cannot 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, 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."
Hawai'i offers a host of tax credits to businesses, ranging from incentives for hotel construction and film production to technology investment. Such tax incentives are used increasingly by states as they compete for new businesses.
If the court decision stands, it could be used to challenge similar investment tax credit programs in other states including Hawai'i, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.
Former state tax director Ray Kamikawa, now a tax practitioner, said the ruling may not be applicable to tax credits offered in states other than Ohio because of differences in the way each state structures such programs.
"Each tax incentive and exception must be analyzed independently," Kamikawa said.
The Ohio lawsuit, filed by a dozen taxpayers and three small businesses, was initiated by independent presidential candidate Ralph Nader. The group's intent 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 will appeal to the U.S. Supreme Court, so they might get a broad "declaration that the Constitution forbids certain kinds of corporate welfare."
At DaimlerChrysler, spokeswoman Mary Gauthier said the company was trying to determine the impact of the ruling. 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.
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 it will affect other states.
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 Inc., in another lawsuit that challenges the way the Toledo city government claimed some property it provided to DaimlerChrysler for the plant.
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."
Advertiser writer Sean Hao contributed to this report.
