Recently, a three-judge panel of 6th U.S. Circuit Court declared that the Ohio Manufacturers Machinery and Equipment Investment Tax Credit violated the U.S. Constitution’s Commerce Clause, citing that tax subsides granted preferential tax treatment to companies to expand within the state rather than in other states.
This decision could have implications that extend far beyond Ohio, as more states utilize some type of investment tax credit as a tool to attract new capital and retain existing jobs.
Because of the nature of these credits, heavy investments into equipment reaps the largest incentives. Therefore, manufacturers are typically the biggest beneficiary of these types of incentives.
The decision raises an interesting question: “What role will incentives play in the federal government’s pursuit to attract and retain business investment in the United States?”
The federal government has many tools it can use to effect the way businesses choose to spend their capital, although direct incentives to companies has typically been the responsibility of the individual states and localities in which a project locates.
Historically, this model has made sense. Place the burden on the states and localities because they were the ones who benefited the most from a location decision.
The federal government could take a back seat because, after all, the company would ultimately locate someplace within the United States. With no additional tax or political benefit to be gained by the federal government from a company choosing to locate between Georgia and Alabama, for example, there was no reason to get involved in such a decision.
However, now the economy has truly become a world economy, and Georgia is no longer competing with just Alabama for a share of business investment. Increased competition from locations outside of the United States has put a tremendous strain on states and localities to compete further because of the unfair labor and overhead competition found in these other locations.
While the states try to counteract these trends, the federal government is now in a position to lose as well. There is no longer a guarantee that the United States will receive the spoils of companies making investments and creating jobs.
With so much at stake, the federal government may be forced to consider offering incentives on a national basis that award companies for creating jobs within the United States.
Help, Not Hindrance
Regardless of your position on this issue, it would appear that even more damaging than taking a backseat to offering incentives is taking an active role against a state’s efforts to attract and retain business.
Decisions like the one levied by the 6th Circuit Court could potentially lead companies to invest outside the United States. If the decision is upheld and copied across the country, a significant tool used by many states — the investment tax credit —would be rendered useless.
Even if the decision is overturned, it will be interesting to see how the federal government moves forward with assisting businesses that choose to invest and create jobs in the United States, rather than overseas.
The adoption of a federal incentive program would certainly go a long way in helping the economy retain many types of jobs, including manufacturing, and quite possibly reduce the burden on states and localities to come up with significant cash to land a deal.
In any event, the federal government should be doing everything possible to try and assist the states, rather than finding ways to make it more difficult.
Brian Corde is director of location strategies for the Corporate Location Division of East Brunswick, N.J.,-based Mintax, which specializes in site selection and government incentives for new and expanding companies. He can be reached at (732) 723-9000.
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