For businesses that are actively engaged in the process of determining the best location for a future facility or business operation, there’s a case currently before the U.S. Supreme Court that could dramatically alter the site location and business attraction landscape in ways that extend well beyond the particulars of the case.
In fact, this case has the Law of Unintended Consequences written all over it.
The case to which I refer to is Cuno vs. DaimlerChrysler Inc. The high court heard arguments earlier this year and is scheduled to render its decision in early summer. In a nutshell — no pun intended — the plaintiffs argue that the state of Ohio, in offering DaimlerChrysler certain incentives if they locate a plant in Ohio, is in violation of the Commerce Clause of the U.S. Constitution because the offer is valid only if the company locates in Ohio. In other words, if the company chose to locate its plant in a neighboring state, it would not be eligible to collect on Ohio’s incentive offer.
| By eliminating certain types of taxes, or by lowering its tax rate, is a state thereby creating an unlevel playing field relative to its neighbors and, therefore, in violation of the Commerce Clause? |
Look, I can appreciate the fact that there are a lot of people who want to do away with financial incentives as an inducement to businesses to relocate to, or remain in, a particular state or locality. As a taxpayer, I can certainly appreciate the argument.
However, this is a case that only a lawyer could love.
Arguing that a state cannot use its own tax code as a way to influence a business’ action is absurd, and to argue that doing so is a violation of the Commerce Clause is beyond ridiculous. This case, if not overturned, is a disaster in the making that goes to the heart of a state’s authority to tax and regulate behavior within its borders.
Let’s not lose sight of the fact that, in the vast majority of cases, financial incentives are used to offset other problems with the local business climate. Businesses do not choose a state or community because of the incentive package.
Businesses evaluate the consequences of a state’s tax environment as part of their overall due diligence before making any decision on where to locate a facility. Depending upon their particular “vulnerability,” businesses weigh the full spectrum of taxes — corporate income, property, sales, inventory, excise, etc. — and calculate literally down to the nickel how much taxes will cost them as a business expense in each competing location.
I know I’m not telling you anything new when I point out that taxes differ from state to state, and they are an expense that, to varying degrees, might tip a company’s location decision to one state over another. What a state is really trying to do when it offers financial incentives is to mitigate the relative uncompetitive impact of their particular tax structure.
If the Supreme Court agrees with the lower court ruling that state tax incentives are a violation of the Commerce Clause, what about states with low or no taxes? By eliminating certain types of taxes, or by lowering its tax rate, is a state thereby creating an unlevel playing field relative to its neighbors and, therefore, in violation of the Commerce Clause?
How in the world will the courts sort out the incoherent mess this case will leave in its wake?
It’s pretty clear that anti-incentive advocates, in actively supporting the Cuno side, are letting their zeal for incentive reform cloud their good judgment. However, the only people who will benefit from this case, should Cuno prevail, is an entire generation of lawyers.
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