Local Government tax incentives

Dept. of Local Government Beware
Local governments often offer corporations tax incentives to locate their offices and plants within the locale. It's a common enough scheme: lose some dollars in tax revenue but gain jobs, economic growth, and so on. It is so common, in fact, that I've never much thought of the obvious constitutional problem.

In Cuno v. Daimler Chrysler, though, the Sixth Circuit Court of Appeals rules that this set-up violates the commerce clause of the Constitution. That clause gives control of interstate commerce to the federal government; and by extension, if local/state governments interfere with interstate commerce, the local government has invaded the fed's turf. This bit of law is the dormant commerce clause.

The tax incentives for local business scheme is so old, though, certainly this has come up before. Yes, it has. As the 6th Cir cases discusses, the Court has set this precedence:

A tax provision satisfies the requirements of the Commerce Clause if (1) the activity taxed has a substantial nexus with the taxing State; (2) the tax is fairly apportioned to reflect the degree of activity that occurs within the State; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to benefits provided by the state. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).

...Indeed, the United States Supreme Court has indicated that the Commerce Clause "does not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry," nor does it prevent a state from "compet[ing] with other States for a share of interstate commerce" so long as "no State [] discriminatorily tax[es] the products manufactured or the business operations performed in any other State." Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 336-37 1977); see also Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 272 (1984) (the federal Commerce Clause "limits the manner in which States may legitimately compete for interstate trade"). Rather, the parties dispute whether Ohio's method for encouraging new economic investment - conferring investment tax incentives and property tax exemptions - discriminates against interstate commerce.

The issue, then, has arisen. But, apparently no ruling has done much to stop the practice. And you have the Court saying 'you can give tax incentives to corporations in order to woo their local enterprise. So, how does this case reach its conclusion? The problem, it turns out, is in the tax scheme's discrimination towards other states. From the opinion:

Although the investment tax credit at issue here is equally available to in-state and out-of-state businesses, the plaintiffs nevertheless maintain that it discriminates against interstate economic activity by coercing businesses already subject to the Ohio franchise tax to expand locally rather than out-of-state. Specifically, any corporation currently doing business in Ohio, and therefore paying the state's corporate franchise tax in Ohio, can reduce its existing tax liability by locating significant new machinery and equipment within the state, but it will receive no such reduction in tax liability if it locates a comparable plant and equipment elsewhere. Moreover, as between two businesses, otherwise similarly situated nd each subject to Ohio taxation, 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.

I can't tell if this is all a bit of legal play, or a real difference from other cases. I'm no tax whiz- but it seems this would always be the case when states offer tax incentives. If so, the case will have far reaching impact and local governments everywhere will be watching the appeal to the Supreme Court. This will be fun.

Now- getting away from the case, what do we think of the tax incentives. I, quite honestly, had never given it much thought. That has changed. One, it seems suddenly clear that this is a dormant commerce clause problem. Moreover, as this James Surowiecki comments in the New Yorker, these incentive schemes do more harm than good. It is an excellent piece, so give a read. He points out the local government shopping that businesses do when considering a plant, with the loser so often being the winning bidder.