The U.S. Supreme Court will determine whether states can offer tax breaks to encourage businesses to make capital investments.
The high court on Tuesday accepted appeals by the state of Ohio and the DaimlerChrysler Corporation, which received an Ohio investment tax credit to build a Jeep plant in a distressed part of Toledo. The issue centers on whether the popular tax credit - used in similar forms by almost every state - violates the Constitution because it interferes with interstate commerce.
Because tax incentives are so widely used, the court's decision could have a huge impact on how governments attract large companies.
"This is a bread-and-butter issue for economic-development practitioners," Bill Badger, chief executive of the Anne Arundel Economic Development Corp., told the Washington Post.
The U.S. Court of Appeals of the Sixth Circuit, based in Cincinnati, ruled last year that the $280 million tax credit encouraged local expansion rather than out-of-state expansion and had the effect of hindering “free trade among the states,” a violation of the Constitution's Commerce Clause, the New York Times reported.
The DaimlerChrysler Corporation and the state of Ohio filed separate appeals. The automaker's appeal called the court's decision, “an extraordinary departure from any common-sense understanding of the Commerce Clause."
The purpose of the Ohio law was "to reward intrastate investment," not to discriminate against any other state, the appeal says. The decision "calls into question the constitutionality of all state income tax and related business incentives.”
Ohio's separate appeal said that because of the state's tax credit, business had invested more than $30 billion in Ohio since 1995 - "money that could just as easily have gone to another state or another country.” Ohio's brief said that 46 states offer some form of investment credit, with the exception of Nevada, South Dakota, Washington and Wyoming.
The plaintiffs include Ohio taxpayers who ultimately had to pay for the credit, Michigan taxpayers who believe they were harmed by the decision to build the Jeep plant in Ohio rather than Michigan, and a landowner whose property was taken by eminent domain. The plaintiffs, in court papers, said they want the Supreme Court to "free all the states from the necessity of engaging in an escalating competition over incentives that deprives all of them of needed revenues."
Some state officials would like one uniform set of tax incentive rules, believing that the state-against-state bidding wars are out of control.
If all states "have to play by the same rules, I am not worried about repercussions," Aris Melissaratos, Maryland secretary of Business and Economic Development, told the Post. "Then we can compete on substantive competitive elements."