|The Supreme Court agreed Tuesday to decide whether a popular tax credit, which most states use to encourage businesses to make capital investments, violates the Constitution.
The case is an appeal by the State of Ohio and the DaimlerChrysler Corporation, which received an Ohio investment tax credit for building a Jeep plant in a depressed area of Toledo, of a court ruling that a benefit of this type interferes unconstitutionally with interstate commerce.
The ruling, made in October by the United States Court of Appeals for the Sixth Circuit, in Cincinnati, provoked an outpouring of criticism from tax experts and business groups. It created an unsettled situation within the Sixth Circuit because the Supreme Court of Michigan, one of four states in the circuit, has upheld a similar credit in that state.
Ford Motor and General Motors supported Chrysler's appeal, as did the United States Chamber of Commerce, the National Governors Association and many other groups.
In its ruling, the appeals court said it was unquestionably "legitimate for Ohio to structure its tax system to encourage intrastate economic activity." But it said the tax credit at issue had the effect of hindering "free trade among the states" by providing an incentive for local expansion rather than out-of-state expansion.
The constitutional source of the problem, in the appeals court's view, is the Commerce Clause, which gives Congress authority to regulate interstate commerce. Under the Supreme Court's precedents, the clause also carries the implication that states may not adopt policies that interfere with interstate commerce.
Most recently in this line of cases, the Supreme Court in its last term invalidated state laws that barred out-of-state wineries from shipping directly to consumers in those states that permitted direct shipment by in-state wineries.
The appeal that the court accepted on Tuesday, DaimlerChrysler Corporation v. Cuno, No. 04-1704, called the appeals court's decision "an extraordinary departure from any common-sense understanding of the Commerce Clause."
The purpose of the Ohio law, the appeal said, was "to reward intrastate investment," not to discriminate against any other state. The decision "calls into question the constitutionality of all state income tax and related business incentives," the appeal brief added.
Ohio's separate appeal, Wilkins v. Cuno, No. 04-1724, which the court also accepted, said that since 1995, business had invested more than $30 billion in Ohio, "money that could just as easily have gone to another state or another country," because of the state's tax credit. The credit against the state's corporate franchise tax, which can be spread over 10 years, is 7.5 percent, raised to 13.5 percent if the capital investment is in a "distressed area."
Ohio's brief said that 46 states offer some form of investment credit, often identified with special enterprise zone programs. The only four states without such credits are those that have no corporate franchise tax: Nevada, South Dakota, Washington and Wyoming.
The challenge to the Ohio tax credit was brought by several plaintiffs, including taxpayers who disapprove of the program, Michigan taxpayers who said they were harmed by Chrysler's decision to build its Jeep plant in Ohio rather than in Michigan and a property owner whose land was taken for the Jeep plant by eminent domain.
The plaintiffs said the Sixth Circuit's opinion was correct but the Supreme Court should still hear the case. The issues "are of broad national importance, because they will apply to a range of comparable business tax incentives offered by many states," the plaintiffs said.
They added that they did not intend to single out Ohio, but rather wanted 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."