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Economic development leaders keep close eye on court case
By Dan McCue
Staff Writer
The business of luring new industries to the region, not to mention aiding their expansion once they set down roots here, may change dramatically in coming weeks when the U.S. Supreme Court is expected to decide whether certain tax incentive plans—one of the most commonly used economic development tools in the nation—are, in fact, unconstitutional.
The case, DaimlerChrysler v. Cuno, which the U.S. Supreme Court heard March 1, involves a $280 million tax break provided to the giant automaker by Ohio lawmakers to support a major expansion of its Jeep-making facilities in the state.
It brings to a boil a long-simmering debate over whether tax breaks like those in Ohio, South Carolina and 44 other states are fair to citizen taxpayers, commercial competitors or even potential materials suppliers for the favored company.
The state of South Carolina, which for years has offered business incentives tied to company performance, joined 35 other states in filing a “friend of the court” brief urging the justices to uphold tax incentive programs.
If the court decides otherwise, many predict dire ramifications for the states, municipalities and business-friendly groups such as the Charleston Regional Development Alliance, which have long seen incentives as a way to close a relocation, expansion or business consolidation deal.
“In a perfect world, I think most of us who sell or represent communities for the purpose of economic development would prefer all incentives go away, and communities would be judged solely on their assets, but that’s not the world we live in,” said David Ginn, president and CEO of the development alliance.
“Instead, communities are forced to be as creative and as smart as they can to come up with an incentives package that works for everybody. Take the ability to do that away—effectively, the ability to create a tie-breaker in a stiff competition between locales, if you will—and many communities are going to have a very hard time competing for economic development.”
Incentive interference
The roots of the Supreme Court case go back to the early 1990s when DaimlerChrysler was considering whether to expand an existing Jeep facility in Toledo or to move the entire operation across the border to Michigan.
According to court documents, what finally tipped the odds in Toledo’s favor was a tax incentive package that gave DaimlerChrysler a one-time credit against the state’s corporate franchise tax for agreeing to purchase factory parts only from vendors within the state, what Ohio law describes as a “qualifying investment.”
The lawsuit, which was brought by a Toledo resident, a small business owner whose property was taken in order to expand the Jeep facility, and some Michigan citizens, challenges the constitutionality of the package under the so-called dormant commerce clause (see story page 32), which prohibits states from acting in a way that interferes with interstate commerce.
Essentially, their claim is that the incentive package discriminates against interstate commerce by providing preferential treatment to in-state economic activity.
The 6th U.S. Circuit Court of Appeals agreed, saying corporations would be treated unequally based on their investment decisions.
University of Georgia School of Law professor Walter Hellerstein, widely considered the nation’s leading authority on taxation and tax law issues, thinks U.S. Supreme Court guidance is long overdue.
“Investment tax credits are the most commonly used incentive programs for business, yet the Supreme Court has never taken a clear stand on their constitutionality,” Hellerstein said. “The Ohio case makes it abundantly clear clarification is needed.”
The Supreme Court has struck down other tax incentive programs. It ruled a special tax the state of Hawaii had imposed to protect a local industry from imports from other states was unconstitutional. It also struck down a New York program that treated companies differently based upon the percentage of export business they conducted.
South Carolina awaits decision
Daniel Young, director of grants and incentives for the South Carolina Department of Commerce, said if the Supreme Court does declare that the existing model for tax incentives for economic development is unconstitutional, “we’ll change our programs to meet whatever parameters the high court sets for us.”
The two most popular tax incentives programs in South Carolina, Young said, are the job tax credit and the investment tax credit. Both are tied to performance.
In the case of the job tax credit, employers must create an agreed-upon number of jobs within a specified time frame to qualify for a partial rebate of the withholding taxes the company pays for its employees.
The investment tax credit offers companies a percentage reduction in their business income tax in proportion to their investment in new facilities during a specified time period.
South Carolina doesn’t have an incentive program quite like the one being challenged in Ohio, but even in light of the current litigation, Young said he wishes it did.
“To tell you the truth, it’s a pretty interesting plan,” he said. “We’d love to have anything that would encourage businesses to shop locally. Perhaps it’s something we’ll look at if the court ultimately decides it passes muster.”
But others take a different view. Among them is the North Carolina Institute for Constitutional Law, which has filed a state court challenge to $242 million in tax breaks given by state officials to Dell Inc. to build a plant in Winston-Salem.
“What we’re seeing nationally is large corporations playing one state off another,” said the institute’s head, retired North Carolina Supreme Court Justice Robert F. Orr. “States, in a desperate search for jobs, are forced to hand out huge tax breaks that shift the burden to small businesses and individual taxpayers.”
But Ginn thinks that characterization is far too pat.
“Each community, each state goes about economic development in different ways,” he said. “The approach you take depends on your resources, of course, but also on how your community is doing at the time discussions with a business are taking place. If you’re doing well, as opposed to dealing with a base closure, you’re in a stronger position to bargain.”
The individual state’s vulnerability to suits such as Cuno varies widely, and each state has tax laws and investment incentives that are unique to its circumstances. South Carolina officials, however, contend that whatever form the Supreme Court decision takes, “economic policy is best left to each state’s individual discretion.”
Tie breaker incentive
Ginn is satisfied with the approach South Carolina and local municipalities have taken, using tax incentives as tiebreakers and deal closers and mandating that businesses be rewarded only for performance, he said.
“Stepping away from the case, I think it’s also important to recognize that in South Carolina, all incentives offered to businesses moving into the area are also available to existing businesses,” Ginn said.
“One of the best uses of incentives is to make sure that businesses are here (and) are growing and healthy. It comes down to this: When the home office is considering an expansion, we want this to be the first place they consider, and when they’re consolidating operations, we want this to be the last place they think of closing. That’s when incentives can be the most effective and important.”
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.
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