Supreme Court Questions Challenge To State Business Tax Breaks

by Mike Godfrey, Tax-News.com, Washington

03 March 2006

Supreme Court judges have cast doubt on the legitimacy of a challenge brought by a group of taxpayers against generous tax breaks granted by the state of Ohio to encourage companies to invest in the state, in a case which is being keenly watched by state governments across the country.

The case concerns the state’s attempt to prevent DaimlerChrysler from shutting a factory in 1998 by offering the auto maker a $280 million tax break in exchange for a $1.2 billion plan to expand the complex.

Last year, a federal appeals court upheld an earlier ruling by the 6th Circuit Court of Appeals in the Cuno v. DaimlerChrysler case which found that the Ohio tax breaks violate the US Constitution's interstate commerce clause.

The tax breaks under scrutiny gave the company a tax credit equal to 13.5% of the company's spending on certain qualified investments, including machinery. Such tax credits are widely used by states to encourage companies to expand and relocate to within their borders and are a critical development tool, especially during difficult economic times.

That ruling is now being contested in the Supreme Court, where this week judges appeared to come down on the side of the Ohio authorities by questioning the taxpayers' right to challenge the tax breaks in the first place. The judges also suggested that the matter was one for politicians, rather than the courts, to decide.

"I'll grant that these are politically controversial," Justice Antonin Scalia stated.

"But isn't that the place to fight it out? Why should the courts decide?," Scalia asked lawyers representing the taxpayers from Ohio and Michigan.

Scalia also suggested that states were perfectly within their rights to set tax rates as they see appropriate.

“What if a state has a lower income tax than any other state?” asked Scalia.

“Does that violate the Commerce Clause?," he added.

Justice David Souter also questioned whether the tax breaks illegally discriminated against firms doing business in other states.

"What you call discrimination is just differentiation," he suggested.

Last May, a bipartisan group of lawmakers introduced a bill that sought to protect state-granted tax incentives for business, arguing that vital economic redevelopment and jobs were at stake if they were banned.

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