US Court Rules Against Ohio Manufacturing Tax Break

by Mike Godfrey, Tax-News.com, Washington

24 January 2005

An US federal appeals court has endorsed a ruling that the state of Ohio violated the US Constitution by giving DaimlerChrysler AG a production tax break, a decision which observers say could have implications for business nationally.

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.

However, the appeal court ruled that the tax break, which gives the company a tax credit equal to 13.5% of the company's spending on certain qualified investments, including machinery, violates the US Constitution's interstate commerce clause.

The tax break was initially challenged unsuccessfully in a lower court by a group led by consumer advocate Ralph Nader, who labelled the incentive a form of "corporate welfare."

Then in September, a three-judge panel of the appeals court ruled that the tax credit "discriminates against interstate commerce by coercing businesses already subject to the Ohio franchise tax to expand locally rather than out-of-state," according to the Wall Street Journal. The US business daily went on to reveal that the full panel last week refused to reconsider the earlier appeals court decision.

Business groups and state governments have warned that the judgement could have implications beyond Ohio’s borders to the states under the jurisdiction of the Sixth Circuit Court of Appeal in Cincinatti, including Michigan, Kentucky and Tennessee, and ultimately nationally.

DaimlerChrysler’s director of corporate communications Michael Aberlich was reported by Dow Jones to be “disappointed and somewhat bewildered" by the ruling, and a spokesman for the Ohio Department of Development announced that the state will contest the decision in the Supreme Court.

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