Tax-Break Tango

The fight over public subsidies to corporations is nearing a crucial decision in the U.S. Supreme Court.
May 2006
By Jonathan Walters  |  Senior Editor
A Senior Editor of Governing, Jonathan has been covering state and local public policy and administration for more than 30 years.

To Charlotte Cuno, the math was pretty simple: The $280 million in state and local tax breaks given to DaimlerChrysler to induce the company to expand a Jeep plant in Toledo meant that her grandkids' education was being short-changed. Their teachers hadn't had raises in years. Programs to fund things such as school computers had gone begging.

That was Cuno's inspiration for filing suit in federal court to block the tax breaks; it wasn't the legal argument that she and her supporters made in Cuno v. DaimlerChrysler. They pressed the claim that the subsidies violated the Commerce Clause of the U.S. Constitution because they served to "distort the free flow of investment in an open national economy." In other words, companies were being pressured to keep their activities within the state of Ohio and thus being discouraged from seeking out profitable opportunities elsewhere--arguably a Commerce Clause restraint of trade.

In October 2004, the Sixth Circuit sided with Cuno, finding that the tax breaks did essentially add up to economic coercion. The case shocked a national corporate community that enjoys billions of dollars in tax breaks offered every year by states and localities, and it got the attention of the governments as well. All those interests are now focused on the U.S. Supreme Court, where a decision on an appeal of Cuno is expected soon.

The Cuno fight is just the most recent and visible battle in a long war between those who view tax breaks such as Ohio's as crucial to state and local economic competitiveness and those who see them as little more than wasteful giveaways that deny needed funding to education and other fundamental priorities. If recent decisions on the power of states and localities to control economic development is any indication, then Ms. Cuno and her supporters are not likely to fare well in the next judicial round.

Kelo v. New London, the celebrated eminent domain case decided by the high court last summer, affirmed the right of state and local governments to take land for commercial development purposes (although the court said states could change the rules through legislation). Most experts predict that the Cuno case will also wind up affirming the right of governments to pursue economic development, in this instance through tax breaks.

Still, there are some public officials who aren't taking any chances. The most sweeping effort afoot at the moment is a bill drafted by U.S. Senator George Voinovich of Ohio that would essentially immunize states and localities from Commerce Clause challenges such as Cuno's.

That bill would have important implications for many states besides Ohio. Michigan, for example, enacted legislation last fall that gives companies tax credits if they can document that they've moved a job out of one state and into Michigan. New York Governor George Pataki has proposed legislation that would allow New York companies to depreciate in-state capital investments 100 percent, while companies that made investments out of state would have to depreciate according to a less favorable schedule.

Critics such as Michael Maserov, of the Center on Budget and Policy Priorities, complain that any legislation along the Voinovich lines could turn corporate subsidies into an out-of-control free-for-all that even business might regret, if, for example, corporate tax law became a 50 state mish-mash of narrowly drawn incentives and breaks. Activists who agree with Maserov (and Cuno) are trying to block proposed new subsidies at the state level before they can make it onto the books. They are challenging a tax cut package for Dell in North Carolina and a broad-based subsidy scheme that would be delivered through economic enterprise zones in Minnesota.

So go the corporate tax-break battles and along with them, some might say, the fate of Charlotte Cuno's grandkids. Will they find jobs on a Jeep assembly line in Toledo, helped along by subsidies to the corporation? Or will they be saddled with debt rung up by the tax breaks that led to the plant's expansion? Will it be both? Or might they just wind up as tax credits for some clever and aggressive corporation that manages to lure them all to Michigan?