STATE TAX INCENTIVES that encourage companies to build wind farms, ethanol plants, factories and other facilities dodged a constitutional challenge.

STATE TAX INCENTIVES that encourage companies to build wind farms, ethanol plants, factories and other facilities dodged a constitutional challenge.

September 01, 2006

STATE TAX INCENTIVES that encourage companies to build wind farms, ethanol plants, factories and other facilities dodged a constitutional challenge.

The US Supreme Court declined in May to rule on whether such incentives violate the commerce clause of the US constitution, which bars states from interfering with interstate commerce. Such incentives might cause a company to put a wind farm, for example, in state X rather than across the border in state Y.

The Supreme Court said that a group of Ohio residents who challenged an investment tax credit that DaimlerChrysler received for building a Jeep factory in Ohio lacked “standing” to challenge the tax credit. It declined to address the merits of their case.

A US appeals court had said earlier that the Ohio tax credit was an unconstitutional attempt by Ohio to redirect interstate commerce.

DaimlerChrysler built a new Jeep factory near an existing plant in Toledo, Ohio in 1998 at a cost of $1.2 billion. The state offered a 13.5% investment tax credit at the time against franchise taxes as an inducement to companies

to put “new manufacturing machinery and equipment” in Ohio. The car manufacturer not only claimed the tax credit, but it also received a property tax exemption for 10 years from the two local school districts. The tax benefits were worth $280 million.

A group of Toledo homeowners and small business people challenged the tax benefits at the urging of Ralph Nader. A US appeals court struck down the investment tax credit, but let the property tax exemption stand. The court suggested that direct subsidies like government grants are permitted under the US constitution, but tax credits are not because they involve a state’s use of its taxing power in an effort to redirect interstate commerce. The appeals court had no problem with the property tax exemption.

The auto maker appealed to the US Supreme Court. The court declined to rule on procedural grounds that had the effect of setting aside the appeals court decision. The case is DaimlerChrysler Corporation v. Cuno. Ohio no longer offers the tax credit and is in the process of phasing out its franchise tax.

Keith Martin