03/25/2009 11:14:13 AM EST
Location-Based Credits and Incentives: The State of the Union
Charles “Chuck” Swenson, CPA, PhD, is Professor of Accountancy at the
University of
Southern California . He has authored a number of books, and is General Editor of Bender's State Taxation: Principles and Practice. He has written over 100 articles, focused primarily on state taxation issues. His writings appear in professional and academic journals and in Lexis State Tax Service Practice Insights. He is also Co-Founder of the National Tax Credit Group, LLC.
Professor Swenson writes: As governments struggle with simultaneous economic downturns and budget crises, questions naturally arise as to the cost effectiveness of tax incentives. One significant incentive is location-based credits and incentives (or LBICs). LBIC programs are sponsored by 43 states, and the federal government has such programs as well. There are about 7,800 zones in the Generally, these programs offer tax incentives for firms locating or expanding in areas lagging in economic development. For a high level state-by-state summary of programs, see: http://www.marshall.usc.edu/leventhal/research/working-papers.htm
Report to California Dep't of Housing and Community Development on Enterprise Zones
A number of questions remain: Does the economic growth produced by these programs pay for itself in terms of an expanded tax base for the government? Also, will there be serious constitutional challenges to the legitimacy of such programs, since they potentially favor one class of firms (those locating in such zones) at the expense of firms not located in such zones?
Constitutional Issues Examined
The constitutionality of state credits and incentives had not been challenged until plaintiffs sued DaimlerChrysler, Inc., challenging the validity of Ohio’s tax credit (see ORC Ann. 5733.33) for investment in new manufacturing machinery and equipment. See Cuno v. Daimler Chrysler, Inc., 386 F.3d 738 (6th Cir. Ohio 2004). Plaintiffs asserted that the credit, conceived to encourage economic development by providing a tax incentive to install new manufacturing machinery and equipment in the state, violates the Commerce Clause of the United States Constitution.
The credits were state tax credits and local property tax abatements that the city of Toledo, Ohio granted to DaimlerChrysler as an inducement to expand its business operations in Toledo. In 1998, DaimlerChrysler agreed to build a vehicle assembly plant in
Toledo in exchange for certain tax incentives. In return, the city gave DaimlerChrysler property tax exemptions and investment tax credits worth an estimated $280 million.
The district court granted DaimlerChrysler’s motion to dismiss. Cuno v. DaimlerChrysler, Inc., 154 F. Supp. 2d 1196 (N.D. Ohio 2001). The United States Sixth Circuit Court of Appeals reversed in part, finding that Ohio's investment tax credit violated the Commerce Clause because it coerces in-state businesses, which are already subject to Ohio’s franchise tax, to keep their activities in-state to benefit from the tax credit. Cuno v. Daimler Chrysler, Inc., 386 F.3d 738 (6th Cir. Ohio 2004). Thus, the economic effect of the
Ohio investment tax credit is to encourage further investment in-state at the expense of development in other states and that the result is to hinder free trade among the states. In 2006 the U.S. Supreme Court denied certiorari because the plaintiffs were found to have no legal standing. Cuno v. DaimlerChrysler Corp., 547 U.S. 1147 (U.S. 2006).