Incentives At Risk

September 30, 2005
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GRAND RAPIDS — The U.S. Supreme Court agreed last Tuesday to hear an Ohio/Michigan lawsuit universally expected to become the landmark precedent governing the nation’s economic development programs.

“If the Supreme Court (rules against the states), all incentives in all of the United States will go away,” said Birgit Klohs, president of The Right Place Inc., which administers the state’s incentive programs in West Michigan. “It’s the biggest thing the economic development world has ever seen …”

The case is an appeal by the state of Ohio and Daimler-Chrysler Corp. of a Sixth Circuit Court of Appeals opinion last year that a $70 million tax credit to increase Jeep production in a depressed area of Toledo rather than building a new plant in Michigan violated the commerce clause of the U.S. Constitution as a disruption of “free trade among the states.”

The original lawsuit, Daimler-Chrysler v. Cuno, was filed by a dozen Ohio and Michigan taxpayers and three small businesses and was initiated by consumer advocate Ralph Nader.

Described as a “true test case” by plaintiff counsel Peter Enrich, a professor at Northeastern University School of Law, the lawsuit was meant to challenge not only Ohio’s investment tax credit, but its entire program of targeted incentives.

The Sixth Circuit Court upheld the majority of the $300 million incentive package, but struck down the credit against Ohio’s state corporate franchise tax, worth approximately $70 million.

A loss for both sides, the plaintiffs did not get the challenge of “corporate giveaways” they had sought, and the four states of the Sixth Circuit Court — Ohio, Michigan, Kentucky and Tennessee — were suddenly faced with eliminating an incentive program used nationwide. Both sides petitioned to retry the case.

The Supreme Court has not yet indicated whether it will examine the property tax exemption program upheld by the lower court.

Klohs, who would like to see the decision overturned altogether, was nonetheless relieved that the Sixth Circuit Court states were no longer alone. The decision will apply to all 46 states with corporate franchise taxes.

“If we’re going to lose, I want a level playing field,” she said. “If we can’t do it, someone in Mississippi ought not to be able to do it, either.”

In Michigan, the corporate franchise tax is called the Single Business Tax (SBT), which is the incentive basis of the Michigan Economic Growth Authority (MEGA) program and Brownfield Redevelopment Program.

An adverse decision could grind West Michigan development to a halt, said John Byl, an environmental attorney and brownfield specialist with Warner Norcross & Judd LLP. He co-authored a brief on behalf of The Right Place and the city of Grand Rapids, one of hundreds filed with the Supreme Court by municipalities, economic development agencies and corporations.

“This has the potential to significantly undermine the tax credits offered by the vast majority of the states, particularly those that are struggling to keep industry in their states,” Byl said.

As Byl noted, there are several kinds of projects in West Michigan receiving significant tax credits. Nearly every large-scale investment in the region over the past year in any field has been accompanied by a government incentive package.

Including abatements, the region saw a dozen incentive packages last week alone, most notably the $6.8 million in tax breaks given to Lacks Enterprises Inc. for its new plating facility in Kentwood and Icon On Bond’s brownfield designation.

If the Circuit Court decision is upheld, all of these packages will be void.

There are some distinctions between Michigan’s programs and the Ohio program under scrutiny, Byl said, that could keep the incentives active. Michigan Economic Development Corp. (MEDC) spokesman Paul Krepps pointed out that the Michigan programs are performance based and tied to job creation. The Ohio program, which was retooled this year to a real property system, originally focused on machinery and investment.

Michael LaFaive, director of fiscal policy for Mackinac Center for Public Policy, a Midland-based watchdog group, believes a Supreme Court decision “will be solid enough that (opponents) won’t have any ground to stand on.”

He does agree with Byl that for an adverse ruling to impact the state, separate lawsuits challenging the Michigan programs might be required.

Byl is skeptical of plaintiffs’ standing for such cases — that is, the plaintiff’s responsibility to establish damages. LaFaive is not.

“These programs target tax relief to a relative handful of businesses while their rivals continue to pay full freight,” he said. “You’ll see a cascading around the country of programs falling like dominos.”

Judging by recent events, West Michigan will have no shortage of plaintiffs.

Days Inn proprietor Bob Sullivan formed a group last spring — Taxpayers Against Waste — to combat the $5.9 million tax break for Alticor’s new downtown hotel. Jim Zawacki, president of Grand Rapids Spring and Stamping, has long complained about the city’s Renaissance Zone borders.

Another example is the tax-free Tool & Die Recovery Zones, which abates state and local taxes for companies with 50 employees or less that enter into a collaborative agreement with other companies.

“The reality is that one of our competitors, which is a 50-man shop now, can get a 15-year zone,” said Dave Muir, Paragon Tool and Die process and IT manager. “Right now, we don’t directly compete with them; we’re a 150-man shop.”

But even if that competing shop were to grow to 200 employees, the benefits of the zone would remain.

“If the government allows you to do it, you should take every advantage,” Muir said. “But theoretically, it could be picking who survives and who doesn’t.”

There is a parallel lawsuit to Daimler-Chrysler v. Cuno in North Carolina, brought by a group of concerned taxpayers against the state and Dell Computer Co. North Carolina officials were so desperate for Dell to build an assembly plant there that they offered Dell’s transition team free dry cleaning, rental cars, gas and golf.

Dell settled for $280 million in tax breaks and subsidies.

Jim Hettinger, CEO of Battle Creek Unlimited, has hopes that the Supreme Court will soften the aggressive incentives of the southern states.

“Some of us agree that incentives are out of control,” he said. “I’d give you a complete and enthusiastic yes (to eliminate targeted incentive programs), but let me throw in one caveat. Michigan competes with Ontario just as much as any of the 50 states.”

Two significant concerns not directly addressed by either lawsuit are the need for states to compete in the global economy, and whether incentive programs work at all. For instance, would the multi-billion dollar Alticor have scrapped its hotel plans if the SBT credits were withheld?

In April, the Mackinac Center released a report showing that the MEGA program was largely ineffective in creating jobs. In 2003, a Detroit News review of MEGA found that the program’s $1.38 billion in incentives could replenish the cash-starved state’s depleted rainy day fund, foot most of the bill for state aid to higher education for a year, and fully fund the Medicaid health-care program for the poor.

Plus, Michigan-based multinationals such as the Big Three, Dow Chemical and Delphi Automotive were among the companies that received the 15 most lucrative tax breaks, adding up to $651 million, or nearly half the total amount of abatements approved. And companies like Kmart and Steelcase never fulfilled the obligations of the MEGA.

Of the 400,000 new jobs added to company payrolls in the state between 1995 and 2000, only 10,787 — or less than 3 percent — were jobs directly created by authority-aided projects.    

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