Tax Incentive Challenge Falls Short

May 19, 2006
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Local development officials can rest easier now that the U.S. Supreme Court has thrown out a challenge to tax incentive programs in Michigan and other states.

In a 9-0 decision last week, the court ruled that the taxpayers who sued over Ohio tax incentives granted to DaimlerChrysler Corp. had no standing to wage their challenge. The Sixth Circuit Court of Appeals had previously declared the $70 million tax credit violated the Commerce Clause of the Constitution as a disruption of “free trade among the states.”

The

Sixth Court
had upheld the majority of the $300 million incentive package to increase production in a depressed area of Toledo, rather than build a new plant in Michigan, but struck down the credit against Ohio’s state corporate franchise tax.

If the ruling had stood, signature Grand Rapids projects like the new JW Marriott Hotel, the Fitzgerald and the

Michigan Street
development could have lost millions of dollars, according to John Byl of Warner Norcross & Judd LLP, a brownfield specialist who filed an amicus brief on behalf of the city.

The corporate franchise tax is used to create incentive packages in all 46 states in which it is levied. In Michigan, the corporate franchise tax is the Single Business Tax (SBT), the incentive basis of the Michigan Economic Growth Authority (MEGA) program and Brownfield Redevelopment Program.

Regarded as one of the nation’s most successful development tools, the brownfield program was a staple of dozens of local projects in the past year, among $82 million distributed across Michigan in 2005, according to state tax expenditures.

If Ohio’s corporate franchise tax credits were struck down, all Michigan programs built around the SBT could have been void, and that decision could have extended to all kinds of tax incentives, including the popular Renaissance Zone program.

“The state has provided us with a lot of tools, and without those I don’t think you’d see a lot of the activity that is going on today,” said Susan Shannon, economic development director for the city of Grand Rapids. “We were happy to see the decision.”

“I think the entire economic development community heaved a sigh of relief,” said Birgit Klohs, president of West Michigan economic development group The Right Place Inc. “This took a lot of the uncertainty away that we’ve had to deal with … this basically said that the states have the right to compete. If you want to do that, you need to put something on the table.”

Michael LaFaive, director of fiscal policy for the Midland-based MackinacCenter for Public Policy and a passionate critic of tax incentives, said that the decision did little to validate the practice.

“We’ve said since 2003 that standing would be the Achilles’ heel of this lawsuit,” he said. “These programs dodged a bullet. The court did not even look at tax incentives.”

The original lawsuit, DaimlerChrysler v. Cuno, was filed by a dozen Ohio and Michigan taxpayers and three small businesses and was initiated by consumer advocate Ralph Nader. A similar case is underway in North Carolina concerning a $280 million package given to Dell Computers, but LaFaive doubts any such challenge will have a national impact.

“It is possible individuals and lawyers may look internally at their own state programs and see if they can find taxpayers that do have standing within a particular state,” he said.

Cases of this type would likely involve situations where one company is favored over another by a tax incentive with all other things being equal, such as a complaint by a company that an incentive package gives a competitor an unfair advantage, he said.    

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