Win, lose, or draw?

For opponents of corporate welfare, a recent court decision may be fool's gold

"This decision is a major blow against the most insidious form of corporate welfare," trumpeted consumer advocate and former presidential candidate Ralph Nader last September when the U.S. Court of Appeals for the Sixth Circuit struck down an Ohio tax incentive rewarding companies that installed newly purchased manufacturing equipment within the state. The defendant in the case, DaimlerChrysler, had received an incentive package worth an estimated $230 million to keep a replacement Jeep manufacturing facility in Ohio. The plaintiffs, private citizens and small businesses, challenged the giveaways - a combination of an investment tax credit against the state's corporate franchise tax, local tax breaks, land, and utilities - under the Commerce Clause. They argued that the tax credits and waivers amounted to discrimination against interstate commerce.

Like Ohio, Texas has a Capital Investment credit against corporate franchise taxes available to businesses that make qualifying investments in selected development zones. In 2001 and 2002, the state Comptroller reports that Texas corporations claimed $20 million in tax credits based on an estimated $30.5 million in capital investments; $10.5 million of that money was invested in Bexar County. In 2003, 63 companies claimed $34 million in captial investment tax credits. Teresa Bostick of the Comptroller's office says that the agency is aware of the Ohio case but "we haven't seen any legislation addressing that decision."

The Commerce Clause "does not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry," the Supreme Court has ruled. Nor does it prevent states from competing for commercial activity providing that "no State discriminatorily tax`es` the products manufactured in any other State."

The Ohio tax credit allows qualifying businesses located in the state to apply a percentage of the cost of new manufacturing equipment against their annual corporate franchise tax, provided the equipment is installed in Ohio. The tax credit increases if the equipment is used in specified economic empowerment zones. The Sixth Circuit invalidated the Ohio provision, drawing from multiple opinions to rule that the Ohio tax credit in effect discriminates against out-of-state business because it gives an advantage to in-state business, thereby impeding the free flow of commerce across state lines.

If something about this case strikes you as a little funny, you're right. A multinational corporation is arguing, in effect, that a state should be able to make life easier or harder for it based on the company's investment decisions; private citizens are asking the federal bench to invalidate some of their state's power to influence businesses that operate in their state. Advocates for tax incentives and exemptions argue that these programs allow states and municipalities to exercise some control over the investments made in their area, encouraging development in an economically downtrodden neighborhood, for example. Opponents such as Nader say that the giveaway programs allow corporations to extort financial concessions that have very little effect on their business decisions and that impoverish school districts and local infrastructure.

In its decision, the Sixth Circuit answered the prayers of corporate welfare opponents in part, but it declined to invalidate the local tax breaks, which were made possible in part by two school districts that agreed to forego 100 percent of DaimlerChrysler's tax liability for the next 10 years. Think about that the next time you're selling tacky Christmas items from a catalog to raise funds for your child's classroom supplies. San Antonio, according to the Express-News, has given up an estimated $22.5 million in tax revenues since 1989 to entice businesses to settle or expand in the city.

The Ohio state tax credit rewarded DaimlerChrysler only if and when it invested in-state, and rollover credits could be applied for a maximum of three years. There was no penalty for investing outside of Ohio; the tax incentive was a carrot, not a stick. Because the tax credit almost doubled if DaimlerChrysler installed any qualifying equipment in designated empowerment zones, Ohio could encourage the corporation to spread the economic development around rather than cluster it on the equivalent of San Antonio's North Side.

Furthermore, legal analysts have noted that Ohio can most likely replace the now-illegal tax credits with subsidies that will pass muster under the Commerce Clause, so DaimlerChrysler and those who follow in its footsteps will still benefit. The school districts, in the meantime, get squat.

Unless the Supreme Court decides to hear the Ohio case, or until another Circuit court produces a conflicting opinion, forcing the Supremes to act, the Sixth Circuit opinion throws Texas' provision in to question, along with similar programs nationwide. But even though critics of corporate welfare are applauding the Sixth Circuit's decision, it's worth asking whether we've thrown out the baby and kept the dirty bathwater.

By Elaine Wolff