by Larry Jones
May 22, 2006

In a victory for state and local governments, the Supreme Court in a unanimous decision on May 15 reversed the ruling of a lower court which invalidated an investment tax credit used in Ohio to encourage economic development.

The case involved a group of taxpayer-plaintiffs who filed a law suit in federal district court claiming the investment tax credit given to Daimler Chrysler to entice the company to expand its Jeep manufacturing plant in Toledo was unconstitutional because it violated the Commerce Clause. The federal district court ruled that the tax incentives did not violate the Commerce Clause. However on appeal, the U.S. Sixth Circuit Court of Appeals held in 2004 that the investment tax credit, which is only available to businesses that invest in Ohio, violated the Commerce Clause, which forbids tax incentives that discriminate against interstate commerce. But the Supreme Court said both lower courts erred by considering the merits of the case because the taxpayer-plaintiffs had no legal standing to challenge the tax incentives.

In companion cases, Daimler Chrysler Corp. v. Cuno No. 04-1704, and Watkins v. Cuno No. 04-724, the Supreme rejected the argument of the taxplayer-plaintiffs, which included Toledo residents who claimed they were injured because the tax breaks given to Daimler Chrysler depleted the state and local treasuries to which they contributed, and diminished the total funds available for lawful use.

Speaking on behalf of the Supreme Court, Chief Justice John Roberts said the plaintiffs, by virtue of their status as taxpayers, have no standing to challenge the tax incentives. He also said the alleged injury claimed by the plaintiff-taxpayers was mere conjecture. Chief Justice Roberts explained, “… affording state taxpayers standing to press such challenges simply because their tax burden gives them an interest in the state treasury would interpose the federal courts as ‘virtually continuing monitors of the wisdom and soundness’ of state fiscal administration, contrary to the modest role Article III envisions for federal courts.”

He also said, “A taxpayer-plaintiff has no right to insist that the government dispose of any increased revenue it might experience as a result of his suit by decreasing his tax liability or bolstering programs that benefit him.” He went on to say, “To the contrary, the decision of how to allocate any such savings is the very epitome of a policy judgment.”

To entice Daimler Chrysler to invest $1.2 billion to expand it’s Jeep manufacturing plant and create 5,000 additional jobs, the city of Toledo and two local school districts in 1998 gave the company a ten-year exemption from property taxes. The state of Ohio also granted the company a tax credit against the state’s franchise tax. Overall the company was given almost $300 million in tax breaks.

Reacting to the Supreme Court’s decision, Toledo Mayor Carleton S. Finkbeiner said, “This ruling affirms that the city of Toledo acted properly by offering incentives to Daimler Chrysler. Daimler Chrysler’s $1.2 billion investment has made Toledo a shining example of new age automotive production, and assured Toledoans of Diamler Chrysler’s presence here for years to come.” Other state and local governments across the nation are expected to echo the mayor’s positive reaction since most have been using similar tax incentives to encourage economic development in their areas.