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Like many states, Ohio tries to attract businesses through tax incentives. But a federal appeals court struck down the state’s investment tax credit as unconstitutional, and last week the Supreme Court heard oral argument in the appeal from that decision. In a surprise twist, the Supreme Court may resolve the matter not on the merits of the constitutional argument that swayed the appellate court, but under doctrines of constitutional or prudential standing. Either way, the ruling could have consequences for how states offer incentives to bring businesses into their jurisdictions. The story is a common one in today’s business climate. DaimlerChrysler wanted to expand its capacity to build Jeeps and already had an existing assembly plant in Toledo, Ohio. The company asked Ohio state and local government officials about incentives to persuade the company to expand in Toledo, rather than in nearby Michigan. Ohio government officials negotiated a package that, among other things, waived local personal property taxes for 10 years and helped DaimlerChrysler qualify for an existing Ohio investment tax credit. Charlotte Cuno, a Toledo taxpayer, joined several similar plaintiffs from Ohio and Michigan in challenging the DaimlerChrysler agreement. Among other things, the plaintiffs alleged that Ohio tax laws providing the investment tax credit and permitting the local property tax exemption violate the federal Constitution by favoring DaimlerChrysler over out-of-state businesses. The U.S. Court of Appeals for the 6th Circuit upheld the state’s personal property tax waiver provision but struck down the Ohio investment tax credit under the Constitution’s “dormant” commerce clause. On March 1, the Supreme Court heard argument over these rulings, consolidating appeals in DaimlerChrysler Corp. v. Cuno and Wilkins v. Cuno. FREE COMMERCE The Cuno case reflects long-standing debates over the constitutionality, efficacy, and wisdom of state tax incentives to promote economic development. The taxing power is a basic element of state sovereignty. Yet the states must employ that power with due recognition of constitutional limitations. The Constitution’s commerce clause grants Congress the power to “regulate Commerce . . . among the several States.” The goal is to control economic rivalry among the states but not nationalize state taxing authority. Although the commerce clause makes an explicit grant of power to Congress, the Supreme Court also has interpreted it to restrict state action even when Congress has not expressly legislated in an area. Among other things, this so-called “dormant” commerce clause prevents states from using their taxing power to interfere with interstate commerce. Legal scholars argue over whether state tax incentive programs conflict with the Supreme Court’s cases on the dormant commerce clause. Past Court opinions apply the commerce clause to state tax laws on a purely case-by-case basis. The Court has not offered any more generalized standards to guide state lawmakers. The resulting doctrinal mess could arguably allow federal courts to stop states even from lowering their corporate tax rates below those of their neighbors. Supporters of the Cuno plaintiffs say that federal judges would exercise discretion and never go that far. Others are more skeptical. Separately, many economists believe that state tax incentives for businesses are not an efficient way to stimulate economic growth and create jobs. Other experts defend the efficacy of properly structured programs. State governments strongly assert their right to make tax policy decisions without federal judicial interference, and almost all states employ some sort of business tax incentives. Meanwhile, copycat litigation has been filed challenging enterprise zone programs in Minnesota and tax breaks for a new Dell plant in North Carolina. Other challenges may be pending in other states. LEGAL OPTIONS The Cuno Court could announce a whole new model for evaluating state tax policies under the commerce clause. One never knows. If the Court follows past practice and resolves the case narrowly, then the decision will not likely make much long-term practical difference. In the short term, a decision upholding Cuno would require most states to review and revise an array of state tax laws. But it is unrealistic to expect that the states will cease competing for new business just because the Supreme Court invalidates the Ohio investment tax credit. Investment tax credits are the most common form of state tax incentives, but they are not the only option. Direct business subsidies, for example, are generally thought to pass constitutional muster. Ohio has already shifted from tax incentives to direct subsidies in response to the 6th Circuit’s decision in Cuno. Alternatively, Congress is considering legislation that would expressly allow state tax incentive programs, which would render irrelevant a contrary decision by the Court under the dormant commerce clause (because then Congress would have used its constitutional power directly). If, on the other hand, the Court reverses the 6th Circuit, the plaintiffs have other means of accomplishing their goals. The plaintiffs can challenge state tax incentive programs in state courts on state constitutional and statutory grounds. Moreover, state governments are not required to offer business tax incentives, and state legislators can decline to do so. And a few years ago, Congress considered legislation that would have expressly precluded state tax incentive programs. STANDING? The Cuno Court may not even reach these issues, however. On its own motion, the Court ordered the parties to brief and argue the question, “Whether respondents have standing to challenge Ohio’s investment tax credit.” Although the Court agreed to consider the 6th Circuit’s rejection of the Ohio investment tax credit, it has so far deferred deciding whether to grant or deny certiorari to Charlotte Cuno and her fellow plaintiffs on the corresponding issue of the personal property tax waiver. The Court may be signaling its desire to use standing doctrine to avoid the commerce clause issue, but return to the status quo ante. The standing issue is complicated in Cuno. Modern standing doctrine imposes several separate but interrelated tests. The Constitution limits the federal judicial role to deciding actual cases or controversies. Interpreting this limitation, the Court requires plaintiffs to establish three elements to have standing in federal court. First, plaintiffs must suffer an injury that is concrete, particularized, and actual or imminent, rather than conjectural or hypothetical. Second, the defendant’s conduct must be the cause of the alleged injury. Third, a favorable decision by the courts must redress that injury. Separately, plaintiffs suing as taxpayers must present more than mere generalized grievances. In addition, a plaintiff must show that the “zone of interests” of the constitutional provision invoked include the interest asserted. The Cuno plaintiffs fall into three distinct groups. Kim’s Auto and Truck Service is a business that had to relocate, under threat of eminent domain, to accommodate DaimlerChrysler’s new plant. Charlotte Cuno and other Toledo-area residents sue solely as Ohio state and municipal taxpayers. Other plaintiffs join the case as Michigan state and municipal taxpayers. The Michigan plaintiffs claim that they were denied the benefits of the spending their state and municipal governments might have undertaken had DaimlerChrysler chosen to build and pay taxes in Michigan rather than Ohio. Such harms are precisely the sort of generalized, abstract, and conjectural injuries that the Court typically finds inadequate to maintain standing. It seems speculative that the tax incentives caused DaimlerChrysler to expand in Toledo rather than build in Michigan, when studies suggest that factors such as prevailing local wages, work-force skills, utility costs, and state regulatory climates are more influential. It seems, at best, barely possible that declaring Ohio’s incentive tax credit unconstitutional will lead to increased Michigan tax revenues. The Michigan plaintiffs highlight their taxpayer status, but they are not suing their own government, but Ohio and its officials, as well as private parties. DIRECT INJURY Kim’s Auto claims specific, individualized economic injuries arising from its relocation. But like the Michigan plaintiffs, Kim’s Auto has not established a direct causal link between the challenged tax incentives and the alleged taking of the property. Moreover, Kim’s Auto does not seek monetary relief for its alleged injuries, but instead merely asks the Court to declare the Ohio investment tax credit unconstitutional. Such a lack of nexus between the injury asserted and the remedy sought is usually fatal to a standing claim. Charlotte Cuno and the other plaintiffs suing solely as Ohio state and municipal taxpayers assert that the tax incentives provided to DaimlerChrysler reduce government funds available for other purposes and also shift a disproportionate share of the state and local tax burden to them. These plaintiffs face the same causation and redressability questions as the Michigan plaintiffs and Kim’s Auto, but taxpayer standing doctrine poses yet another hurdle for them. Generally, taxpayers may not use that status to challenge federal laws in federal court. The Court considers the interest of an individual taxpayer in the federal treasury too remote and shared with too many people to support a claim. (The Court has to date adopted only one narrow exception to this taxpayer standing rule in cases involving government establishment of religion — an issue not raised in this case.) Instead of permitting general taxpayer standing, the Court requires a federal taxpayer to show some more direct and individualized injury, as Kim’s Auto arguably has done. The circuit courts of appeal are divided over whether federal taxpayer standing limitations apply to taxpayer challenges to state laws. But if state taxpayers are analogous to federal taxpayers, it seems unlikely that the Court will grant the Ohio taxpayer plaintiffs standing to challenge the Ohio investment tax credit. Finally, the Cuno plaintiffs must meet the zone-of-interests standard to have standing. To satisfy this prudential requirement, the plaintiffs must show that the commerce clause protects or regulates the interests that they assert. But none of the Cuno plaintiffs claims to be engaged in interstate commerce, nor do they claim that granting the Ohio investment tax credit to DaimlerChrysler in any way interferes with their own past, present, or even future participation in interstate commerce. Instead, Kim’s Auto complains of its property being taken, and the other Ohio plaintiffs object to the allocation of tax benefits and burdens among Ohio taxpayers. However valid these concerns may be generally, they are beyond the scope of the commerce clause. The Court requires standing to ensure that a party bringing suit has a concrete and personal stake in the outcome. In this way, the Court avoids intruding too deeply into policy matters that the states or the political branches of the federal government are institutionally more capable of handling. For the Cuno plaintiffs, their case seems to be more about achieving a policy goal than redressing an actual injury suffered at the hands of the defendants. The constitutionality of state tax incentives is important, but standing doctrine suggests that Cuno is not the right case to resolve that issue. Overturning the 6th Circuit’s decision on standing grounds returns Cuno and similar pending cases to the state legislatures and courts, which may be able to resolve the controversy without resorting to the Supreme Court. At worst, deciding Cuno on standing grounds means that the Court is left with the commerce clause issue for another day — and another, more interested litigant.
Kristin E. Hickman is an associate professor at the University of Minnesota Law School, where she specializes in tax law.

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