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State governments around the country may have to contend with a bombshell on tax credits recently dropped by the 6th U.S. Circuit Court of Appeals. The court said that Ohio’s investment tax credit — which allows corporations to offset their corporate franchise taxes in proportion to new machinery they bring to the state — violates the dormant commerce clause. Cuno v. DaimlerChrysler Inc., No. 01-3960. Some 40 other states have similar tax credits designed to lure corporations to invest within their borders, according to Peter D. Enrich. a Northeastern University law professor, who argued for the plaintiffs, a group of Ohio taxpayers. And other states have taken notice. “If this decision stands, it certainly provides precedent for challenging several of [Kentucky's] programs,” said Hollie Spade, executive director of the Office of Legal Services in the Kentucky Cabinet for Economic Development. She said that Kentucky, Tennessee and Michigan have all been in touch with Ohio, and may be filing amicus briefs when Ohio files for rehearing. Enrich, a former general counsel to the Massachusetts Executive Office for Administration and Finance, laid the groundwork for the suit in a 1996 Harvard Law Review article that argued that investment tax credits allow corporations to play one state against another, to the detriment of all. That article caught the eye of Ralph Nader, who helped translate the idea into litigation, Enrich said. Enrich is in discussion with other lawyers about bringing similar suits outside Ohio, he said. Enrich didn’t get all that he wanted. The 6th Circuit refused to strike down certain kinds of preferential tax treatment that the city of Toledo used to lure DaimlerChrysler to the area, such as exemptions from property taxes, and suggested that direct subsidies to DaimlerChrysler in an amount equal to the investment tax credits would pass constitutional muster. But critics of the decision warn that such distinctions could be swept aside by the force of the court’s main holding. “If this is the law (and I don’t believe it can be), virtually every state tax incentive is challengeable on dormant commerce clause grounds as is virtually every routine state expenditure policy,” wrote Professor Edward A. Zelinsky of Yeshiva University Benjamin N. Cardozo School of Law, a tax expert, in an e-mail message. On its face, the commerce clause confers a power on Congress to regulate commerce. But courts have held that it also implicitly (or dormantly) limits state action that would interfere with that power, including taxes found to discriminate against out-of-state economic activity. Professor Brannon P. Denning of the Samford University Cumberland School of Law, the author of a treatise on the commerce clause, said, “I’m not sure what drag there is on interstate commerce if anyone can locate to the state to take advantage of the credit.” Both Zelinsky and Denning conceded, however, that the 6th Circuit’s decision is not without support in the Supreme Court’s dormant commerce clause jurisprudence. Denning said there is broad language in some of the Supreme Court decisions cited by the 6th Circuit that lend support to its holding. Zelinsky wrote, “I don’t blame the 6th Circuit panel since, as it correctly notes, the U.S. Supreme Court has never given a coherent definition of a discriminatory tax — and I don’t believe that such a definition exists.” The court has on its calendar a group of cases, dealing with state regulation of interstate wine shipments, that may clarify its current take on the doctrine, Denning said. The Ohio Attorney General’s Office, which represented the state, declined comment, and referred questions to the Ohio Department of Development. Bruce Johnson of the development department said that he urged the state attorney general to appeal the decision. He said that Enrich’s theory overlooks the fact that the state is competing in an international marketplace, not just against other states. DaimlerChrysler spokeswoman Mary Gauthier said the company will appeal. She added, however, that the decision will not affect operation of its plant in Toledo. At least one lawyer has filed a similar lawsuit independently of Enrich. Attorney John DeCamp of Lincoln, Neb.’s DeCamp Legal Services challenged Nebraska’s investment tax credit on equal protection and commerce clause grounds in May in Lincoln. DeCamp v. Nebraska, No. CI041981 (Neb. 3d Dist. Ct.). DeCamp, who owns restaurants and other small businesses, asserted that preferential tax treatment for big businesses subverts the free enterprise system. In light of Cuno, DeCamp is considering removing his suit to federal court, he said.

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