Federal Court Strikes Down Ohio's Investment Tax Credit Used for Jeep Plant

CINCINNATI September 2, 2004; The AP reported that a tax credit that Ohio granted DaimlerChrysler AG to build a Jeep plant is unconstitutional because it grants preferential treatment to companies to expand within the state rather than elsewhere, a federal appeals court ruled Thursday.

The ruling by the 6th U.S. Circuit Court of Appeals could be cited to challenge similar tax-break programs used by other states to promote economic development, said a lawyer who argued against Ohio's program.

"This particular form of corporate welfare is no longer constitutional in Ohio," said lawyer Terry Lodge of Toledo.

"It is a tremendous win for taxpayers, for small businesses that are just local and couldn't qualify for something like this as an incentive," Lodge said.

Some 35 of the 45 states with a corporate income tax had some type of investment tax credits, according to a 1996 report by the state of New York, said National Taxpayers Union spokesman Pete Sepp. He said the appellate court's ruling could hamper many states in their competition to use tax breaks to lure corporate investment.

"The one silver lining in this ruling might be that states might be encouraged to have more broad-based, low-tax systems rather than taking piecemeal approaches to lure firms," Sepp said.

A dozen taxpayers and three small businesses in Toledo had sued over the investment tax credit that Ohio granted DaimlerChrysler to build the plant, which employs about 3,800 workers and produces the Jeep Wrangler and Liberty models. The Toledo plant opened in 2001.

Officials said the total value of the tax incentives for DaimlerChrysler was about $280 million, including the investment tax credit and a 10-year local property tax exemption.

The federal appeals court reversed a lower court's 2001 ruling and said Ohio's investment tax credit violates the U.S. Constitution.

"Any corporation currently doing business in Ohio, and therefore paying the state's corporate franchise tax in Ohio, can reduce its existing tax liability by locating significant new machinery and equipment within the state, but it will receive no such reduction in tax liability if it locates a comparable plant and equipment elsewhere," Judge Martha Craig Daughtrey wrote for the unanimous three-judge appeals panel.

The Constitution authorizes Congress to regulate commerce and "implicitly limits the state's right to tax interstate commerce," Daughtrey wrote.

Lodge estimated that the ruling could affect approximately $70 million of DaimlerChrysler's incentive package. He said it might also have implications for a $2 billion expansion under way of Jeep operations in Toledo.

The appeals court agreed with another part of U.S. District Judge David Katz's ruling that upheld Ohio's personal property tax exemption, which is also used as a tax incentive for economic development.

Ohio officials believe the investment tax credit encourages capital investment that could keep companies from leaving the state, and has used it extensively since implementing it in 1995, said Bruce Johnson, the state's director of development.

The state has granted investment tax credits worth $1.9 billion that have resulted in a $31.6 billion investment by corporations in new machinery and equipment that qualifies them for a tax credit, he said.

DaimlerChrysler was examining the ruling to determine its impact, company spokeswoman Mary Gauthier said. The automaker had not decided how it will respond, she said.

Ohio Attorney General Jim Petro plans to challenge Thursday's ruling, spokeswoman Kim Norris said. Petro could ask the full 12-judge appellate court to rehear the case or request review by the U.S. Supreme Court.