Paul L. Caron

Tuesday, March 20, 2007

Mota on Cuno and State Tax Incentives

Sue Ann Mota (Bowling State University, Department of Legal Studies) has published DaimlerChrysler v. Cuno -- Plaintiffs Lack Standing to Challenge State Franchise Tax Credit in Federal Court, According to the Supreme Court, 29 N.C. Cent. L.J. 66 (2006).  Here is the Conclusion:

DaimlerChrysler v. Cuno is a case of ironies. Ironically, Cuno and other plaintiffs filed the case in state court, and when defendants removed the case to federal court, the plaintiffs requested a remand to state court, which was denied. This then put the burden on the plaintiffs to establish standing, and ultimately, they failed. Ironically, the Ohio tax scheme was challenged both by Ohio taxpayers who alleged injury because of the tax incentives given to keep the Jeep plant, as well as Michigan residents who alleged injury because they did not get the Jeep plant expansion.

While the State of Ohio may have preferred an outright ruling on the merits to clarify the constitutionality of tax credits to promote economic growth, the Court's ruling once again leveled the playing field for states. After the ruling by the Court of Appeals for the Sixth Circuit, only Ohio, Michigan, Kentucky, and Tennessee were not allowed to use the franchise tax credit, putting those states at a comparative disadvantage. Thus, Cuno again leaves all states with the option to use such incentives.

This was not the result legal counsel for plaintiffs Peter Enrich desired. Mr. Enrich, author of the article Saving States From Themselves: Commerce Clause Constraints on Tax Incentives for Business, published in the Harvard Law Review, posits that states are caught in a contest that none can win by offering such incentives, and this results in a "race to the bottom." Enrich concluded that the Court should use the commerce clause to restrain this competition by the states to induce businesses to stay, expand, or move to the state. Since that has not occurred, Enrich has suggested in the article that Congress could statutorily restrict such efforts, but this is unlikely to occur. Alternatively, plaintiffs other than taxpayers including businesses and states themselves could raise the challenge. Finally, citizen taxpayers may challenge such incentives in state courts, as most states have relatively permissive standing standards. This may be the last viable hope to challenge such incentives.

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