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University of Minnesota
Law School
Legal Studies Research Paper
Series
Research Paper No. 05-49
Foreword: DaimlerChrysler v. Cuno
and the Constitutionality of State Tax
Incentives for Economic Development
Kristin E. Hickman &
Sarah L. Bunce
This paper can be downloaded without charge from the
Social Sciences Research Network Electronic Paper
Collection at: http://ssrn.com/abstract=859684
1
FOREWORD: DAIMLERCHRYSLER V. CUNO
AND THE CONSTITUTIONALITY OF
STATE TAX INCENTIVES
FOR ECONOMIC DEVELOPMENT
by
Kristin E. Hickman and Sarah L. Bunce
In 2004, in Cuno v. DaimlerChrysler, Inc., 386 F.3d 738
(6th Cir. 2004), the Sixth Circuit invalidated the Ohio
investment tax credit on dormant Commerce Clause
grounds while upholding a property tax waiver by the City
of Toledo and local school boards against a similar
challenge. The Supreme Court granted DaimlerChrysler’s
petition for certiorari on the Ohio investment tax credit issue
only while ordering the parties to brief whether the Cuno
plaintiffs have standing to sustain their challenge. The Cuno
plaintiffs’ petition for certiorari on the property tax waiver
issue remains pending. On October 7, 2005, scholars and
other experts gathered at the University of Minnesota Law
School to discuss issues raised by the Cuno case. The
purpose of this essay is to introduce and provide
background for essays produced in connection with a
conference on DaimlerChrysler Corp. v. Cuno, as the case is
known on the Supreme Court’s docket.
2
FOREWORD: DAIMLERCHRYSLER V. CUNO
AND THE CONSTITUTIONALITY OF
STATE TAX INCENTIVES
FOR ECONOMIC DEVELOPMENT
by
Kristin E. Hickman
∗
and Sarah L. Bunce∗∗
The dual sovereignty of federal and state
governments is a hallmark of American governance. One of
the most fundamental elements of sovereignty is the power
to tax. Yet for the republic to function as the founders
intended, that power cannot be unlimited. Rather, the States
must employ that power with due recognition for
requirements and limitations imposed not only by their own
constitutions but also the United States Constitution.
Indeed, as the Supreme Court has noted on several
occasions, there is “much room for controversy and
confusion and little in the way of precise guides to the States
in the exercise of their indispensable power of taxation.”1
Against this backdrop, the Sixth Circuit Court of
Appeals announced its decision in Cuno v. DaimlerChrysler,
Inc.,2 a case in which the plaintiffs as citizens and taxpayers
challenged the constitutionality of two different Ohio tax
incentives. The court ultimately declared a state-level
investment tax credit to be in violation of the “dormant
Commerce Clause” of the United States Constitution while
upholding a municipal property tax waiver against the same
challenge. The United States Supreme Court has now
agreed to hear oral argument in this case and, potentially, to
revisit the question of the constitutionality of state tax
incentives for economic development.
∗ Associate Professor of Law, University of Minnesota Law School.
∗∗ J.D. expected 2006, University of Minnesota Law School.
1 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 457
(1959).
2 386 F.3d 738 (6th Cir. 2004).
3
In October 2005, scholars, economists, and other
experts gathered in Minneapolis at an event co-sponsored by
the University of Minnesota Law School and the Federalist
Society for Law and Public Policy Studies to discuss issues
raised by DaimlerChrysler v. Cuno, as the case is known on
the Supreme Court’s docket. To some extent, the debate is
one of long standing. Scholars have written extensively both
on the dilemma of state tax incentives and the dormant
Commerce Clause3 and on the efficacy and wisdom of state
tax incentives as a mechanism for economic development.4
The Cuno case has brought new attention to these old
debates, however, and offers fresh fodder for consideration
and commentary. Our purpose here is to introduce and
provide background for the essays to follow, which in turn
explore some of the many ideas discussed in Minneapolis.
The Facts
The story of the Cuno case is a familiar one in today’s
business climate. In the late 1990s, DaimlerChrysler decided
to expand its capacity to build Jeeps. DaimlerChrysler
already had a vehicle-assembly plant in Toledo, Ohio, and
liked the idea of expanding its operations in that area. So
DaimlerChrysler approached Toledo municipal and Ohio
state government representatives to inquire about tax
incentives that might be available in the event that the
company chose to expand its facilities in Toledo rather than
across the border in nearby Michigan.
3 See, e.g., Peter D. Enrich, Saving the States from Themselves: Commerce
Clause Constraints on State Tax Incentives for Business, 110 HARV. L. REV. 377 (1996);
Clayton P. Gillette, Business Incentives, Interstate Competition, and the Commerce
Clause, 82 MINN. L. REV. 447 (1997); Walter Hellerstein & Dan T. Coenen,
Commerce Clause Restraints on State Business Development Incentives, 81 CORNELL L.
REV. 789 (1996); Kathryn L. Moore, State and Local Taxation: When Will Congress
Intervene?, 23 J. LEGIS. 171 (1997); Edward R. Zelinsky, Restoring Politics to the
Commerce Clause: The Case for Abandoning the Dormant Commerce Clause Prohibition
on Discriminatory Taxation, 29 OHIO N.U. L. REV. 29 (2002-03).
4 See, e.g., Melvin L. Burstein & Arthur J. Rolnick, Congress Should End the
Economic War Among the States, 10 STATE TAX NOTES 1895 (1995) ; Alan Peters &
Peter Fisher, The Failures of Economic Development Incentives, 70 J. AMER. PLANNING
ASSOC. 27 (2004); James R. Rogers, State Tax Competition and Congressional
Commerce Power: The Original Prudence of Concurrent Taxing Authority, 7 REGENT
U. L. REV. 103 (1996).
4
Two statutory tax incentive provisions proved useful
in persuading DaimlerChrysler to develop in Ohio rather
than Michigan.5 Section 5733.33 of the Ohio Revised Code
grants a taxpayer a non-refundable credit against Ohio
corporate franchise tax if the taxpayer purchases new
machinery and equipment and installs it in Ohio.6 If the
purchases are targeted for use in specific, economically
depressed areas, the credit increases to 13.5 percent of the
total investment; however, the credit is limited to $1 million
unless the taxpayer increases its overall ownership of
machinery and equipment in the state for a given tax year.7
Separately, sections 5709.62 and 5709.631 of the Ohio
Revised Code allow municipalities to offer personal
property tax waivers, among other things, to businesses that
agree to invest in facilities and job preservation or growth in
designated enterprise zones certified by the state as
economically depressed.8 The waiver is calculated as a
specified portion of the assessed value of new, tangible
personal property.9 With consent from the local school
districts, the personal property tax exemption can exceed 75
percent of the taxpayer’s total expenditure.10 After working
with local and state officials, DaimlerChrysler accepted a
$280 million incentive package — a package that included
the 13.5 percent investment tax credit against state corporate
franchise tax and a ten-year, 100 percent personal property
tax exemption — to build a new vehicle-assembly plant in
Toledo.11
Charlotte Cuno, a self-described Toledo resident,
homeowner, and taxpayer, joined several plaintiffs from
Ohio and Michigan to bring suit against DaimlerChrysler,
the State of Ohio, the City of Toledo, local school boards, and
various individual government officials over that $280
5 See Cuno, 386 F.3d at 741.
6 Ohio Rev. Code Ann. § 5733.33.
7 Cuno, 386 F.3d at 741.
8 Ohio Rev. Code Ann. §§ 5709.62, 5709.631.
9 See Ohio Rev. Code Ann. § 5709.62(C)(1)(a).
10 See id. at § 5709.62(D).
11 See Cuno, 386 F.3d at 741.
5
million incentive package.12 The plaintiffs alleged that the
state investment tax credit and local property tax
exemptions granted to DaimlerChrysler as incentives to
expand its business operations in Toledo discriminated
against interstate commerce in violation of the Commerce
Clause by “providing preferential treatment to in-state
economic activity.”13
The federal district court dismissed the plaintiffs’
claims for failure to state a claim upon which relief may be
granted, holding that neither the investment tax credit nor
the property tax exemption violated the Commerce Clause.14
On appeal, however, the Sixth Circuit found the investment
tax credit, but not the property tax waiver, to be in violation
of the dormant Commerce Clause of the United States
Constitution.15
The Doctrine
Article I, section 8 of the United States Constitution
grants Congress the power to “regulate Commerce . . .
among the several States.”16 The goal of the Commerce
Clause was to control economic rivalry among the states and
to create “an area of trade free from interference by the
States.”17 It was not, however, intended to eliminate the
“power of the States to tax for the support of their own
governments”18 or to nationalize state taxing authority.19
12 Brief of Appellants at 4-5, Cuno v. DaimlerChrysler, Inc., 386 F.3d 738
(6th Cir. 2004) (No. 01-3960); see also Complaint for Declaratory and Injunctive
Relief at 5-7, Cuno v. DaimlerChrysler, Inc., No. CI0200006084 (Lucas Co., Ohio
Mar. 28, 2000). The plaintiffs were assembled by Ralph Nader in order to attack
the incentive package as a form of “corporate welfare.” See J.T. Young, Benedict
Arnold Courts, WASH. TIMES, July 24, 2005, at B4.
13 Brief of Appellants, supra note 12 at 12-13.
14 Cuno v. DaimlerChrysler, Inc., 154 F. Supp. 2d 1196, 1203-04 (N.D. Ohio
2001), aff’d in part, rev’d in part, 386 F.3d 738 (6th Cir. 2004).
15 Cuno v. DaimlerChrysler, Inc., 386 F.3d 738, 746-48 (6th Cir. 2004).
16 U.S. CONST. art I, § 8, cl. 3.
17 Freeman v. Hewit, 329 U.S. 249, 252 (1946).
18 Gibbons v. Ogden, 9 Wheat. 1, 199 (1824).
19 See James R. Rogers, supra note 4, at 126.
6
The Supreme Court has interpreted the Commerce
Clause to provide more than an affirmative grant of power.
The “negative” or “dormant” Commerce Clause prohibits
states from acting in a manner that interferes with interstate
commerce.20 “No State, consistent with the Commerce
Clause, may ‘impose a tax which discriminates against
interstate commerce . . . by providing a direct commercial
advantage to local business.’”21 Given this limit on state
power to tax interstate commerce, the Supreme Court has
developed a four-prong test with which to analyze state
taxation under the Commerce Clause. A state tax provision
will satisfy Commerce Clause requirements if it (1) applies to
an activity with a substantial nexus with the taxing state, (2)
is fairly apportioned, (3) does not discriminate against
interstate commerce, and (4) is fairly related to the services
and benefits provided by the State.22
The Cuno case will be merely the latest in a line of
Supreme Court jurisprudence to apply these principles and
consider the relationship between the Commerce Clause and
state tax policy. Although different commentators analyzing
the issue have discussed several of the Court’s such cases,
the Cuno court focused its analysis on three that it felt
particularly compelled the conclusions reached. In all of
these cases, only the third, antidiscrimination prong of the
above four-part test was at issue, as was the case in Cuno.
The first of these cases is Boston Stock Exchange v. State
Tax Commission.23 In Boston Stock Exchange, the Court
considered the constitutionality of an amendment to New
York’s securities transfer tax statute. Before the amendment,
the transfer tax was neutrally applied to all stock
transactions with a New York nexus, regardless of where the
sale of the stock actually occurred. The constitutionality of
the original transfer tax was not in question. The
20 See Quill Corp. v. North Dakota, 504 U.S. 298, 309 (1992).
21 Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 329 (1977)
(quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450,
458 (1959)).
22 See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
23 429 U.S. 318 (1977).
7
amendment, by contrast, was designed to encourage in-state
transfers and “ease the competitive disadvantage of the tax
on New York securities markets.”24 The amendment
reduced the securities transfer tax for non-residents on stock
sales executed in New York and also capped the tax liability
for all taxpayers on each New York sale. Meanwhile, out-of-
state stock sales with a New York nexus were subject to the
full transfer tax. Stock exchanges located in other states
complained that the amendment, by reducing the tax on in-
state sales only, diverted business from them to the New
York exchanges as customers sought to lower their New
York transfer tax burdens.
The Court held the amendment created a
discriminatory burden on interstate commerce in violation
of the Commerce Clause.25 Rejecting the notion that the
statute was “compensating legislation” enacted to neutralize
the competitive advantage of regional stock exchanges, the
Court viewed the amendment as “foreclos[ing] tax-neutral
decisions” by creating “a financial advantage to sales on the
New York exchanges at the expense of the regional
exchanges.”26 By diverting securities sales from the “most
economically efficient channels,” New York had
impermissibly “us[ed] its power to tax an in-state operation
as a means of ‘requiring (other) business operations to be
performed in the home State.’”27 The Court concluded the
diversion of interstate commerce and the foreclosure of tax-
neutral decisions were “wholly inconsistent with the free
trade purpose of the Commerce Clause.”28
In reaching its decision, however, the Court made the
following observation:
Our decision today does not prevent the States
from structuring their tax systems to encourage
the growth and development of intrastate
24 Boston Stock Exch., 429 U.S. at 325 n.7.
25 See id. at 332.
26 Id. at 331.
27 Id. at 336 (quoting Pike v. Bruce Church, Inc., 397 U.S. 137, 145 (1970)).
28 Id. at 336.
8
commerce and industry. Nor do we hold that
a State may not compete with other States for a
share of interstate commerce; such competition
lies at the heart of a free trade policy. We hold
only that in the process of competition no State
may discriminatorily tax the products
manufactured or the business operations
performed in any other State.29
Thus, the Court remained open to the use of state taxing
authority to compete for interstate commerce. The Court,
unfortunately, provided no examples of competitive tax
provisions that would not be viewed as discriminatory.
The Court subsequently addressed a constitutional
challenge against Louisiana’s “First-Use Tax” in Maryland v.
Louisiana.30 The tax in question was imposed on the “first
use” of any raw natural gas imported into Louisiana and
was equal to a severance tax imposed on Louisiana gas
producers. The purpose of the First-Use Tax was to equalize
competition between Louisiana-produced gas subject to the
severance tax and gas produced elsewhere not subject to the
severance tax; but Louisiana also provided a number of
exemptions and credits from the First-Use Tax that were
available only to local enterprises. Gas used for particular
purposes inside Louisiana was exempt from the First-Use
Tax entirely. Taxpayers subject to both the First-Use Tax
and the severance tax were allowed a tax credit equal to the
amount of the First-Use Tax to be applied against the
severance tax owed. Other credits were available if the end
use as well as the first use of the gas was in Louisiana. As a
result of these various exemptions and credits, most
Louisiana consumers were insulated from the effect of the
First-Use Tax while out-of-state gas consumers enjoyed no
such protection.
In holding the First-Use Tax unconstitutional under
the Commerce Clause, the Court assessed the tax “in light of
29 Id. at 336-37.
30 451 U.S. 725 (1981).
9
its actual effect.”31 According to the Court, the severance tax
was clearly within Louisiana’s taxing authority; and the
Court seemed to suggest that, theoretically, a tax might be
structured as a corollary to that severance tax, much as many
states employ complementary sales and use tax regimes, to
assure uniform treatment of natural gas to be consumed in
Louisiana.32 The various credits and exemptions embedded
in the Louisiana first use tax, however, destroyed any such
view of the First-Use Tax. Through those credits and
exemptions, the First-Use Tax “unfairly discriminates
against purchasers of gas moving through Louisiana in
interstate commerce.”33 Such a result, the Court concluded,
“unquestionably discriminate[s] against interstate commerce
in favor of local interests.”34
The final link in the chain of jurisprudence relevant to
the Sixth Circuit is Westinghouse Electric Corporation v. Tully,
in which the Court struck down a New York franchise tax
provision designed to give corporations a credit for income
derived from Domestic International Sales Corporation
(DISC) exports.35 DISCs were pass-through entities for
federal income tax purposes, meaning that their income was
taxed only to their shareholders and not at the entity level.36
New York, at least at that time, did not tax distributions
from a subsidiary to a parent corporation; so New York had
to pursue a different approach with DISCs or forego ever
taxing DISC income.37 To address this problem, New York
31 Maryland v. Louisiana, 451 U.S. at 756.
32 See id. at 758-59. As the Court observed, use taxes are constitutional as a
compensatory corollary to sales taxes, with the ultimate goal of use taxes being to
equalize the cost of in-state and out-of-state goods consumed inside a state. See
id. The Court rejected the First-Use Tax as a compensatory corollary to the
severance tax on the ground that a severance tax is imposed for the privilege of
removing resources from a state’s soil, and Louisiana had no interest in land
outside its borders from which the imported gas was removed. See id. Yet the
Court then recognized the validity of imposing taxes on imported goods to
ensure equal treatment for similarly situated taxpayers and suggested that it was
the credits and exemptions and not the mere imposition of the tax that doomed
the Louisiana First-Use Tax. See id. at 759.
33 Id. at 760.
34 Id. at 756.
35 466 U.S. 388, 401 (1984).
36 DISCs were a creation of federal tax code provisions that have since been
repealed. See id. at 391-92 (discussing these provisions.)
37 See id.
10
enacted provisions consolidating each DISC with its parent
entity for franchise tax purposes. To promote increased
export activity, however, New York adopted an offsetting
franchise tax credit based on a ratio of New York export
income to total export income. With the use of this ratio, the
greater the income generated by a DISC from New York
exports, the greater the tax credit.
Westinghouse, a Pennsylvania taxpayer subject to
New York franchise tax and owner of a Delaware-based
DISC, sued. Under the new provisions, Westinghouse had
to recognize all of the income from its DISC in its taxable
income for New York franchise tax purposes but was
ineligible for any corresponding credit. Westinghouse
alleged that the credit awarded for exports by New York
DISCs unconstitutionally discriminated against out-of-state
taxpayers with DISCs located elsewhere. After illustrating
the application of the tax credit, the Court concluded the
credit “[wa]s awarded in a discriminatory manner” based on
business conduct within the state. 38
Although Boston Stock Exchange and Maryland v.
Louisiana both involved taxes on particular transactions in
interstate commerce rather than a general income tax, the
Westinghouse Court deemed this distinction to be irrelevant.39
The Court saw no constitutional significance in the formally
distinguishable but economically identical cases of a 70%
credit against a general income tax for shipments in
interstate commerce to other states and a 30% tax imposed
upon shipments in interstate commerce from other states.
Moreover, the Court discounted any distinction between
diverting new business into the state, the purported effect of
the taxes in Boston Stock Exchange and Maryland v. Louisiana,
and preventing business from leaving the state, which New
York claimed to be doing. “Whether the discriminatory tax
diverts new business into the State or merely prevents
38 Id. at 401 (1984).
39 See id. at 404.
11
current business from being diverted elsewhere, it is still a
discriminatory tax that ‘forecloses tax-neutral decisions.’”40
The Court has acknowledged that its case-by-case
approach toward policing the boundary between the
Commerce Clause and state tax policy has resulted in “much
room for controversy and confusion and little in the way of
precise guides to the States in the exercise of their
indispensable power of taxation.”41 Indeed, scholars have
struggled with the implications of these and similar cases for
state tax and economic development policies. Edward
Zelinsky has argued that the distinction between
discriminatory and nondiscriminatory state taxation as
defined by the Court is indeterminate, with “no convincing
basis under the dormant Commerce Clause for declaring
some state taxes discriminatory and others not.”42 Zelinsky
suggests that even the most basic decision of a state to
reduce its general tax rates in an effort to attract new
business would be susceptible to invalidation under the
Court’s current dormant Commerce Clause analysis.43
Further, though the Court thus far has distinguished tax
exemptions and credits from direct subsidization, Zelinsky
charges that the two are economically indistinguishable and
that the Court’s antidiscrimination reasoning could apply
equally to the latter.44 Peter Enrich acknowledges this
“slippery slope” yet suggests that the Court will use its
discretion on a case-by-case basis to avoid “needless
intrusions upon state [tax] policymaking.”45 Other scholars
have carefully parsed the Court’s rhetoric to seek a
principled basis for distinguishing permissible from
unconstitutional tax exemptions and credits. Dan Coenen
and Walter Hellerstein created an analytical framework for
40 Id. at 406 (quoting Boston Stock Exch. v. State Tax Comm’n, 429 U.S. 318,
331 (1977)).
41 See, e.g., Westinghouse, 466 U.S. 388, 403 (1984); Boston Stock Exch. v.
State Tax Comm’n, 429 U.S. 318, 329 (1977).
42 Edward A. Zelinsky, supra note 3, at 36.
43 See id.
44 See id. at 33-35.
45 See Enrich, supra note 3, at 461. Enrich has argued it would be a
“shocking development” for some state tax policies to come under Commerce
Clause scrutiny. See id. at 459.
12
the Court’s tax incentive decisions that relies on in-state
favoritism and coercion as deciding factors.46 Similarly,
Philip Tatarowicz and Rebecca Mims-Velarde developed a
series of six questions for classifying tax exemptions and
credits, and suggested invalidating only those that seek to
benefit local interests by imposing burdens on their out-of-
state competitors.47
The Rationale
Although DaimlerChrysler clearly highlighted these
scholarly concerns for the Sixth Circuit,48 the Cuno court
largely sidestepped that debate. Instead, the Cuno court
followed the Supreme Court’s case-by-case lead, looking
only to whether the challenged provisions offered
“differential treatment of in-state and out-of-state economic
interests that benefits the former and burdens the latter.”49
Looking first at the investment tax credit, the court
acknowledged that the credit was equally available to both
in-state and out-of-state businesses.50 Despite this equal
availability, however, the court noted that corporations
would be subject to unequal tax treatment based on in-state
or out-of-state investment decisions.51 Someone paying
Ohio taxes would receive a credit against Ohio taxes due in
exchange for further Ohio investment, while a similar Ohio
taxpayer that chose to invest in Michigan instead would not.
Comparing the tax investment credit to the tax provisions
considered in the Boston Stock Exchange, Maryland v.
Louisiana, and Westinghouse decisions, the Sixth Circuit
found the tax credit used the state’s power to tax to
encourage the development of local business. Because “the
economic effect of the Ohio investment tax [wa]s to
46 See Coenen & Hellerstein, supra note 3, at 804.
47 See Philip M. Tatarowicz & Rebecca F. Mims-Velarde, An Analytical
Approach to State Tax Discrimination Under the Commerce Clause, 39 VAND. L. REV.
879, 886 (1986).
48 See Final Brief of Appellee DaimlerChrysler Corp., Cuno v.
DaimlerChrysler, Inc., 386 F.3d 738 (6th Cir. 2004).
49 Cuno v. DaimlerChrysler, Inc., 386 F.3d 738, 743 (6th Cir. 2004).
50 See id.
51 See id.
13
encourage further investment in-state at the expense of
development in other states,”52 the court held the tax
investment credit unconstitutional under the Commerce
Clause.
Turning to the property tax exemption, the court’s
initial analysis focused on the eligibility conditions placed
on the exemption. The plaintiffs argued that the
requirement to “agree to maintain a specified level of
employment and investment” in Ohio resulted in
preferential tax treatment for the taxpayer who agrees to the
conditions as compared to the taxpayer who chooses to
remain free to hire and invest elsewhere.53 The court
rejected this argument, however, stating that “conditional
exemptions raise no constitutional issues when the
conditions for obtaining the favorable tax treatment are
related to the use or location of the property itself.”54 The
court found persuasive the fact that the statute imposed no
specific monetary requirement, no job creation requirement,
no restriction on the persons employed or served, and no
inducement to engage in another form of business
independent of the newly acquired property – all conditions
that court suggested might independently burden interstate
commerce. Without these characteristics, the court
concluded, the property tax exemption did not resemble
others previously held unconstitutional.
The court further dismissed the argument that the
exemption created a discriminatory economic effect. Here,
the court identified the “fundamental differences” between
tax credits and exemptions: “[u]nlike an investment tax
credit that reduces pre-existing income tax liability, the
personal property tax exemption does not reduce any
existing property tax liability.”55 Thus, the court concluded,
a taxpayer’s decision not to invest in Ohio simply means that
the taxpayer will not be subject to the property tax at all, just
like the taxpayer for whom the property tax has been
52 Id. at 745.
53 Id.
54 Id.
55 Cuno, 386 F.3d at 747.
14
waived. Recognizing that “any discriminatory treatment
between a company that invests in Ohio and one that invests
out-of-state cannot be attributed [to] the Ohio tax regime,”
the court held the property tax exemption constitutional.56
The Cuno court rejected the defendants’ attempt to
apply a categorical framework to the Supreme Court
decisions, noting that the Supreme Court itself had not yet
adopted such an approach. Moreover, the court dismissed
the defendants’ comparison of the investment tax credit to a
constitutionally permissible direct subsidy. While the court
acknowledged that a direct subsidy would have the same
economic effect as the tax credit — an effect the court
concluded to be impermissible — the court nonetheless
distinguished the tax credit as constitutionally infirm due to
the “fact that the tax credit involves state regulation of
interstate commerce through its power to tax.”57
Just as they have done with the Supreme Court’s
cases in this area, scholars could parse the Sixth Circuit’s
rhetoric in Cuno to divine yet another set of rules for
distinguishing good tax credits and exemptions from bad.
Yet the Cuno court explicitly declined to offer such guidance.
Ultimately, the court’s stated reason for continuing down
the analytical slippery slope was that the Supreme Court has
provided no basis for arresting that slide.
The Implications
While the relationship between the dormant
Commerce Clause and state tax policy will strike many
followers of Supreme Court jurisprudence as a dry and
esoteric issue, the Cuno decision could have far-reaching
impact. Ohio is not the only state with a potential Cuno-style
problem. Most states have enacted various tax incentive
provisions designed to encourage economic development.
Many state legislatures have demonstrated their willingness
further to provide direct subsidization on a case-by-case
56 Id. at 747-48.
57 Id. at 746.
15
basis. Some of these other states face litigation similar to the
Cuno case. The Sixth Circuit’s opinion calls into question
existing tax statutes and economic development policies of
many if not most states, as well as the future of state tax
policy, and raises important questions about the role of the
courts in guiding state tax decisionmaking.
A. What Does Cuno Mean for the States?
In order to appreciate fully the implications of the
Cuno decision, it is necessary to understand just how broadly
the Sixth Circuit’s opinion on the Ohio investment tax credit
potentially sweeps. By striking down the Ohio investment
tax credit based on its discriminatory economic effect of
favoring local investment at the expense of out-of-state
investment, the Sixth Circuit followed a line of reasoning
that lacks reasoned limitation. Many if not most state tax
policies aimed at encouraging economic development by
their very purpose entail favoring local over out-of-state
investment. Indeed, existing antidiscrimination analysis
suggests that even the Ohio property tax exemption should
fall due to its effect of giving local property investment a
break on taxes that other states are known to impose,
notwithstanding the Sixth Circuit’s conclusion to the
contrary. Many would argue that, since most state taxes are
imposed only on in-state activity, any reduction in state
taxes would, in some sense, discriminate against out-of-state
activity.58
For example, if State A were to lower its overall
corporate franchise tax rate from 6% to 4% in order to
encourage in-state businesses to expand their State A
businesses and to woo corporations from State B (with an
existing franchise tax rate of 6%), this rate reduction would
have the same economic effect for a given taxpayer as
offering a more targeted tax incentive. Certainly, such a rate
reduction would be considered a use of the state’s taxing
power to encourage local business activity. Applying the
Cuno court’s analysis, such a rate reduction could be
58 See Zelinsky, supra note 3, at 36.
16
unconstitutional as applied to those businesses already
located in State A, though permissible with regard to
corporations lacking State A presence.
Another important consideration is whether the
court’s distinction between tax incentives and direct tax
subsidies is really a distinction at all.59 The Cuno court itself
acknowledged that the two devices had the same ultimate
effect, yet the tax incentive was deemed unconstitutional
because it stemmed from the state’s power to tax. While it is
true one of the original purposes for the Commerce Clause
was to eliminate the discriminatory taxation between and
among the states,60 it does not logically follow that practices
that produce the same discriminatory results are acceptable
as long as the state’s taxing power is not implicated. And
the Cuno court’s emphasis on the discriminatory effect of the
state tax incentive suggests that just such a distinction
between tax and non-tax is not possible.61
Supporters of the Sixth Circuit’s decision dismiss the
importance of doctrinal clarity and contend that the courts
can address these questions on a case-by-case basis.62
Admittedly, it seems unimaginable that the courts would
ever go so far as to invalidate a general reduction in tax rates
as a violation of the Commerce Clause.63 Left unanswered,
however, is the question of how states should distinguish
between permissible state tax competition and
unconstitutional discriminatory tax schemes in developing
coherent tax systems.
The Cuno decision thus leaves open the possibility
that a whole host of state tax credits, deductions, and
programs intended to encourage economic development are
59 See id.; Zelinsky, supra note 58, at 35.
60 See Rogers, supra note 19, at 105.
61 See Enrich, supra note 3, at 459 (“[C]ash subsidies . . . surely distort
economic decisions in precisely the same way as tax benefits.”).
62 See id. at 462 (quoting West Lynn Creamery, Inc. v. Healey, 512 U.S. 186,
201 (1994)).
63 See id. at 459 (“As the Court has emphasized, ‘[t]he simple fact is that the
appropriate level or rate of taxation is essentially a matter for legislative, and not
judicial, resolution.’”).
17
constitutionally suspect. Given the prevalence of state tax
incentives,64 many states are left wondering what to do.
Most states have remained steadfast, continuing to offer tax
incentives.65 Other states have braced themselves for
litigation, defending against constitutional challenges of tax
incentives of their own.66
Minnesota is one such state. In 2003, the Minnesota
legislature enacted two programs — the Job Opportunity
Building Zone (JOBZ) and the Biotechnology and Health
Sciences Industry Zone (Biotech Zone) — to promote
economic development through tax incentives. The JOBZ
program designates ten areas within the state as “job
opportunity zones”; this designation allows businesses
within the zones to receive partial property tax exemptions,
qualified individual tax exemptions on investment income,
sales tax exemptions on qualified purchases, and corporate
franchise tax exemptions based on the percentage of
business operations in the zone. The Biotech Zone program
is similar to the JOBZ program, but is targeted at
corporations that research, develop, or manufacture
biotechnology products. To qualify for these business
incentives, a business must operate or relocate in a zone and
must increase its employment or make certain capital
investments. Plaintiffs Alec G. Olson and Butterworth LP
have brought suit alleging the programs violate the
Commerce Clause and other provisions of the Minnesota
and United State Constitutions.67
64 See Walter Hellerstein, Commerce Clause Restraints on State Tax Incentives,
82 MINN. L. REV. 413, 421-23 (1997); Young, supra note 12.
65 See, e.g., Tax Incentives Will Be Tested by High Court, LINCOLN JOURNAL
STAR, Sept. 28, 2005, at B1; Tom Ramstack, Justices to Mull Business Tax Lures,
WASH. TIMES, Sept. 28, 2005; Kentucky Business Incentives,
http://www.thinkkentucky.com/kyedc/kybizince.asp (last visited Nov. 6,
2005). As Clay Gillette has noted, “[N]o state, aware of the incentive programs
offered by other jurisdictions, can escape from the cycle . . . for fear that doing so
will place it at a competitive disadvantage in the search for economic
development.” Gillette, supra note 3, at 479.
66 See Young, supra note 12 (“Unsurprisingly, other cases attempting to take
advantage of this novel interpretation are already pending (with suits filed in
Minnesota and Wisconsin, with additional cases expected in Nebraska,
Oklahoma, and North Carolina.)”).
67 See Jennifer Carr & Cara Griffith, Litigation and Tax Incentives After the
Downfall of Ohio’s ITC, STATE TAX NOTES, 367-68 (May 2, 2005).
18
North Carolina is in a similar position. In 2004, the
North Carolina General Assembly passed legislation to
provide tax incentives and subsidies to computer
manufacturers that locate facilities within North Carolina.68
While the bill did not specifically reference any computer
manufacturers, it was well-understood the legislation was
designed to encourage Dell to locate a facility in the
Winston-Salem area. Under the legislation, Dell may claim a
100% credit against corporate income or corporate franchise
tax and may claim refunds of sales and use taxes paid on
building the facility. The legislation also established lenient
eligibility requirements for the incentives and grants, with
no wage requirement and no requirement that certain
employment levels be sustained. The total state incentive
package offered to Dell was estimated at $242 million; Dell
will receive an additional $37 million in incentives from
Winston-Salem and Forsyth County.69 In June 2005, Robert
Orr, a former North Carolina Supreme Court justice,
brought suit on behalf of the N.C. Institute for Constitutional
Law, claiming the incentives violate the Commerce Clause
and Equal Protection Clause of the United States
Constitution, as well as various North Carolina
constitutional provisions.70
In both the Minnesota and North Carolina cases, the
plaintiffs have cited the Sixth Circuit’s Cuno decision as
supporting their claims. The litigation in Minnesota and
North Carolina is representative of the exposure to litigation
many other states face as a result of the Cuno decision.71 The
likelihood of nationwide litigation on state tax incentive
issues serves to underscore the impact and the significance
of the Cuno decision.
68 Suit Filed in North Carolina to Enjoin Incentives Offered to Computer
Manufacturing Facility, 66 STATE TAX REVIEW (CCH) 1 (July 6, 2005) [hereinafter
Suit Filed].
69 Paul B. Johnson, Dell Opens This Week, HIGH POINT ENTERPRISE, October 4,
2005.
70 Dell Deal Challenge Merits Legal Answer, GREENSBORO NEWS & RECORD,
Oct. 14, 2005, at A12; Suit Filed, supra note 68.
71 See Jennifer Carr & Cara Griffith, supra note 67, at 369.
19
In the end, rather than supplying the principled
guidance states need to conform their tax policies to
constitutional requirements, the Sixth Circuit has instead
merely continued the controversy and confusion. So while it
is true the Supreme Court has acknowledged that states are
free to compete with one another for a share of interstate
commerce, the antidiscrimination principle developed by the
Court and pursued by the Sixth Circuit in Cuno threatens to
restrain variation and innovation severely in the area of state
taxation.72
B. Who Should Be Able To Decide?
Though the states and taxpayers are crying out for
guidance, is it right to criticize the courts for declining to do
more than follow the existing case-by-case approach? The
courts have described their role in this context as “mak[ing]
the delicate adjustment between the national interest in free
and open trade and the legitimate interest of the individual
States in exercising their taxing powers.”73 The case-by-case
model employed by the courts, factoring in “the unique
characteristics of the statute at issue and the particular
circumstances,”74 may create few principles on which states
can rely. But at a time when “judicial restraint” has become
something of a mantra, it is perhaps unrealistic or even
undesirable to ask the courts to provide a broad but
arbitrary test for evaluating the discriminatory effect of a
panoply of state tax exemptions, credits, and deductions.
Though scholars have long criticized the lack of guiding
principles in the Court’s case-by-case model for addressing
the relationship between tax incentives and the Commerce
Clause, the Court’s jurisprudence to date has not intruded
that far into the realm of state tax competition.
Cuno arguably breaks new ground in pushing the
courts further toward compelling tax uniformity among the
states; but perhaps that is less due to the Court’s
72 See Enrich, supra note 3, at 466.
73 Boston Stock Exch. v. State Tax Comm’n, 429 U.S. 318, 329 (1977).
74 Id.
20
interpretation of the Commerce Clause than the lower
courts’ willingness to entertain a more aggressive strain of
lawsuits. One distinguishing factor between Cuno and the
cases before it is the identity of the plaintiffs. In all of the
cases relied upon by the Cuno court, the plaintiffs were
states, businesses, or both – i.e., parties with a broader
interest in not pushing the Court’s antidiscrimination
analysis too far, lest they lose their own ability to participate
in and benefit from state tax competition. It is in these
parties’ interests to pursue a careful balance between
national and local interests in Commerce Clause
jurisprudence.
By contrast, the Cuno plaintiffs have no reason to
pursue or even respect such balance. Unlike the Boston
Stock Exchange or Westinghouse Electric or the gas
producers who brought suit in Maryland v. Louisiana, the
Cuno plaintiffs do not allege that a state is using a particular
tax credit or exemption to favor a local competitor’s business
interests over their own or otherwise to discriminate against
them personally. Instead, the Cuno plaintiffs are simply
taxpayers who disagree with the economic development
policies pursued by their government officials. While some
taxpayer suits are motivated by idealistic dedication to lofty
constitutional goals such as free speech or equal protection,
the plaintiffs in Cuno and similar litigation are hardly
motivated by similar allegiance to Commerce Clause
principles. State tax incentives for economic development
have been the subject of much policy debate. The Cuno case
merely reflects the underlying policy disagreement between
those like the Cuno plaintiffs who see state tax incentives as
an improper allocation of state funds and a drain on state tax
revenues and the states that remain adamant that the
incentives are needed to encourage economic development.
The Commerce Clause is merely one mechanism by which
the Cuno plaintiffs hope that the courts will mandate the
policy outcome that incentive opponents have been unable
to achieve legislatively.
Notwithstanding the policy debate, state legislatures
have continued to employ state tax incentives as a
21
mechanism for economic development. Opponents of state
tax incentives argue that the very nature of state tax
competition prevents state legislatures from ending the
economic war, even though doing so would be in their own
best interests; and they argue that a federal solution is
required. They may be right. Federal involvement does not
necessarily entail a judicial response.
Many have urged Congress to take action to end state
tax competition.75 With that goal in mind, U.S.
Representative David Minge of Minnesota has endeavored
to persuade Congress to impose an excise tax on businesses
benefiting from state tax incentive programs and prohibit
states from using federal funds in connection with such
activities.76 By contrast, in response to the Cuno decision,
however, state governments have lobbied Congress to enact
the Economic Development Act of 2005, which purports to
preserve the ability of the states to pursue state tax incentive
programs.77 It is not at all clear that congressional action
will be a panacea, however. As Walter Hellerstein argues,
the current proposed federal legislation appears to do little
more than codify the muddled Supreme Court precedent.78
Such “guidance” could merely shift the litigation focus from
constitutional attacks to statutory attacks.
Regardless, the Court is ill-equipped to wade through
competing economic studies of state tax incentives to
develop a test for distinguishing the good from the bad.
Edward Zelinsky has advocated returning the issue of state
75 See Rogers, supra note 60, at 138; Burstein & Rolnick, supra note 4, at 1900
(“[I]t is now time for Congress to exercise its Commerce Clause power to end
another economic war among the states.”). But see Gillette, supra note 3, at 478
(“It . . . does not follow that federal intervention to save states from themselves is
warranted.”).
76 See, e.g., Minge Testimony at W&M Oversight Hearing on Tax Code and
Economy, 2000 TAX NOTES TODAY 188-22 (Sept. 27, 2000); Minge Testimony at House
Budget Hearing on Unnecessary Business Subsidies, 1999 TAX NOTES TODAY 127 (July
2, 1999); Minge Bill Would Tax Companies’ State, Local Relocation Subsidies, 1999 TAX
NOTES TODAY 58 (March 26, 1999); Minge Bill, H.R. 3044, Would Tax State, Local
Subsidies for Businesses, 1997 TAX NOTES TODAY 228 (Nov. 26, 1997).
77 S. 1106, 110th Cong. (2005).
78 See id.; Walter Hellerstein, Cuno and Congress: An Analysis of Proposed
Legislation Authorizing State Economic Development Incentives, 4 GEO. J.L. & PUB.
POL’Y __ (2006).
22
tax incentives to the political branches,79 and Brannon
Denning correspondingly urges the Court toward a
minimalist resolution of the Cuno case.80 Frustrating though
such an outcome would be to the Cuno plaintiffs, standing
doctrine may represent the best means by which the Court
could overturn the Sixth Circuit, avoid far-reaching
economic policy implications, and remove the federal
judiciary from the debate.81
C. A Mountain or a Molehill?
Taking the federal judiciary out of the equation
would do nothing to resolve the policy debate over state tax
incentives, however. Moreover, overturning the Cuno
decision could remove the primary incentive for prompt
congressional action and simply return the matter to the
states. How concerned should we be with that outcome?
It is important to consider whether state tax
incentives represent good economic policy. Economists
have collected an abundance of evidence that many if not
most state tax incentive programs are economically
inefficient and represent bad economic policy.82 Prominent
commentators describe state tax competition as a “race to the
bottom” that leaves all states with less tax revenue for roads,
schools, police and fire protection, and all manner of public
goods, including economic development initiatives.83 As
one scholar has concluded,
There is substantial evidence that [state tax]
incentives are not a cost-effective means of
stimulating investment and job creation.
79 See, e.g., Edward A. Zelinsky, Ohio Incentives Decision Revisited, 37 STATE
TAX NOTES 859 (Sept. 19, 2005) (“There is much to be said for . . . federal
legislation producing the kind of targeted tax breaks challenged in Cuno.”).
80 See Brannon P. Denning, Cuno and the Court: The Case for Minimalism, 4
GEO. J.L. & PUB. POL’Y __ (2006).
81 In granting certiorari, the Court asked the parties to brief the issue of
standing. The Court may dismiss the case on standing grounds without deciding
the constitutionality of the tax investment credit.
82 See, e.g., Peters & Fisher, supra note 4.
83 See Enrich, supra note 3, at 466-67; Rogers, supra note 4, at 107; Burstein &
Rolnick, supra note 4, at 1896-98.
23
Eliminating them could improve state tax and
economic policy by freeing up billions of
dollars that could be used more productively
for some combination of general tax cuts,
worker education and training, and
infrastructure improvements.84
To varying degrees, other experts have defended the
economic wisdom of at least some state tax incentive
programs, depending upon how they are structured.85 Thus
viewed, tax competition among the states is not
automatically a bad thing. State governments remain
adamant in defending their prerogative of making their own
tax policy decisions without federal judicial interference.86
State innovation and experimentation are invaluable traits of
our federalist system; and placing limitations on the use of
state tax incentives effectively eliminates one area within
which states could experiment and innovate.87
84 David Brunori, The Politics of State Taxation: Helping States Hurt
Themselves, 36 STATE TAX NOTES 752 (June 6, 2005), quoted in Zelinsky, supra note
79.
85 The strength and scope of such defenses varies greatly. For example,
Michael Mazerov is strongly critical of most existing tax incentive programs, but
notes that economists would support the granting of economic development
incentives in the form of sales tax exemptions for business purchases. See
Michael Mazerov, The Ohio Investment Credit Decision: Modest but Helpful ‘Arms
Control’ in the ‘Economic War Between the States’, 35 STATE TAX NOTES 849, 854
(March 21, 2005). Mazerov also acknowledges that the public visibility of
property tax abatements and direct subsidies makes these incentives at least
preferable to more private tax credits. See id. By comparison, Arthur Rolnick
and Mel Burstein argue principally against providing direct subsidies and
preferential tax treatment to individual businesses. See Rolnick & Burstein, supra
note 4. Still others tout the economic merits of a wider range of state tax
incentive programs. See Kevin Thompson, Coalition Forms to Promote Federal
Protection of State Tax Incentives, BUDGET & TAX NEWS, March 1, 2005, available at
http://www.heartland.org/Article.cfm?artId=16549 (“Some economists argue
state tax incentives encourage job creation and investment that otherwise would
not occur . . . .”).
86 See, e.g., Adam Bruns, Missouri Needs Business Climate Reform, and the
State’s New Governor Aims to Deliver It, SITE SELECTION, July 2005, available at
http://www.siteselection.com/features/2005/jul/mo (“[Missouri’s incentive
program] Quality Jobs is an example of a program that would meet any sort of
court challenge. . . . If there were any sort of court-created problem, we’re going
to respond to that quickly.”).
87 See Enrich, supra note 3, at 459.
24
Even if the Court upholds the Sixth Circuit in Cuno,
the policy debate will continue, albeit in a slightly different
form. It is unrealistic to expect that the states will give up
competing for new business; and as it stands, the Cuno
decision does not reject all state economic competition. At a
minimum, the Sixth Circuit’s decision leaves open the
opportunity for states to use direct subsidies instead of tax
incentives to lure new business development. Indeed, Ohio
is already adjusting its economic development activities in
that direction in response to Cuno.88
While some state tax incentive programs may be
economically unwise, overturning the Sixth Circuit’s opinion
in Cuno and returning the matter to the states may not lead
to state economic Armageddon. Upholding the Sixth
Circuit’s opinion in Cuno may only cause states to adjust
their policies to a new constitutional reality and shift the
debate from tax incentives to direct expenditures. Either
way, it seems as plausible as not that the Cuno case could
have very little practical impact, regardless of how the Court
resolves it, notwithstanding the dire predictions of each side.
Conclusion
Ultimately, the Cuno decision presents more questions
than it answers. With the Supreme Court granting certiorari,
it is possible that at least some answers will come. It is
equally conceivable, and maybe preferable, that the Supreme
Court will sidestep the heart of the issue, resolve the case
without reaching the merits, and leave the matter of state tax
incentives to the political branches. Either way, it seems
certain that those who attended the conference in
Minneapolis and who contributed to the essays to follow can
look forward to the discussion to come.
88 See Edward A. Zelinsky, Ohio Incentives Decision Revisited, 37 STATE TAX
NOTES 859 (Sept. 19, 2005) (discussing congressional testimony of Ohio Lt. Gov.
Bruce Johnson).
