April 18, 2005

Analysis Finds Flaws in Court Ruling Against Tax Incentives for Business Investment

For immediate release
Media contact: Chris Atkins (202) 464-5106

WASHINGTON, D.C.—A new analysis from the Tax Foundation finds the ruling in the case of Cuno v. DaimlerChrysler—which invalidated an Ohio tax credit for business investment—is legally flawed and sets poor precedent for tax policymakers. (View full analysis here.)

The investment tax credit in the Cuno case gives a corporation a tax credit against its Ohio corporate franchise tax liability in exchange for the purchase and installation of machinery at an Ohio production facility. The Sixth Circuit Court of Appeals ruled the credit illegally discriminated against interstate commerce in September 2004.

"The irony of the Cuno opinion is that it imperils broad-based state tax reform while simultaneously allowing the system of state tax incentives to continue in different or slightly altered forms," said Staff Attorney Chris Atkins, author of the analysis. "Those who are convinced that state tax incentives are harmful would be mistaken in accepting Cuno as the remedy."

The report demonstrates three legal flaws in the Cuno decision:

• The ruling is overly broad. The Sixth Circuit held that Ohio’s investment tax credit discriminated against interstate commerce because the credit was not available for investments in other states. The court failed to take into account that all state tax policies are contingent on in-state activities and thus in some sense discriminate against interstate commerce.

• The ruling allows state tax incentives to continue in the form of direct cash subsidies. The court struck down tax credits for in-state investment, but gave its blessing to the use of direct subsidies, allowing existing tax credits to simply change in form but not in substance.

• The ruling allows state tax incentives to continue if granted to out-of-state companies. Under the Cuno rule Ohio would be free to offer an investment tax credit to out-of-state businesses without pre-existing tax liability but would be barred from offering similar credits to resident businesses with pre-existing tax liability.

"Not only does Cuno fail to stop the bidding war between states and localities for business investment, but it also applies to legitimate tax policies that are naturally, but not unconstitutionally, discriminatory," said Atkins. "Cuno is not the answer for those who want the states to stop carving special incentives into their tax codes."

The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization based in Washington, D.C.

(View full analysis here.)

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