Reply Brief — DaimlerChrysler Corp. v. Cuno

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No. 04-1704

IN THE

Supreme Court of the United States

DAIMLERCHRYSLER CORPORATION,

Petitioner,

V.

CHARLOTTE CUNO, ET AL.,

Respondents.

On Writ Of Certiorari

Fe The United States Court Of Appeals

For The Sixth Circuit

t

REPLY BRIEF FOR PETITIONER

DAIMLERCHRYSLER CORPORATION

CHARLES A. ROTHFELD THEODORE B. OLSON

ERIKA Z. JONES Counsel of Record

MIRIAM R. NEMETZ THEODORE J. BOUTROUS, JR-~

DAVID DEBOLD

MAYER, BROWN, ROWE MATTHEW D. MCGILL -

& Maw LLP MICHAEL S. DIAMANT

1909 K Street, N.W.

Washington, D.C. 20006 GIBSON, DUNN & CRUTCHER LLP

(202) 263-3000 1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Petitioner

i

TABLE OF CONTENTS

RO ee Fer CE ee ctesersenttionecnamenssnnsininnimnininiets il

ITT sicennicinstinnpeaciccenincesiattiienieivaiianinianiitaieniaaaiigiie 2

I. RESPONDENTS’ NOVEL ARGUMENTS FOR

TAXPAYER STANDING MUST _ BE

TEI \scniseiceisingnecanenssileiciiiniiiasinddebsdiapéiinasssnoabieiiin 2

A. Respondents Cannot Satisfy The Minimum

Article [Il Requirements for Federal

i scicinscesiviitsidatlsabintednctsinabbiipininienenticatiti 2

B. Flast v. Cohen Does Not Endow Taxpayers

With Standing to Bring Commerce Clause

Chaldenges To State Taxe8.....0cccssoscsescscseseccecessessoesss 4

C. Respondents’ Other Arguments’ For

Standing Are Meritless .................secccsessssssssreessseees 6

II. RESPONDENTS’ EXPANSIVE VISION OF

THE DORMANT COMMERCE CLAUSE

CANNOT BE RECONCILED WITH THIS

COURT'S DECISIONSG.......... niciarticanenciptveinininieieincanieaseniee 9

A. Respondents’ View of the Dormant

Commerce Clause Would Endanger Nearly

Every Manner of State Economic

Development Program ...........00ccsccccsesscsessosecsseesssees 10

B. The Ohio ITC Does Not Violate the

Dormant Commerce Clause, Because It

Does Not Impose A Burden On Interstate

SE eae Se re. 13

C. Respondents Fail to Demonstrate That

Ohio’s ITC Discriminates Against Interstate

Bee ccinssbcnesecsscccitembigebeiitashitgciahbdiahatanipmaesnaniioadd 18

IT <risinscncisiniphirnoncemsitsiasceuainncniennenipeisidinicindeesaniiaig 20

il

TABLE OF AUTHORITIES

Cases Ps

Allen v. Wright, 468 U.S. 737 (1984)..........cccsssceeseessresseeeeeeenes 7

Arkansas Writers’ Project Inc. v. Ragland, 481 U.S.

ee OOD scveicacetstensntbiiainisiintanstgpidibiiiddipranidaiiaduabialiavenminvianiasinn 5

Arizonans for Official English-v. Ariz., 520 U.S. 43

ERGO cctnnccsessmniocnsecatiiuisibatensinnsnnesctbipalinserrmatsddiatrtioementesasi 3

ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S.

ee CD chevnsicinsessintiiidiiaiincinniateisiisltiiinecninviaiitdinavteives 14-15 |

Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984)............ 13

Boston Stock Exch. v. State Tax Comm'n, 429 U.S.

PE RT OP cicnnncesiisstitiapitantensunibitldiniigtansanaiiibimiiniianeiinens 10, 13

Bowen v. Kendrick, 487 U.S. 589 (1988)........cccceesseseeseeeeees 5

Camps Newfound/Owatonna v. Town of Harrison,

Fe Cs Fe Ce Diintcisnscrcniniliinginircineipepnniitibanen 12, 16

Caterpillar Inc. v. Lewis, 519 U.S. 61 (1996).......ccccesseeseees 8

Central Va. Cmty. Coll. v. Katz, No. 04-885 (Jan. 23,

Fo icnscssininciisuiinnentaisiiibininisintnaditinilibiiomabinjuietininennnetinss 19

City of Chi. v. Int’l Coll. of Surgeons, 522 U.S. 156

DUT El saseturinsipiuccesaiibenadiiamtiasstanecialdhineaedntippincmaintincimtieniel 9

Clarke v. Securities Industry Ass’n, 479 U.S. 388

OT cininscnstrieniinssiniibiadidisiipleniteihataiiiapiaamebintibetaniiaiitoinsieatiniie 8

Cohens v. Virginia, 6 Wheat. 264 (1821)........ccccceseseeerees 19

Committee for Public Education and Religious

Liberty v. Nyquist, 413 U.S. 756 (1973)........:ccccceseeeeeeeee 12

Container Corp. v. Franchise Tax Bd., 463 U.S. 159

GO U ciccccicictoritnnsssiatisiailbianinaniisidiaimpidonsiinainddi bunpeisineaees 14

Cuno v. DaimlerChrysler Corp., No. 04-1407, (Apr.

hy aaa vieinereicinctveniticnitibiatinnnsnnscitiinaiasianmnatdiatinmdininietimeints 9

ill

Doremus v. Bd. of Educ., 342 U.S. 429 (1952)......cccsseeeeees 3,4

PE Vi Miiee8; TOA OB. 11 CAGGD) vivciasescccccscssnsossscsnsscsccscescseses 3

Flast v. Cohen, 392 U.S. 83 (1968)...........escsssccssssssssseeees 4,6

Friends of the Earth, Inc. v. Laidlaw Environmental

Services (TOC), Inc., 528 U.S. 167 (2000) ..........cceceeeeees 5

Fulton Corp. v. Faulkner, 516 U.S. 325 (1996)... 16

General Motors Corp. v. Tracy, 519 U.S. 278 (1997)......... 18

Hughes v. Alexandria Scrap Corp., 426 U.S. 794

(1976) .....ssessessseresssrescerssensssssssnsssssssessnsssssssssssrssssssesessssees LO

Kassel v. Consol. Freightways Corp. of Del., 450

as SE PE cinteadinicisaidisarnianinidiuiinianiepecnanimninptinst 9

Lewis v. Casey, 518 U.S. 343 (1996) .......:ccssccecceseseseereeeees 7,8

Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).....2, 3, 5

* Maryland v. Louisiana, 451 U.S. 725 (1981)..........0:00000+ 9,17

Massachusetts v. Mellon, 262 U.S. 447 (1923).......:::cc00000 3,7

New Energy Co. v. Limbach, 486 U.S. 269 (1988)........ 10, 14

Oregon Waste Sys., Inc. v. Dep’t of Envtl. Quality of

ig ee a ihsciiiniescisiscahiigilienneintiintsntaiiniebigiozen 14

Steel Co. v. Citizens for a Better Env't, 523 U.S. 83

EPO IU stustarsscivsaciipdihilibaiinsihcciintinetsshaaniiialiibibsesniigtbinasccenidieiainmeaiess 4

United States v. Salerno, 481 U.S. 739 (1987)........cccceseceeee 15

Valley Forge Christian Coll. v. Ams. United for

Separation of Church & State, Inc., 454 U.S. 464

rea baiirinsachbclas ei licinnsisatusbetibapontsiialilnaiininisipedibnndvneasimsomedsis 3

Walz v. Tax Comm'n, 397 U.S. 664 1970) ........cccccceecseeeeeees 12

West Lynn Creamery, Inc. v. Healy, 512 U.S. 186

SII TT ccecinssesnsiinnctatnadinddecnenscipasetigennsenaitinspiiitemadindadeinenenidpumsnese 12

iv

Westinghouse Elec. Corp. v. T ully, 466 U.S. 388

IRIE conscsensonececsasesnnpsonsessocapissasscoapaineisnitaneenteenisinntill passim

Westinghouse Elec. Corp.v. Tully, 63 N.Y.2d 191

PEPE ccedsetnatactnesnsnsiienisiadeniocsediatintticsinddenaidintenipinliiiguninl 4,16

Other Authorities

Dan T. Coenen, Untangling the Market-Participant

Exemption to the Dormant Commerce Clause, 88

EOD, Ss. BRDU. FOS Cie Pecsicesenssccsicasecsvtiintnsccscintannetaciasacie 12

Gregory Cancelada, Chrysler Will Invest $1 Billion at

Fenton, St. Louis Post-Dispatch (Dec. 12, 2005)............. 19

Spending By Not Taxing, The Economist, Jan. 23,

PEED cnrctnishsastingssconsesstadighinneceieindanisesuanieseiiiimiiioaenmenumaeDs 12

Walter Hellerstein & Dan T. Coenen, Commerce

Clause Restraints on State Business Development

Incentives, 81 Cornell L. Rev. 789 (1996) .........c.scceceeeees 11

REPLY BRIEF FOR PETITIONER

DAIMLERCHRYSLER CORPORATION

The first two paragraphs of respondents’ brief reveal

fundamental deficiencies in the merits of their case as well as

their capacity to maintain it. They affirmatively proclaim

that precisely because “most jurisdictions offer comparable

tax breaks,” the tax credits they challenge “only have mini-

mal impacts on business decisions.” Resp. Br. | (emphasis

added). That is a devastating concession because it means

that, far from coercing Ohio companies to invest in-state

rather than elsewhere, Ohio’s investment tax credit (ITC)

has, at the very most, a “minimal” potential impact on Ohio’s

economy or interstate commerce generally.

Respondents thus acknowledge their objection is not that

the ITC raises barriers to their ability to compete fairly in in-

terstate commerce—from time immemorial, the central con-

cern of the dormant Commerce Clause. Rather, respondents’

real complaint is the supposed “high costs on states and lo-

calities in lost tax revenues” from “tax breaks” targeted to

certain businesses and the resulting “shift of the costs of state

and local government to other classes of taxpayers, like Re-

spondents.” Resp. Br. 1,4. But this generalized grievance—

entirely divorced from the purposes of the Commerce Clause,

available in equal measure to all taxpayers of Ohio, and

predicated only on claims of injury that are, at the very most,

uncertain, remote, attenuated, and speculative—cannot pos-

sibly satisfy the “irreducible minimum requirements” for Ar-

ticle III standing.

Even if respondents could establish jurisdiction, their

concession that the ITC has no significant impact on inter-

state commerce is just as surely fatal to the merits of their

claim. Respondents would have this Court extend the pre-

emptive force of the dormant Commerce Clause to invalidate

not just state laws that obstruct interstate commerce, but all

state policies of “taxation and regulation that advantage[] in-

state economic activity.” Resp. Br. 1. This Court, however,

2

has never construed the dormant Commerce Clause to intrude

so deeply into state fiscal policies and essential police pow-

ers. Respondents’ vision of “national control[]” over the

economy (id.) conflicts irreconcilably with the Constitution’s

fundamental structural commitment to federalism.

Ohio’s ITC is available to in-state and out-of-state com-

petitors on equal terms. Its manifest purpose is to attract in-

vestment, whether from within the State or from without. It

imposes no burdens on or impediments to interstate com-

merce. It assesses no taxes on out-of-state actors or actions.

And it does nothing to impair or inhibit the free flow of trade.

Indeed, as 18 amicus briefs on behalf of nearly 80 public and

private entities attest, credits such as the one offered by Ohio

not only encourage interstate commerce, they are vital tools

in both domestic and foreign competition for business and

job development. This tax incentive does not violate the

dormant Commerce Clause.

ARGUMENT

Il. RESPONDENTS’ NOVEL ARGUMENTS FOR

TAXPAYER STANDING MUST BE REJECTED

A. Respondents Cannot Satisfy The Minimum

Article III Requirements for Federal Jurisdiction

This is not a close case for standing. Respondents fail

the first and most basic of the “irreducible constitutional

minimum” requirements for Article III standing: a “concrete

and particularized” “injury in fact” that is “actual or immi-

nent,” not “conjectural or hypothetical.” See Lujan v. De-

fenders of Wildlife, 504 U.S. 555, 560 (1992). Respondents

nowhere allege that they participate meaningfully in inter-

state commerce or are competitors with others that do. See

J.A. 18a-19a. Rather, their sole allegation of jurisprudential

injury is entirely unrelated to interstate commerce; respon-

dents claim only that the ITC “deplete[s] the state coffers to

which Respondents . .. must contribute” such that “either

their contributions must be increased or the sum total avail-

3

able to fund programs on which they rely is diminished.”

Resp. Br. 12; see also J.A. 28a (Compl. ¥ 40).'

But this is no more than a claim that respondents have

been exposed to “the burden of taxation in support of an [al-

legedly] unconstitutional regime.” Valley Forge Christian

Coll. v. Ams. United for Separation of Church & State, Inc.,

454 U.S. 464, 477 (1982). This Court has long rejected tax-

payer standing based on allegations that the challenged ex-

penditure is “likely to produce additional taxation to be im-

posed upon a vast number of taxpayers.” Massachusetts v.

Mellon, 262 U.S. 447, 487 (1923). As this Court stated more

recently, “a generally available grievance about government

.. . Seeking relief that no more directly and tangibly benefits

{the plaintiff} than it does the public at large -- does not state

an Article III case or controversy.” Lujan, 504 U.S. at 573-

74; see also FEC v. Akins, 524 U.S. 11, 23-24 (1998); Arizo-

nans for Official English v. Ariz., 520 U.S. 43, 64 (1997).

A state taxpayer can satisfy Article III’s injury-in-fact

requirement only when the plaintiff alleges a “direct and par-

ticular financial interest” in the outcome of the litigation.

Doremus v. Bd. of Educ., 342 U.S. 429, 435 (1952). Re-

spondents allege “not a direct dollars-and-cents injury,” id. at

434, but a political difference. Far from demonstrating that

the ITC increases their tax burden in some tangible way, re-

spondents’ brief makes clear that their alleged injuries are, at

most, a matter of steep conjecture.

First, respondents freely admit that tax incentives like

Ohio’s are practiced virtually everywhere and have only

“minimal impacts on business decisions.” Resp. Br. 1. Thus,

a fortiori, the ITC can have no more than “minimal” impact

on respondents’ taxes. Second, there is little reason to be-

lieve that, over the long run, the ITC reduces the revenues

collected by the State. To the contrary, if the ITC functions

' Respondents have abandoned any special claim to standing for

Kim's Auto (through the eminent domain seizure of its property) or any

standing claim at all for the Michigan respondents.

4

as the Ohio legislature intended, it encourages greater pro-

ductive investments and economic activity in State, and thus

greater taxable revenues—just the opposite of respondents’

claims. Moreover, most capital investments will continue to

generate tax revenue long after the seven-year ITC expires.

Third, even if Ohio’s revenues were depleted in exactly the

manner that respondents allege, respondents point to no

change in the taxes they now pay or the services they now

enjoy, and they offer no reason beyond their ipse dixit that

those taxes or services will be affected in the future. In the

absence of any allegation of a “concrete and particularized”

“dollars-and-cents injury,” this Court’s precedents require

dismissal of the respondents’ dormant Commerce Clause

challenge for lack of standing.’

B. Flast v. Cohen Does Not Endow Taxpayers With

Standing to Bring Commerce Clause Challenges

To State Taxes

Respondents pointedly have dodged this Court’s Dore-

mus standard for state taxpayer standing in favor of a singu-

larly broad interpretation of the test for federal taxpayer

Standing set out in Flast v. Cohen, 392 U.S. 83 (1968). Un-

der their view of that decision, a federal taxpayer (and a for-

tiori, a state taxpayer) has standing whenever his challenge

“is directed to an exercise of Congress’s [or a state’s] taxing

and spending power,” and “the suit rests on a constitutional

> Moreover, this “injury” is unlikely to be redressed by the relief

sought by respondents. First, if respondents’ view of the dormant Com-

merce Clause prevails, the remedy that follows may be simply to invali-

date the provisions of the statute that limit the credit to in-state invest-

ments, as did the New York Court of Appeals on remand from Westing-

house. See Westinghouse Elec. Corp. v. Tully, 63 N.Y.2d 191, 194

(1984). And even if the ITC were struck down in foto, respondents ac-

knowledge that this only will cause states to offer a different menu of tax

rate reductions or exemptions to businesses (Resp. Br. 47), and thus they

concede that invalidation of the ITC will neither reduce their taxes nor

provide additional funds for services. This failure of redressability is an

reason respondents lack Article Ill standing. See Steel Co. v.

Citizens for a Better Env't, 523 U.S. 83, 103 n.5 (1998).

5

provision that is a specific limitation on the exercise of [that]

taxing and spending power.” Resp. Br. 11-12.

Even assuming that, after Lujan, Flast’s “logical nexus”

theory of taxpayer standing remains good law, see Friends of

the Earth, Inc. v. Laidlaw Environmental Services (TOC),

Inc., 528 U.S. 167, 203 (2000) (Scalia, J., dissenting) (noting

that its “logical nexus’ analysis” has “fallen into desue-

tude”), Flast cannot assist respondents in this dormant Com-

merce Clause case. Respondents point to no case anywhere

that has invoked Fiast to permit a taxpayer challenge under

the Commerce Clause (much less the dormant Commerce

Clause). Indeed, respondents themselves concede (at 12) that

in the nearly 40 years since Filast, “only the Establishment

Clause has been recognized,” as falling within its “narrow

exception” to the “general rule against taxpayer standing.”

Bowen v. Kendrick, 487 U.S. 589, 618 (1988).

Respondents thus candidly seek to extend Flast far be-

yond its historically limited reach—an extension that would

grant any taxpayer standing to challenge, under the dormant

Commerce Clause, any state tax, even those paid only by

other taxpayers. They justify this proposed extension of

Flast solely on the basis that the Establishment Clause and

the dormant Commerce Clause share—in respondents’

view—“a similar historical role” as “specific limit[s} on dis-

criminatory state taxation.” Resp. Br. 13. This expansive

exception would certainly swallow the rule against general

taxpayer standing; for if the dormant Commerce Clause

meets the test for “a specific constitutional limitation” on the

government’s “taxing and spending power” (Resp. Br. 12-

13), then all manner of taxation and spending would fall

within the Flast exception. Many other provisions in the Bill

_ Of Rights limit state (and federal) power to tax and spend.

See, e.g., Arkansas Writers’ Project, Inc. v. Ragland, 481

U.S. 221 (1987) (invalidating state sales tax under the Free

Press Clause). And state powers are further circumscribed,

both explicitly and implicitly, by constitutional provisions

vesting authority in the executive and legislative branches.

Respondents offer no reason why their argument would not

6

similarly extend taxpayer standing to any state tax challenge

predicated on a state’s alleged interference with the exercise

of any enumerated federal power.

Even if, by some principle not apparent from respon-

dents’ reasoning, that remarkable expansion could be limited

to the Commerce Clause, it would distort the Article III]

standing requirement beyond recognition. The allegations in

this case are fundamentally different in character from those

made in Flast. In Flast, the taxpayer’s contention was “that

his tax money [was] being extracted and spent in violation of

specific constitutional protectiuns against such abuses of leg-

islative power” (392 U.S. at 106); the decision recognized the

plaintiffs’ “clear stake as taxpayers in assuring that they not

be compelled to contribute even ‘three pence . . . for the sup-

port of any one [religious] establishment.’” /d. at 114 (Stew-

art, J., concurring) (citation omitted); see also id. at 106 (ma-

jority opinion) (requiring a “nexus” between the alleged ille-

gal conduct and plaintiffs’ status as taxpayers). But respon-

dents are not challenging the use of their property to fund a

program that violates their rights. See id. at 103-04 (noting

that the concern of those who drafted the Establishment

Clause was that “religious liberty ultimately would be the

victim if government could employ its taxing and spending

powers to aid one religion over another or to aid religion in

general”). Rather, their argument is that others should be

compelled to pay more taxes.

This distinction strikes at the heart of respondents’ ar-

guments for taxpayer standing. Though the failure to collect

tax revenue might give rise to a cognizable injury io a com-

petitor, respondents identify no decision—because there is

none—where the Court held that the failure to collect taxes

caused an Article [II injury-in-fact to taxpayers as such.

C. Respondents’ Other Arguments For Standing

Are Meritless

Respondents make three additional arguments in support

of their standing to pursue a dormant Commerce Clause chal-

lenge. First, they contend that they have municipal taxpayer

7

standing because some of Ohio’s franchise tax revenue is

remitted to municipalities. See Resp. Br. 15-17. But respon-

denis offer no authority for this proposition and none exists.

The theory behind municipal standing is that the taxpayer has

a “direct and immediate” interest in the actions of the mu-

nicipal corporation, Mellon, 262 U.S. at 486-87, but that the-

ory has no application to a challenged state action, especially

one that has only an attenuated relationship to the municipal

fisc. Under respondents’ trickle-down theory of standing,

taxpayers may locate injuries in the state-wide impact of state

legislation on local revenue. Given the vast array of federal

and state programs that provide blocks grants and other funds

to municipalities, respondents’ theory is one of virtually lim-

itless utility. In any event, respondents’ complaint nowhere

alleges that the fisc of the City of Toledo is injured by the

ITC. See J.A. 14a-3la. Respondents allege only that the ITC

“depletes the funds of the State of Ohio to which Plaintiffs

contribute.” /d. 28a (emphasis added). Respondents cannot

here assert standing based on an injury they have not alleged

below.

Second, Respondents contend that so long as they have

Article Ill standing to bring their challenge to the City of

Toledo’s property tax abatement, they have “ancillary” or

“pendent” standing to bring any additional claim “that can be

spun out of the common nucleus of operative fact.” Resp Br.

18-19. This argument, however, is squarely foreclosed by

numerous decisions of this Court holding that standing must

be analyzed on a claim-specific basis. See, e.g., Allen v.

Wright, 468 U.S. 737, 752 (1984) (“the standing inquiry re-

quires careful judicial examination of a complaint’s allega-

tions to ascertain whether the particular plaintiff is entitled to

an adjudication of the particular claims asserted”) (emphasis

added). As this Court explained, “standing is not dispensed

in gross.” Lewis v. Casey, 518 U.S. 343, 358 n.6 (1996). “If

the right to complain of one administrative deficiency auto-

matically conferred the right to complain of a// administra-

tive deficiencies, any citizen aggrieved in one respect could

8

bring the whole structure of state administration before the

courts for review. That is of course not the law.” /d.

Finally, respondents argue that this Court’s decision in

Caterpillar Inc. v. Lewis, 519 U.S. 61, 75 (1996), dictates the

waiver of prudential standing requirements in this case.

Resp. Br. 27. But that decision is readily distinguished. Cat-

erpillar concerned removal jurisdiction—not prudential

standing. There, the Court overlooked error in the premature

removal of a case when, by the time judgment was entered,

the federal courts had jurisdiction over the case. See 519

U.S. at 73. It was in this context that the Court stated “con-

siderations of finality, efficiency, and economy become -

overwhelming.” /d. at 75. Here, respondents do not claim

that they fall within the zone of interests of the dormant

Commerce Clause. Unlike Caterpillar or the other cases

cited by respondents, the Court here has an institutional in-

terest in enforcing the prudential requirements for standing.

This is because the “zone of interests” requirement ensures

that the issues are argued by a “reliable” advocate, rather

than a plaintiff whose interests are only “marginally ‘related

to or inconsistent with the purposes implicit” in the constitu-

tional or statutory provision on which he or she relies.

Clarke v. Sec. Indus. Ass'n, 479 U.S. 388, 397 n.12, 399

(1987).° Respondents fall into this latter category and there-

fore have no standing.

For all these reasons, this Court should vacate the judg-

ment below insofar as it invalidates the ITC for lack of stand-

’ Respondents also contend that enforcement of the prudential

standing requirements would be “fundamentally unfair” in view of peti-

tioners’ arguments below that respondents had standing. Resp. Br. 27.

But when DaimlerChrysler made that argument, it did so on the basis of

the unique claims of injury arising out of the seizure of Kim’s Auto’s

property. See C.A. J.A. 200-01. Respondents have since abandoned any

claim based on Kim’s Auto, apparently recognizing themselves that those

injuries became unredressable no later than the close of the eminent do-

main proceedings. Respondents’ claims of unfairness thus ring hollow.

9

ing and remand the case to the courts below with instructions

that the ITC claim be dismissed.‘

II. RESPONDENTS’ EXPANSIVE VISION OF THE

DORMANT COMMERCE CLAUSE CANNOT BE

RECONCILED WITH THIS COURT’S DECISIONS

Respondents’ central contention is that the dormant

Commerce Clause bars all state “measure[s] that provide[]

preferential tax treatment,’—i.e., “a lower effective tax

rate”—‘“conditioned on in-state economic activity.” Resp.

Br. 9. This contention, however, finds no support in this

Court’s dormant Commerce Clause jurisprudence. Of

course, as the late Chief Justice acknowledged, that jurispru-

dence has not been a model of clarity or consistency, see

Kassel v. Consol. Freightways Corp. of Del., 450 U.S. 662,

706 (1981) (Rehnquist, J., dissenting) (“[T]he jurisprudence

of the ‘negative side’ of the Commerce Clause remains hope-

lessly confused”), and the language employed in some of its

opinions may, from time to time, have been more expansive

than the holdings of those decisions.

It is thus possible, as respondents demonstrate, to as-

semble a collection of out-of-context phrases to support the

propositions that the dormant Commerce Clause bars all “in-

centive[s] ‘to invest . . . within [the State] rather than to in-

vest .. . in other States,”” Resp. Br. 42 (quoting Maryland v.

Louisiana, 451 U.S. 725, 757 (1981)), as well as “an[y] at-

tempt to provide a positive incentive for increased business

Respondents’ suggestion (at 28) that the “appropriate remedy is

a remand of the case to the Ohio state courts,” is strange in light of their

separate challenge to the City of Toledo’s property tax abatement. See

Cuno v. DaimlerChrysler Corp., No. 04-1407, Pet. for Certiorari (filed

Apr. 18, 2005) (presenting question whether Sixth Circuit correctly de-

cided that City of Toledo’s property tax abatement did not violate the

Constitution). As respondents note (at 18), under City of Chi. v. Int'l

Coll. of Surgeons, 522 U.S. 156, 165-66 (1997), removal was appropriate

even if only the property tax claim was within the federal court’s jurisdic-

tion. Remand to the state courts would therefore be appropriate only if

this Court determines that the district court also lacked jurisdiction over

respondents’ other federal claim, an argument pressed by no party.

10

activity in [the State].” Resp. Br. 41 (quoting Westinghouse

Elec. Corp. v. Tully, 466 U.S. 388, 393 (1984)). But the

holdings of those cases do not advance any proposition

nearly so broad, and the Court has repeatedly made clear that

the States are free to take all manner of steps, including the

use of their taxing and spending powers, to encourage local

investment and development. See, e.g., Boston Stock Exch. v.

State Tax Comm’n, 429 U.S. 318, 336 (1977). A close ex-

amination of the facts of the cases cited by respondents dem-

onstrates that the dormant Commerce Clause bars only state

action that burdens, i.e., imposes a cost upon, interstate

commerce and does so in a manner that discriminates against

out-of-state actors or transactions. This Court has never

found a dormant Commerce Clause violation where state ac-

tion only reduces the cost of in-state economic activity, and

respondents suggest no reason tethered to the text or history

of the Commerce Clause to do so now. >

A. Respondents’ View of the Dormant Commerce

Clause Would Endanger Nearly Every Manner

of State Economic Development Program

The cornerstone of respondents’ dormant Commerce

Clause argument—and the Sixth Circuit’s holding below—is

that there is no constitutional distinction to be made between

a state law that penalizes out-of-state actors or conduct, and a

state law that accords benefits to in-state actors or conduct.

See Resp. Br. 39-40; Pet. App. 9a. Indeed, respondents ndi-

cule any such distinction as advancing a “triumph of form

over substance,” claiming that, at least in the realm of eco-

nomic action, every state-provided benefit necessarily carnes

with it a corresponding penalty that is visited on those ineli-

gible for the benefit. Resp. Br. 43; see also Pet. App. 10a

(“economically speaking, the effect of a tax benefit or burden

is the same”). Accordingly, in respondents’ view, the dor-

mant Commerce Clause bars state action that “advantage[s]

in-state economic activity.” Resp Br. 1.

Respondents’ view, however, cannot be reconciled with

this Court’s long-held view that “[d]irect subsidization of

—__

1]

domestic industry does not ordinarily run afoul of [the Com-

merce Clause].” New Energy, 486 U.S. at 278; see also

Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 810 (1976)

(noting that “[the business] remain[s} within Maryland in re-

sponse to market forces, including that exerted by money

from the State.”). Recognizing this, respondents now shrink

even from using the word “subsidies.” This is peculiar be-

cause a subsidy is surely the most direct of “advantages” a

state can provide to in-state economic actors, and, at least

until the case reached this Court, exactly what the respon- -

dents alleged the ITC to be. See J.A. 28a. Respondents in-

stead now recast the ITC as a “discriminatory tax prefer-

ence[] favoring in-state business location.” Resp. Br. 1.

Innocuous though it may seem, respondents’ newly

minted terminology is an essential component of their argu-

ment. It is only by disavowing their earlier acknowledgment

that the ITC was, in form and effect, a subsidy, that respon-

dents can now argue that their expansive view of the dormant

Commerce Clause is sufficiently cabined and “leaves wide

latitude for state programs in support of economic develop-

ment.” Resp. Br. 48. Respondents contend that their version

of the dormant Commerce Clause would ban only “preferen-

tial tax treatment conditioned on in-state economic activity,”

id. 9—more specifically, “‘any provision that reduces the

taxpayer’s ‘effective [in-state] tax rate’ as the taxpayer en-

gages in more in-state activity.’” Jd. 41 (quoting Walter Hel-

lerstein & Dan T. Coenen, Commerce Clause Restraints on

State Business Development Incentives, 81 Cornell L. Rev.

789, 815 (1996)). And though they remain silent on the topic

of direct subsidies, respondents suggest that, under their

view, not only across-the-board tax cuts, but also programs

“ranging from worker training and infrastructure construction

to low interest loans” all remain immune from dormant Com-

merce Clause attack. Resp. Br. 48.

Thus, ironically, even as they disparage as “formalistic”

any distinction between benefits and burdens, respondents

place great reliance on a formalism of their own design—a

distinction between “tax breaks,” on one hand, and other

12

forms of cash and non-cash benefits provided by states to as-

sist local industry, on the other. This distinction, though, is

illusory. The ITC is a one-time subsidy available to any

company, whether or not already doing business in Ohio, that

is willing to build a plant or otherwise increase its capital in-.

vestment. To be sure, the ITC will lower a firm’s “effective

tax rate,” but it is obvious enough that a cash subsidy can do

so just as surely and effectively. See West Lynn Creamery,

Inc. v. Healy, 512 U.S. 186, 194 (1994) (“effect [of tax] on

Massachusetts producers is entirely . . . offset by the sub-

sidy”). It is merely a question of accounting. More impor-

tantly, though, respondents fail to offer any cogent rationale

why a tax benefit that operates in the same manner as a direct

subsidy—a benefit simple for in-state activity—should be

treated any differently.°

The one supposed “practical” difference respundents of-

fer is “the relative ease with which tax breaks can be enacted

and the difficulty and complexity of enacting expenditure

programs.” Resp. Br. 48-49 (citing Dan T. Coenen, Untan-

gling the Market-Participant Exemption to the Dormant

Commerce Clause, 88 Mich. L. Rev. 395, 480-81 (1989)).

Even if respondents’ highly questionable political theory

- were to be accurate with regard to tax credits,’ respondents

Suggest no reason why such “practical”—in fact, nakedly po-

litical—considerations have any value whatsoever in inter-

* Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S.

564, 589-590 (1997), also is of no assistance to respondents. Camps

Newfound relied on Establishment Clause precedent to establish the dis-

tinction between a cash payment and the exemption from a generally ap-.

plicable “burden of property taxation.” Id. at 50 n.24 (quoting Walz v.

Tax Comm'n, 397 U.S. 664, 673 (1970). But as nearly contemporaneous

Establishment Clause cases demonstrate, tax credits—unlike exemp-

tions—are indistinguishable from subsidies. See, e.g., Committee for

Public Education and Religious Liberty v. Nyquist, 413 U.S. 756, 789-90

(1973).

® To support their theory, respondents rely solely on a law review

article that, in tum, relies principally on a magazine article from 1988.

See Coenen, supra, at 481 n.485 (citing Spending by Not Taxing, The

Economist, Jan. 23, 1988, at 51).

13

preting the Constitution. If there is a constitutionally signifi-

cant difference between subsidies to attract investment and

tax credits to attract investment, it cannot be found merely in

a theory that subsidies, for some reason, in some states, under

some circumstances, might be more difficult to dispense.

There is thus no basis for respondents’ proposed cate-

gorical distinction between tax credits and subsidies (and

similar non-cash benefits) provided by states. Accordingly,

the limiting principle respondents attempt to erect in reliance

on that distinction collapses of its own weight. If it is true

that the benefit from the ITC creates a burden on businesses

that invest outside Ohio, then other benefits to domestic in-

dustry—be they subsidies, stadiums, or even schools—also

impose burdens on interstate commerce, and would be im-

proper under respondents’ sweeping vision of the dormant

Commerce Clause. Contrary to respondents’ assertions, the

legal principle they espouse cannot be cabined simply to

“preferential tax breaks,” and this no doubt explains their ef-

forts to abandon the use of the word “subsidy.”

Respondents’ vision of the dormant Commerce Clause

would all but obliterate the limitation this Court placed on its

sweep in Boston Stock Exchange, there holding that nothing

in that Clause “prevent[s] the States from structuring their tax

systems to encourage the growth and development of intra-

state commerce and industry.” 429 U.S. at 336. Under re-

spondents’ proposed expansion, the States’ “police powers”

to “encourag[e] domestic industry,” Bacchus Imports, Ltd. v.

Dias, 468 U.S. 263, 271 (1984), would be supplanted by “na-

tional control[}” over local economies, Resp. Br. 1, a notion

at war with the very concept of a federal system of govern-

ment.

B. The Ohio ITC Does Not Violate the Dormant

Commerce Clause, Because It Does Not Impose

A Burden On Interstate Commerce

Respondents argue that any state measure that provides a

“lower effective tax rate . . . conditioned on in-state eco-

nomic activity” violates the dormant Commerce Clause.

14

Resp. Br. 9. This theory must be rejected. In the realm of

taxation, a lower effective tax rate for in-state actors is a nec-

essary, but not a sufficient, condition for a dormant Com-

merce Clause violation. Both the text of the Commerce

Clause and this Court’s cases demonstrate that a state tax

must also impose additional costs upon—and thus burden—

out-of-state activity before a violation can be found.

Respondents deem this description of the reach of the

Commerce Clause “novel,” Resp Br. 39, and “radical,” id.

44, but that is wrong. This Court has consistently adhered to

this basic limitation. See New Energy, 486 U.S. at 273 (dor-

mant Commerce Clause “prohibits ... regulatory measures

designed to benefit in-state economic interests by burdening

out-of-state competitors”) (emphasis added); see also Oregon

Waste Sys., Inc. v. Dept’ of Envtl. Quality of Or., 511 U.S.

93, 99 (1994) (dormant Commerce Clause bans differential

treatment of in-state and out-of-state economic interests that

benefits the former and burdens the latter”) (emphasis

added). And respondents concede as much, for nowhere do

they argue that the dormant Commerce Clause implicates

state measures that do not burden interstate commerce.

The relevant question here is simply whether the opera-

tion of Ohio’s franchise tax and ITC, regulates decisions to

invest out-of-state by imposing financial burdens on such

investments. Respondents contend out-of-state investments

are so burdened by Ohio’s franchise tax because it is “a tax

on the apportioned share of the total income earned by corpo-

rations through the operation of an interstate business,” and

because even though such an investment will necessarily “re-

duce the share of the company’s total income that is appor-

tioned to Ohio, a substantial proportion of the income earned

through that new [out-of-state] investment is still likely to be

apportioned to Ohio.” Resp. Br. 44, 45 n.13. If true, this

would call into question the constitutionality of not just the

ITC but the franchise tax itself. See Container Corp. of Am.

v. Franchise Tax Bd., 463 U.S. 159, 164 (1983) (“[A] State

may not, when imposing an income-based tax, ‘tax value

15

earned outside its borders.’” (quoting ASARCO Inc. v. Idaho

State Tax Comm'n, 458 U.S. 307, 315 (1982)).

But it is not true, and the very example that respondents

herald in their brief demonstrates as much. See Resp. Br. 35

n.15 (citing Br. of Center on Budget and Policy Priorities

(CBPP) as Amicus Curiae in Support of Respondents at A-1-

A-7). In that example, before the “ABC Corp.” made its out-

of-state investment, it owed $39,100 in Ohio franchise tax.

See CBPP A-1.’ After ABC built its out-of-state plant, under

the example’s assumptions, ABC’s tax liability to Ohio (at

the same 8.5% rate), remained exactly at $39,100, even

though net income increased by 50%. See id. A-5. The new

income generated by the investment was attributed only to

the State in which it was built; none of it was attributed to

(and, thus, burdened by) Ohio. This demonstrates that under

many (if not all) circumstances Ohio’s franchise tax does not

reach the income generated by out-of-state investments. This

is sufficient to defeat respondents’ facial challenge to the

ITC. See United States v. Salerno, 481 U.S. 739, 745 (1987).

Moreover, respondents are clearly wrong when, defying

common sense, they assert that “many” of the tax-and-credit

schemes invalidated by the Court involved taxes that did not

impose burdens upon the out-of-state conduct that was sup-

posedly the object of the state’s discrimination. Resp. Br. 45.

Westinghouse certainly was not such a case. There the Court

struck down a tax credit that depended on the ratio between

in-state and out-of-state activity. See 466 U.S. at 400-02 &

n.9. The Court recognized that because the tax credit was

reduced when out-of-state activity increased—even when in-

state conduct remained constant—the New York scheme had

the “most pernicious effect” of “penaliz[ing] increases in the

DISC’s shipping activities in other States.” /d. at 401 & n.9.

The reduction of the New York tax credit functioned effec-

?

ABC Corp. starts with all of its property, all of its payroil and

one-tenth of its sales in Ohio. CBPP Br. A-1. The resulting Ohio appor-

tionment value of 0.46, when multiplied by both ABC's net income ($1

million) and the Ohio tax rate of 8.5%, yields an Ohio tax of $39,100.

16

tively as a New York tax em out-of-state activity; it raised the

cost of doing business out-of-state."

So, too, in the other cases cited by respondents. Camps

Newfound/Owatonna v. Town of Harrison, 520 U.S. 564

(1997), and Fulton Corp. v. Faulkner, 516 U.S. 325 (1996),

both invalidated exemptions from state propery taxes: in

Camps Newfound, an exemption from a Maine tax on real

property that was fully available to non-profit entities unless

they operated principally for the benefit of non-residents of

the State, see 520 U.S. at 568-69, and in Fulton Corp., an

exemption from a tax on the value of corporate stock that

was tied to the extent to which the stock issuer did business

in North Carolina, see 516 U.S. at 328. In each case, the

Court reasoned that because the tax exemption—like the

DISC credit in Westinghouse—was reduced or revoked when

the taxpayer engaged in business outside the State or with

out-of-state actors, the tax exemption discriminated against

interstate commerce. See Camps Newfound, 520 USS. at

568-69; Fulton Corp., 516 U.S. at 333. And contrary to re-

spondents’ suggestion (at 45) that these property taxes did

not impose burdens on out-of-state conduct, the underlying

property taxes manifestly applied—indeed, only applied—to

. Respondents’ suggestion that this “pernicious effect” was un-

necessary to the holding in Westinghouse because the Court was “focused

primarily on the benefits provided for New York activity,” Resp. Br. 41,

and that, by implication, the Court would have struck any tax credit that

reduced an in-state exporters’ effective tax rate, defies any fair reading of

the Court’s decision. See Westinghouse, 466 U.S. at 400 (“It is this sec-

ond adjustment, made only to the credit and not to the base taxable in-

come figure, that has the effect of treating differently parent corporations

that are similarly situated in all respects except for the percentage of their

DISCs’ shipping activities conducted from New York.” (emphasis

added)). It is further belied by the state court’s actions on remand, where

it severed only the portion of the tax credit formula that measured the

ratio of in-state DISC activity to out-of-state DISC activity, effectively

extending the DISC credit “to all of the DISC accumulated income attrib-

utable to the parent corporation, without regard to the exports’ place of

shipment.” See Westinghouse Elec. Corp., 63 N.Y 2d at 194.

17

those businesses that elected to engage in interstate com-

merce, notably among them, the plaintiff in each action.

In cases involving taxes on transactions, the out-of-state

burdens are even more obvious. For instance, in Maryland v.

Louisiana, the Court struck down Louisiana’s “first-use tax”

on natural gas transported into the State from the outer-

continental shelf where offsetting credits were granted only

to Louisiana residents. See 451 U.S. at 754-760. Louisiana’s

first-use tax thus was paid only by out-of-state gas consumers

and thus functioned as a tax on interstate commerce itself.

Respondents’ notion that these taxes did not impose burdens

on interstate commerce is clearly wrong.

In short, respondents thus have no answer to the argu-

ment that a state tax does not violate the dormant Commerce

Clause unless—at a minimum—it imposes actual burdens

upon the out-of-state conduct against which the tax suppos-

edly discriminates. And Ohio’s ITC simply does not impose

any burdens on out-of-state activity. Indeed, respondents

concede that it has little or no effect on business decisions

because other State remain free to enact—and have en-

acted—comparable provisions, Resp. Br. 1. Thus, the ITC

cannot be said to “coerc[e]” businesses to invest in Ohio, as

the Sixth Circuit incorrectly held. Pet. App. 6a. The ITC

does not penalize or otherwise burden a company for invest-

ing out of state and therefore does not violate the Commerce

Clause.

In the end, it is respondents, not DaimlerChrysler, who

elevate “form over substance.” Resp. Br. 43. It is beyond

dispute that Ohio could have reimbursed DaimlerChrysler for

a portion of its capital improvements at the Stickney Avenue

plant, or could have made a cash payout contingent on the

company keeping its Jeep assembly plant in Ohio, and nei-

ther offer would have regulated or burdened DaimlerChrys-

ler’s decision to invest elsewhere had it ultimately done so.

For this same reason, Ohio’s offer of an ITC to companies

that make a capital investment does not regulate or burden

interstate commerce. Respondents’ contention to the con-

18

trary is disproved by their own example. This Court accord-

ingly should find that the ITC operates solely as a subsidy to

in-state investment, and should reject respondents’ sugges-

tion that such an in-state benefit necessarily creates out-of-

state burdens.

C. Respondents Fail to Demonstrate That Ohio’s

ITC Discriminates Against Interstate Commerce

Even if this Court were to accept respondents’ conten-

tion that the benefit the ITC accords to in-state investors it-

self reflexively imposes a burden on out-of-state investors,

such a burden violates the dormant Commerce Clause only if

it constitutes discrimination against interstate commerce.

The ITC does not.

Respondents do not dispute that a finding of discrimina-

tion against interstate commerce requires a predicate finding

that in-state and out-of-state actors are similarly situated. See

General Motors Corp. v. Tracy, 519 U.S. 278, 298 (1997).

Respondents also do not dispute that a corporation that in-

vests in-state is not similarly situated, vis-a-vis the underly-

ing franchise tax, to one that invests out-of-state. They ac-

knowledge that when a firm invests in-state, it increases its

Ohio apportionment value and, thereby, its exposure to

_Ohio’s franchise tax, while a corporation with an Ohio pres-

ence that invests out-of-state decreases its Ohio apportion-

ment value and its exposure to Ohio tax. Resp. Br. 34. Re-

spondents contend, though, that this is an insufficient basis to

justify different treatment of in-state and out-of-state inves-

tors. They argue, in essence, that in-state and out-of-state

investors are situated similarly enough for dormant Com-

merce Clause purposes, even if not for other purposes.

In support of this argument, Respondents first contend

that this Court, in Westinghouse, “directly rejected precisely

th{e] argument” that differences in apportionment value can

justify different treatment. Resp. Br. 34 (citing Westing-

house, 466 U.S. at 400-02 n.9). Respondents are wrong.

Though the Court noted that it was “not unmindful” of the

fact that increased in-state business activity results in a

19

higher apportionment value, the Court did not conclude that

such differences, as a categorical matter, foreclosed different

treatment. This is unsurprising because the “similarly situ-

ated” argument was not raised in Westinghouse—not by the

State of New York and not by its amicus, the State of Cali-

fornia. See Westinghouse Elec. Co., No. 81-2394, Br. of Ap-

pellees (NY Br.); id. Br. of the State of Cal. as Amicus Cu-

riae in Supp. of Br. of James H. Tully, Jr. (CA Br.); see also

Westinghouse, 466 U.S. at 400 (corporations were “similarly

situated in all respects except for the percentage of their

DISCs’ shipping activities conducted from New York”).’

This Court is “not bound to follow [its] dicta in a prior case

in which the point now at issue was not fully debated.” Cen-

tral Va. Cmty. Coll. v. Katz, No. 04-885, slip op. at 5 (Jan.

23, 2006) (citing Cohens v. Virginia, 6 Wheat. 264, 399-400

(1821)).

Finally, even if this Court finds the differences between

in-state and out-of-state investors to be insubstantial, the out-

of-state investors still suffer no coercion. To be sure, Ohio’s

ITC is available only to those who choose to invest in Ohio.

But as respondents themselves state, these investment tax

credits have “minimal impacts on business decisions, largely

because most jurisdictions offer comparable tax breaks.”

Resp. Br. 1. Because of the widespread availability of these

credits—a product of healthy competition among the states to

create attractive investment environments—Michigan’s in-

vestment tax credit did not impose an unconstitutional bur-

den on DaimlerChrysler’s decision to locate its Jeep plant in

Ohio, any more than Ohio’s ITC imposed a burden on its de-

cision to expand its engine plant in Detroit, or its decision in

December 2005 to invest $1 billion in two Missouri plants.

See Gregory Cancelada, Chrysler Will Invest $1 Billion at

Fenton, St. Louis Post-Dispatch, Dec. 13, 2005, at Al (not-

9

Rather New York and its amicus relied principally on the asser-

tion that “New York taxes only the income reasonably allocated to it.”

See NY Br. 8; CA Br. 9 (“New York is taxing only New York income.”).

For the reasons explained above this assertion was not true.

20

ing various state and local tax incentives totaling more than

$75 million). In choosing where to locate investments, com-

panies like DaimlerChrysler make rational economic choices

among states (and foreign countries) that remain free to in-

clude tax credits and other tax breaks to reduce the cost of

doing business in their locale. It is difficult, to say the very

least, to divine “economic Balkanization” from a regime in

which states are permitted to compete with each other to pro-

vide the best economic inducements for investment.

CONCLUSION

The judgment of the court of appeals should be vacated

in relevant part and the case should be remanded with in-

structions that the respondents’ federal challenges to Ohio’s

ITC be dismissed. Should the court reach the merits, the

judgment of the court of appeals should be reversed in rele-

vant part.

Respectfully submitted.

CHARLES A. ROTHFELD THEODORE B. OLSON

ERIKA Z. JONES Counsel of Record

MIRIAM R. NEMETZ THEODORE J. BOUTROUS, JR.

DAVID DEBOLD

MAYER, BROWN, ROWE MATTHEW D. MCGILL

& MAw LLP MICHAEL S. DIAMANT

1909 K Street, N.W.

Washington, D.C. 20006 GIBSON, DUNN & CRUTCHER LLP

(202) 263-3000 . 1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Petitioner

February 21, 2006