Amicus Curiae Brief — DaimlerChrysler Corp. v. Cuno

| [FILED

DD | pec 5- am

Nos. 04-1704 & 04-1

OF THE CLERK

eeeniaiadalenent S.

In the

Supreme Court of the United States

DAIMLERCHRYSLER WILLIAM W. WILKINS

CORPORATION, ET AL., Tax ComMm’R For THE

STATE OF OHIO, ET AL.,

Petitioners, Petitioners,

V. and Vv.

CHARLOTTE CUNO, ET AL., | CHARLOTTE CUNO, ET AL.,

Respondents. Respondents.

On Writ of Certiorari to the United

States Court of Appeals for the Sixth Circuit

Brier oF Amici Curiae CHAMBER OF COMMERCE OF THE

Unitep STATEs OF AMERICA, KENTUCKY CHAMBER OF

COMMERCE, MicHIGAN CHAMBER OF COMMERCE, OHIO

CHAMBER OF COMMERCE, TENNESSEE CHAMBER OF

Commerce & Inpustry, Detroir REGIONAL CHAMBER OF

COMMERCE, AND TOLEDO AREA CHAMBER OF COMMERCE

IN SUPPORT OF PETITIONERS

Rosin S. CONRAD CHARLES A. TROST

AMAR D. SAaRWAL Counsel of Record

NATIONAL CHAMBER MICHAEL G. STEWART

LITIGATION CENTER, INC. WALLER LANSDEN DortcH &

1516 H Street, N.W. Davis, PLLC

WasuHINGTON, D.C. 20036 511 Union Street, Suite 2700

(202) 463-5337 NASHVILLE, TN 37219-1760

Counsel for Amici Curiae (615) 244-6380

Becker Gallagher Legal Publishing, Inc. , 800.890.5001

TABLE OF CONTENTS

po gt. EP eC TE ROR ERAT TOTES i

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INTEREST OF AMICT CURIAE ... 2... .. cece. l

SUMMARY OF THE ARGUMENT ............. 2

I 664 ces ks xp bb edne daw Our eee 4

I. THE COURT OF APPEALS’ DECISION

ADVANCES A POLICY AGENDA THAT IS

NOT MANDATED BY THE COMMERCE

CLAUSE AND THAT IS GROUNDED IN A

FUNDAMENTAL MISUNDERSTANDING OF

THE GLOBAL NATURE OF THE

COMPETITION FOR HIGH-WAGE JOBS ... 4

Il. CONSISTENT WITH ORIGINAL INTENT

BEHIND THE COMMERCE CLAUSE, THIS

COURT HAS PROPERLY DRAWN A

DISTINCTION BETWEEN LAWS WHICH

EFFECT UNCONSTITUTIONAL TARIFFS

AND SIMILAR TRADE BARRIERS AND

LAWS WHICH MERELY DECREASE THE

COST OF DOING BUSINESS WITHIN A

oo ee 14

A. This Court’s Commerce Clause jurisprudence

is grounded in an economically meaningful

distinction between protectionist trade barriers

and lawful in-state efforts to create a favorable

er Ory eee ee 17

B. The court of appeals’ holding departs from the

original purpose of the Commerce Clause . . 22

C. The court of appeals’ holding necessitates a

formalistic distinction between credits and

EE: gi oS a He ace ae a Pe

Ill. AS IN QUILL CORP. V. NORTH DAKOTA, THIS

COURT SHOULD DEFER TO CONGRESS THE

COMMERCE CLAUSE PUBLIC POLICY

ISSUES ARISING OUT OF STATE AND

LOCAL BUSINESS TAX INCENTIVES .....

RP Pee Pe rye ree ee re

ili

TABLE OF AUTHORITIES

CASES

Associated Industries of Mo. v. Lohman,

ee eee GE 0 so cd ORE eee waa e se 17

Bacchus Imports, Lid. v. Director of Taxation,

ee 6 ch vise 0 8 bas eden ne 20-21

Bendix Autolite Corp. v. Midwesco Enterprises, Inc.,

4 FRE Se eee yee 26

Boston Stock Exchange v. State Tax Comm’n,

OE oo is oso aS nu wileee 4% 15, 17

Camps Newfound/Owatonna, Inc. v. Town of Harrison,

EE: oi Naw is oho wee ok WO 15, 28

Carbone, Inc. v. Town of Clarkstown,

ee I es sa ek aw ci ed wate wa 24

Commonwealth Edison Co. v. Montana,

er oo ok a 5 ba ok > heb ce bn ees 29

Cuno, et al. v. Daimler Chrysler, Inc., et al,

386 F.3d 738 (2004) .......... 15, 16, 21, 24, 25

Dean Milk Co. v. Madison,

A RS ERIN et tt LO Td i gate 17

Fulton Corp. v. Faulkner,

reer ee eae ee 15, 17, 22

iv

Goldberg v. Sweet,

Ss Be GE oo CN TRT A VST TOA 25

Hughes v. Alexandria Scrap Corp.,

CPEs FOUND 0 6 RSH 0 OO CRS DD 15, 25

James B. Beam Distilling Co. v. Georgia,

RR ft APP Oe ee ee eee 28

Moorman Manufacturing Co. v. Bair,

437 U.S. 267 (1978) ............. 15, 19, 20, 28

New Energy Company of Indiana v. Limbach,

SEB UD. TP CGD ccc ccscctevecs 14, 17, 23, 25

Oklahoma Tax Comm'n v. Jefferson Lines, Inc..,

FeO. Wey FP CNOOE. 0 0 ¢k0n0b bob henb heen 22

Quill Corp. v. North Dakota, ‘

504 U.S. 25G (1SSS) 0 cc cccens 4, 26, 27, 28, 29

United States v. Lopez,

SHREDS BPG o ocdacesttveckésueease 10

West Lynn Creamery v. Harris,

SER WS. TEPC oo wa tandenseudeuwe 23, 24

Westinghouse Electric Corp. v. Tully,

GOOD FeO CD voc bec kasi con eke canaus 4

OTHER AUTHORITIES

Bureau of Labor Statistics, State Average Annual Wages

for 2001-2002 (visited December 1 , 2005)

<http://www.bls.gov/cew/state2002.txt> ......... 11

Vv

Bush Bernard, Smyrna Nissan plant to add Pathfinder SUV,

THE TENNESSEAN, June 26, 2003, at lA .......... 12

Bill Carey, Force of Runyon’s personality lured

Nissan to Tennessee, THE TENNESSEAN (Nashville),

DS +h bocdadvd een obese Ch wes be wae s 12

Jorge Carrillo, Transactional Strategies and Regional

Development; The Case of GM and Delphi in Mexico,

JOURNAL OF INDUSTRY STUDIES 127 (2004) ........ 9

Economic Development and the Dormant Commerce

Clause: The Lessons of Cuno v. DaimlerChrysler and

lts Effect on State Taxation Affecting Interstate

Commerce, Joint Hearing Before Subcomm. on the

Constitution and Subcomm. on Commercial and

Administrative Law, 109" Cong., 1* Sess. 27 (2005) .. 7

ECONOMICS AND BUSINESS GROUP CENTER FOR

AUTOMOTIVE RESEARCH, THE CONTRIBUTION OF

THE INTERNATIONAL AUTO SECTOR TO THE U.S. ECONOMY:

AN UPDATE (2005) (available at

www .cargroup.org/pdfs/AIAMFinal.PDF) .... 8, 11, 12

~

Peter D. Enrich, Saving the States from Themselves:

Commerce Clause Constraints on State Tax Incentives

for Business, 110 HARV. L. REv. 377 (1996) . 6, 13, 17-18

THOMAS FRIEDMAN, THE WORLD IS FLAT; A BRIEF

HISTORY OF THE TWENTY-FIRST CENTURY (Farrar,

en ne we bk S bebe 10

Clayton P. Gillette, Business Incentives, Interstate

Commerce, and the Commerce Clause, 82 MINN. L.

REV. 447 (December 1997) .............. 12-13, 18

vi

GERALD GUNTHER, CONSTITUTIONAL LAw 93

og | TLE Tee ETT EE ae 22

Danny Hakim, For a G.M. Family, the American Dream

Vanishes, N.Y. Times, November 19, 2005 ........ 10

PAUL J. HARTMAN AND CHARLES A. TROST, FEDERAL

LIMITATIONS ON STATE AND LOCAL TAXATION 2d

ERIE, ee ty RE RE LTE 28

Walter Hellerstein and Dan T. Coenen, Commerce

Clause Restraints on State Business Development

Incentives,

81 CORNELL L. REV. 789 (May 1996) .... 24, 25, 27-28

JOHN HUMPHREY AND OLGA MEMODOVIC, UNITED NATIONS

INDUSTRIAL DEVELOPMENT ORGANIZATION, THE GLOBAL

AUTOMOTIVE INDUSTRY VALUE CHAIN: WHAT PROSPECTS

FOR UPGRADING BY DEVELOPING COUNTRIES (2003)

(available at www.unido.org/file-storage/download/?file-id =

GEE 5. doeGs bwEs 0 ek eke teees be eee 8,9

Charles E. McClure, Tax competition; is what’s good

for the private goose also good for the public gander?,

ps URE kn CkSB eee des- 4s 18

THE FEDERALIST No. 42 (James Madison) ...... 22-23

Chris Micheli, A 50-State Comparison of Tax Incentives

for Manufacturing Equipment Purchases, 12 STATE TAX

PEE 6:46 bébind<aatnee wes esn ken 27

vii

JUAN CARLOS MORENO BRID, MEXICO’S AUTO

INDUSTRY AFTER NAFTA; A SUCCESSFUL

EXPERIENCE IN RESTRUCTURING?, WORKING PAPER

#232 (1996) (available at

http://www.nd.edu/ ~ kellogg/WPS/232.pdf) ....... 8

Arundhati Parmar, GM growth might bring 180

workers, FORT WAYNE (Indiana) JOURNAL-GAZETTE,

GE EF 6 640 bien on boa Wh be de eee Os 11

Keith Phillips et al., Gauging the Impact of the San Antonio

Toyota Plant, VisTA - SOUTH TEXAS ECONOMIC TRENDS AND

ISSUES (Federal Reserve Bank of Dallas, San Antonio Branch,

San Antonio, TX), Spring 2004 (available at

http://dallasfed.org/research/vista/vista0401 .pdf) . 8, 9, 13

Keith Russell, Transfers, local hires to have shot at

high-end jobs, THE TENNESSEAN (Nashville),

PE SU UE 6 no eae ch EPMA DDS cb eee ee 12

Philip Tatarowicz and Rebecca F. Mims-Velarde,

An Analytical Approach to State Tax Discrimination

Under the Commerce Clause, 39 VAND. L. REV. 879

DT cctecthideben howe s vibeeandes 14-15

THE PADUCAH (Kentucky) SUN, May 20, 2005 ...... 12

Ken Thomas, Auto industry, lawmakers watching

S. Ct. on tax incentive case, ASSOCIATED PRESS,

PEE CR EE we we veeesnenenceacona 11-12

l

INTEREST OF AMICI CURIAE

This amici curiae brief in support of the briefs of

Petitioners is submitted pursuant to Rule 37 of the Supreme

Court Rules.’ Counsel for Petitioners and Respondents have

consented to the filing of this brief. Their consent letters have

been filed with the Clerk of the Court.

The Chamber of Commerce of the United States of

America is the world’s largest business federation. With a

substantial presence in all fifty States and the District of

Columbia, the Chamber represents an underlying membership

of more than three million businesses and organizations of

every size and kind. As the principal voice of American

businesses, the Chamber regularly advocates the interests of

its members in federal and State courts throughout the country

on issues of national concern.

The Kentucky Chamber of Commerce is the largest broad-

based business association in Kentucky, representing more

than 7,000 businesses. :

The Michigan Chamber of Commerce is a non-profit.

membership organization which represents the interests and

views of over 6,500 private corporations and businesses

engaged in commercial, industrial, agricultural, civic and

professional activities in Michigan.

The Ohio Chamber of Commerce, founded in 1893, is

Ohio’s largest and most diverse statewide business advocacy

organization. The Chamber works to promote and protect the

' Pursuant to Supreme Court Rule 37.6, counsel for amici state that no

counsel for any party authored this brief in whole or in part and that no

entity other than amici made a monetary contribution to the preparation or

submission of this brief.

2

interests of its 4,000 business members while building a more

favorable Ohio business climate.

The Tennessee Chamber of Commerce and Industry is the

State chamber of commerce and manufacturers’ association,

representing more than 1,000 members across Tennessee

from all facets of business and industry.

The Detroit Regional Chamber of Commerce is a non-

profit business advocacy organization, representing more than

21,000 businesses in Southeast Michigan.

The Toledo Area Chamber of Commerce is a broad-based

non-profit membership organization in Toledo, Ohio, which

represents more than 3,700 businesses.

Each of the above-listed organizations works to enhance

the economy and business climate of the State or region it

serves. All have a collective interest in this case because the

court of appeals’ decision has created legal uncertainty which

will diminish the value and effectiveness of business tax

incentives in Kentucky, Michigan, Ohio, and Tennessee, as

well as in States in Circuits other than the Sixth Circuit, and

will thereby hinder industrial development in those States.

SUMMARY OF THE ARGUMENT

The Chamber of Commerce of the United States of

America, Kentucky Chamber of Commerce, Michigan

Chamber of Commerce, Ohio Chamber of Commerce,

Tennessee Chamber of Commerce and Industry, Detroit

Regional Chamber of Commerce, and Toledo Area Chamber

of Commerce (the “Chambers”) submit this brief as amici

curiae in support of the briefs of Petitioners.

Amici urge this Court to reject Respondents’ anti-incentive

political agenda, which is based on an ill-informed and

outdated understanding of the global economic forces central

to business investment decisions in today’s economy.

3

Contrary to Respondents’ assertion, this Court cannot free the

States from the competition for business investment because

that competition is global, not national. Incentives are not

part of a zero-sum game pitting States against each other, but

a tool used by States to compete effectively with Canada,

Mexico and other nations to attract major capital investments

which strengthen the United States economy as a whole.

This Court should analyze this case in light of its existing

Commerce Clause jurisprudence, which sensibly draws a

distinction between unlawful trade barriers and lawful credits,

subsidies, and other purely intra-state activities which make

an adopting State an attractive place to do business without

placing burdens on interstate trade. That distinction is

economically meaningful because, while it prevents the

creation of trade barriers which impede commerce and

impoverish the nation, it allows the creation of incentives, like

the tax credits at issue, which have the aggregate effect of

lowering costs for intra-state and interstate businesses alike.

Grounded in an analysis of economic effects, this Court's

existing analytical framework does not require the sort of

tortured, formalistic reasoning that the court of appeals

necessarily employed in its effort to distinguish Ohio’s

investment tax credit from run of the mill business subsidies

that this Court has long recognized as constitutional. This

Court’s existing jurisprudence, moreover, carries out the clear

intent of the Framers, who created the Commerce Clause to

prohibit protectionist tariffs, not to solve what Respondents

perceive to be the problem of low aggregate tax rates for

businesses. This Court should apply its existing Commerce

Clause doctrine to validate the statute at issue, an incentive

which lowers the cost of doing business in Ohio without

imposing any barrier to goods and services provided in

interstate commerce. The Court should reject the

Respondents’ self-described “novel legal theory” that the

4

Commerce Clause prohibits laws which affect interstate

commerce by making a State attractive to business

investment.

To the extent Respondents can assemble empirical support

for their view ‘that incentives are bad public policy, they

should bring that evidence to the attention of Congress. That

body is empowered to create a national policy regarding .

business incentives that balances the obvious and

overwhelming benefits generated by major capital investments

like the DaimlerChrysler facility at issue against the

perceived, albeit unproven, economic inefficiencies and other

costs that Respondents claim such incentives impose on the

States. As in Quill Corp. v. North Dakota, this Court should

reverse the court of appeals’ decision, leaving to Congress a

clear path for such action as Congress may deem prudent and

necessary. 504 U.S. 298 (1992).

ARGUMENT

I. THE COURT OF APPEALS’ DECISION ADVANCES

A POLICY AGENDA THAT IS NOT MANDATED

BY THE COMMERCE CLAUSE AND THAT IS

GROUNDED IN A FUNDAMENTAL

MISUNDERSTANDING OF THE GLOBAL NATURE

OF THE COMPETITION FOR HIGH-WAGE JOBS.

This Court has long recognized that each State has broad

authority to craft tax laws to meet the particularized needs of

its citizens and, accordingly, that application of the

Commerce Clause requires a “delicate balancing of the

national interest in free and open trade and a State’s interest

in exercising its taxing power.” Westinghouse Electric Corp.

v. Tully, 466 U.S. 388, 403 (1984). The court of appeals’

decision upsets this balance, radically expanding the reach of

the Commerce Clause anti-discrimination principle to usurp

States’ authority in the area of business tax incentives. In so

5

doing, the court of appeals has signed on to a very particular

policy agenda, in effect substituting the economic

prepossessions of a self-selected group of consumer advocates

and legal academicians for the judgment of the elected

representatives of the people of Ohio. An examination of the

assumptions underlying the anti-incentive agenda promoted by

the Respondents and embraced by the court of appeals reveals

that it is based on an outdated understanding of the global

economic forces that confront State actors charged with the

responsibility to attract and maintain high-wage jobs and

business investments for the benefit of their constituents. As

such, it provides a textbook example of the sort of

impractical, ill-informed policy that often results when

interest groups use the courts to avoid the deliberative,

analytical processes necessary to effect economic policy

through legislation.

The central assumption underlying Respondents’ agenda

is that States use incentives like Ohio’s investment tax credit

to compete amongst themselves for a finite pool of investment

capital and that, therefore, incentives provide no net gain for

the national economy the Commerce Clause was designed to

protect. As Respondents observed in their Brief in Response

to Petition for Certiorari:

{I}t has never been Respondents’ intention to single

out Ohio’s incentive programs as _ distinctly

problematic, nor to place Ohio (or the Sixth Circuit

states) at a competitive disadvantage vis a vis the rest

of the nation. Instead, Respondents anticipate that a

clear statement of the wunconstitutionality of

discriminatory tax incentives will free all the states

from the necessity of engaging in an escalating

competition over incentives that deprives all of them of

needed revenues, while gaining a meaningful

advantage for none.

6

Respondents’ Brief in Response to Petition for Certiorari at 5-

6, DaimlerChrysler Corp., et al. v. Cuno and Wilkins v. Cuno

(Nos. 04-1704 and 04-1724) (emphasis supplied). Thus,

Respondents and their academic supporters urge this Court to

“save the states from themselves” by creating a “level playing

field” on which they can compete for business investment.

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, 398 (1996)

(making the empirically incorrect assertion that “the

incentives competition is, for the States collectively, at best a

zero-sum game ... the business that one state attracts is a

business that would have gone to another state”).

Respondents’ arguments postulate an economy that no

longer exists. The “playing field” on which States compete

today for business investments is not the nation, but the

world. Incentives are not part of a “zero-sum game” in

which one State’s gain is inevitably another’s loss, with no

aggregate benefit to the national economy. Rather, incentives

allow States to compete with Mexico, Canada and other

nations to attract valuable industries and thereby strengthen

the economy of the entire nation. The likely result of Ohio

not being able to offer incentives to DaimlerChrysler to create

or keep jobs in Toledo as a consequence of this case is not

that these jobs will migrate to Alabama or Georgia, but that

they will likely go to an existing DaimlerChrysler plant in

Canada, Mexico or Europe and leave the United States

altogether. Conversely, plants that are successfully recruited

in part with incentives are often obtained in competition with

other countries and thus represent a net gain not only to the

recruiting State but also to the nation’s economy as a whole.

As was stated by Ohio’s Lieutenant Governor Bruce Johnson

in testimony before Congress:

7

We live in an increasingly global marketplace, where

a company’s very survival depends on its ability to be

lean and efficient. This market demands that I be able

to offer incentives in order for Ohio to compete

against its regional neighbors; not only with other

States, but also countries like Canada and Mexico.

Case in point: Ontario, Canada, lists Ohio as one of

its chief competitors, and offers at least nine tax

incentives to encourage investment. You can find

them on their website.

* * *

We believe the flexibility to put together aggressive,

customized incentive packages is critical to securing

these projects. Take for example projects like Lab

One’s $18.4 million expansion of its laboratory

facilities in. Cincinnati, or the United States

Enrichment Corporation’s decision to invest $1.1

billion creating 500 high-paying jobs in rural southern

Ohio. Ohio won out over facilities in Asia and

Mexico when the Whirlpool Corporation chose to

invest $143 million in several Ohio facilities.

Economic Development and the Dormant Commerce Clause:

The Lessons of Cuno v. DaimlerChrysler and Its Effect on

State Taxation Affecting Interstate Commerce, Joint Hearing

Before Subcomm. on the Constitution and Subcomm. on

Commercial and Administrative Law, 109" Cong., 1* Sess.

27 (2005). Far from “sav[ing} the states from themselves,”

the court of appeals’ decision hobbles the States in their

ongoing efforts to compete in the global economy.

The forces of global competition are particularly fierce in

the automotive industry at the center of this lawsuit. In the

past two decades, automotive manufacturers have expanded

beyond their historic national bases of operation, constructing

major production facilities around the globe. Major Asian

and European manufacturers—BMW, Honda, Mercedes,

Mitsubishi, Nissan, NUMMI, Subaru-Isuzu and Toyota—have

all built plants in the United States. ECONOMICS AND

BUSINESS GROUP CENTER FOR AUTOMOTIVE RESEARCH, THE

CONTRIBUTION OF THE INTERNATIONAL AUTO SECTOR TO THE

U.S. ECONOMY: AN UPDATE (2005) (available at

http://www .cargroup.org/pdfs/AIAMFinal.PDF) (prepared

for the Association of International Automobile

Manufacturers, Inc.). At the same time, U.S., European and

Asian manufacturers have dramatically expanded their

presence in Mexico. JOHN HUMPHREY AND OLGA

MEMODOVIC, UNITED NATIONS INDUSTRIAL DEVELOPMENT

ORGANIZATION, THE GLOBAL AUTOMOTIVE INDUSTRY VALUE

CHAIN: WHAT PROSPECTS FOR UPGRADING BY DEVELOPING

COUNTRIES, 7 (2003) (available at http://www.unido.org/file-

storage/download/?file id=11902); see also JUAN CARLOS

MORENO BRID, MEXICO’S AUTO INDUSTRY AFTER NAFTA;

A SUCCESSFUL EXPERIENCE IN RESTRUCTURING?, WORKING

PAPER #232 (August 1996) (available at

http://www.nd.edu/ ~ kellogg/WPS/232.pdf) (describing

Mexican operations of major producers). Thus the decision

to locate an automotive production line is now made by

international companies that can readily evaluate the costs and

competing benefits offered by the many States and nations in

which they conduct business.

This competition for automotive investment is especially

acute in North America, where the Mexican auto industry has

risen over the past decade to directly challenge the United

States at every level of production. As one study recentiy

observed, there is now an “auto corridor that extends from

Mexico City to Atlanta.” Keith Phillips et al., Gauging the

Impact of the San Antonio Toyota Plant, VisTA - SOUTH

TEXAS ECONOMIC TRENDS AND ISSUES (Federal Reserve Bank

9

of Dallas, San Antonio Branch, San Antonio, TX), Spring

2004 (available at http: //dallasfed.org/research/vista/vista040

1.pdf). GM, Ford, DaimlerChrysler, Nissan, VW Group and

Honda all have major assembly plants operating in the

Mexican portion of that corridor, HUMPHREY &

MEMODOVIC, supra, at 7. Total employment at these

Mexican facilities—652,000 in 2002—rivals employment in

the top six automotive-producing States—Michigan, Indiana,

Ohio, Kentucky, Illinois and Tennessee, which was 670,000

during the same period. Phillips, supra. Qualitatively, the

Mexican auto industry has transformed itself from a low cost

parts producer to a direct competitor employ ing “sophisticated

product design, development and research” to manufacture

finished vehicles. Jorge Carrillo, Transactional Strategies and

Regional Development; The Case of GM and Delphi in

Mexico, 11 JOURNAL OF INDUSTRY STUDIES 127 (2004).

Reflecting this transformation, Mexico’s total exports of

vehicles rose from 18,245 to 1.8 million between 1980 and

2001—with ninety percent exported to North America.

HUMPHREY & MEMODOVIC, supra, at 11. State economic

development officials working to attract and preserve

automotive jobs must therefore labor with an ever-present

awareness that a robust competitor with ties to virtually every

major manufacturer offers a realistic, low cost alternative site

for virtually every potential plant or production line—an even

more viable alternative since the advent of the North

American Free Trade Agreement, which precludes tariff

barriers among the three North American signatories. /d. at

10 (noting that the “NAFTA Agreement created the basis for

much deeper integration” of member states’ automotive

industries).

Global competition is hardly a secret or obscure

phenomenon. A decade ago, this Court noted that

“[iJncreasing global competition has ... made primary and

10

secondary education economically more important. The

portion of the American economy attributable to international

trade tripled between 1950 and 1980.” United States v.

Lopez, 514 U.S. 549, 621 (1995). International competition

is now an ever-present topic in the popular press and even the

focus of best-selling books. See, e.g., Danny Hakim, For a

G.M. Family, the American Dream Vanishes, N.Y. TIMES,

November 19, 2005, at A2 (noting that “domestic automakers

and suppliers are fighting to survive brutal global

competition”); THOMAS FRIEDMAN, THE WORLD IS FLAT; A

BRIEF HISTORY OF THE TWENTY-FIRST CENTURY 117 (2005)

(generally describing increasing global competition and noting

the “process of competitive flattening, in which countries

scramble to give companies the best tax breaks, education and

subsidies ... to encourage offshoring to their shores”). Yet to

read Respondents’ briefs one would have no idea that the

phenomenon of global competition even exists. This omission

is particularly startling when one considers the precise issue

in this case—the validity of incentives offered to induce a

German company with automotive assembly plants on three

continents to invest in the United States. Respondents’

Opposition to incentives is grounded in an assumption that

States are competing solely with each other and that this Court

has the power to “free all the states from the necessity of

engaging in an escalating competition.” Respondents’ Brief

in Response to Petition for Certiorari, supra, at 6. The

reality is that the States’ fiercest competitors for plants like

the DaimlerChrysler facility at issue are in other nations

beyond this Court’s jurisdiction. Respondents’ failure to

grasp this central reality of today’s economy upends the entire

logical framework underpinning Respondents’ arguments and

underscores what a poor substitute academic commentators

are for legislators in the arena of economic development.

1}

Tax incentives offered to automotive manufacturers are a

reasoned response by States not only to the intense global

competition for investment but also to the extraordinary

benefits generated by that particular industry. A facility like

DaimlerChrysler’s Jeep plant in Toledo, in and of itself, can

be the linchpin which lifts thousands of families into the

middle class. On average, a job in one of the automobile

assembly plants established in the United States by

international manufacturers pays $59,000 in salary and

benefits—nearly twice the average wage in States directly

affected by the court of appeals’ decision. CONTRIBUTION OF

THE INTERNATIONAL AUTO SECTOR, supra, at 13; Bureau of

Labor Statistics, State Average Annual Wages for 2001-2002

(visited December 1, 2005) < http://www.bls.gov/cew/state

2002.txt >*. Moreover, jobs in automotive plants are a small

fraction of the total employment created by such investments. _

For each direct hire at an automotive assembly plant, on

average 9.4 additional jobs are created at automotive suppliers

and other businesses. /d. at 18.

Even these geometric increases in employment have

proven to be just the tip of the iceberg of economic benefits

accruing to those States that have successfully recruited major

automotive investments. In State after State, initial

investments in a single plant have generated years of

expansions and additional, related investments. In Ohio, for

example, Honda’s small initial investment in a 64-employee

motorcycle plant in 1979 paved the way for four plants

representing a capital investment of $6.3 billion and

employing 16,000 people. Ken Thomas, Auto industry,

? Domestic manufacturers also offer very high-wage jobs. Average pay

for GM’s hourly workers, including benefits, was $74.00 per hour in

2004. Arundhati Parmar, GM growth might bring 180 workers, FORT

WAYNE (Indiana) JOURNAL-GAZETTE, November 19, 2005, at B9.

12

lawmakers watching S. Ct on tax incentive case, ASSOCIATED

PRESS, September 28, 2005. In Kentucky, Toyota’s original

1985 investment of $800 million in a single assembly plant for

200,000 vehicles per year has expanded to a $4.5 billion plant

producing 435,000 vehicles per year and employing 7,000

people. One Kentucky newspaper recently editorialized that

“this one industrial recruiting success did more for the state

than the entire agendas of other governors.” THE PADUCAH

(Kentucky) SUN, May 20, 2005. In Tennessee, Nissan’s

initial U.S. manufacturing facility, attracted in 1980 with a

$30 million incentive package, has entirely transformed the

State’s economy, spawning the location of more than 950

parts plants collectively estimated to employ 33% of the

State’s manufacturing workforce. Bush Bernard, Smyrna

Nissan plant to add Pathfinder SUV, THE TENNESSEAN, June

26, 2003, at 1A. Nissan itself has since opened an additional

Tennessee manufacturing plant and increased its Tennessee

employment from 2,200 in 1980 to approximately 8,000 in

2005. Bill Carey, Force of Runyon’s personality lured Nissan

to Tennessee, THE TENNESSEAN (Nashville), May 9, 2004, at

4E; Keith Russell, Transfers, local hires to have shot at high-

end jobs, THE TENNESSEAN (Nashville), November 11, 2005,

at '0A. All told, investments by international automotive

companies in the United States had, by 2003, created 55,000

direct jobs and generated investment of over twenty-two

billion dollars in the U.S. economy. CONTRIBUTION OF THE

INTERNATIONAL AUTOMOTIVE SECTOR, supra, at 4.

Respondents question whether such substantial, long term

economic benefits justify the cost of incentives like Ohio’s

investment tax credit, but tellingly present no conclusive

empirical evidence to support their claims. At best

“[e}mpirical studies that seek to evaluate [Respondents’]

allegations are inconclusive.” Clayton P. Gillette, Business

Incentives, Interstate Competition, and the Commerce Clause,

13

82 MINN. L. REV. 447, 452 (December 1997). Certainly, the

States that actually compete for investments believe that

incentives are an effective and, indeed, essential tool for

attracting automotive plants and similar facilities. And

practical experience seems to bear out the theory, put forward

by some commentators, that incentives, far from harming the

national economy, actually assist in the rational allocation of

resources therein. /d. at 448. The States that have provided

substantial incentive packages, like Ohio, Tennessee and

Kentucky, because of their existing automotive supplier base,

have been the States that have stood to derive particularly

significant economic benefits from automotive sector

investment because the presence of suppliers substantially

enhances the jobs multiplier effect of such direct investment.

Phillips, supra. Those States also have larger numbers of

low-wage workers in desperate need of high-paying jobs,

while lacking some of the attributes, like ocean ports, natural

resources, and established high-tech research communities,

that drive the economies of many high-wage States that have

not seen the need to provide similar incentive packages.

Proponents of Respondents’ anti-incentive agenda have

cautioned against “[a]ttributing to state political actors an

unrealistic reservoir of both information and economic

rationality.” Enrich, supra, at 402. But Respondents’ failure

to acknowledge the global nature of the competition for jobs

strongly suggests that the single court-mandated economic

policy they promote would be neither optimal nor rational.

To the extent the Respondents can assemble a coherent body

of evidence to demonstrate that incentives are in fact bad

economic policy, they should present that evidence to

Congress or to the State legislatures that are best equipped to

evaluate such evidence in light of countervailing evidence and

in a position to react appropriately to changing economic and

societal conditions. In the meantime, this Court should

14

decline Respondents’ invitation to strait-jacket States with an

outdated policy that has long been rendered irrelevant by the

rapidly-changing world economy.

Il. CONSISTENT WITH ORIGINAL INTENT BEHIND

THE COMMERCE CLAUSE, THIS COURT HAS

PROPERLY DRAWN A DISTINCTION BETWEEN

LAWS WHICH EFFECT UNCONSTITUTIONAL

TARIFFS AND SIMILAR TRADE BARRIERS AND

LAWS WHICH MERELY DECREASE THE COST

OF DOING BUSINESS WITHIN A GIVEN TAXING

STATE.

In its unanimous decision in New Energy Company of

Indiana v. Limbach, 486 U.S. 269, 278 (1988), this Court

succinctly articulated the thrust of its longstanding approach

to business incentives under the Dormant Commerce Clause:

The Commerce Clause does not prohibit all state

action designed to give its residents an advantage in

the marketplace, but only action of that description in

connection with the State’s regulation of interstate

commerce. Direct subsidization of domestic industry

does not ordinarily run afoul of that prohibition;

discriminatory taxation of out-of-state manufacturers

does.

In cases in which this Court has evaluated State business

incentives under the Commerce Clause’s anti-discrimination

principle, it has consistently adhered to this central distinction

between discriminatory trade barriers and non-discriminatory

incentives which merely lower the cost of doing business in

a given State. As many commentators have observed, this

Court has consistently struck down as discriminatory those

statutes that have imposed tariff-like barriers to interstate sales

and movements or otherwise penalized taxpayers for engaging

in interstate commerce. See Philip M. Tatarowicz and

15

Rebecca F. Mims-Velarde, An Analytical Approach to State

Tax Discrimination Under the Commerce Clause, 39 VAND.

L. REV. 879, 928 (May 1986). By contrast, this Court has

upheld statutes which have merely “encourage[d] the growth

and development of intra-state commerce and industry”

through measures, like direct subsidies or apportionment

schemes favorable to in-state businesses, which simply lower

the cost of doing business in a taxing State without burdening

interstate transactions. Boston Stock Exch. v. State Tax

Comm'n, 429 U.S. 318, 336 (1977); see, e.g., Hughes v.

Alexandria Scrap Corp., 426 U.S. 794, 816 (1976)(upholding

subsidy); Moorman Manufacturing Co. v. Bair, 437 U.S.

267 (1978)(upholding single factor apportionment scheme).

In striking down Ohio’s investment tax credit, the court of

appeals rejected the notion that this distinction embodied in

this Court’s decisions creates a principled rule of law:

The defendants maintain that the Supreme Court’s

opinions should be read narrowly to hold that tax

incentives ... are permissible as long as they do not

penalize out-of-state economic activity.../n their view,

the Commerce Clause is primarily concerned with

economic protectionism - that is, regulatory measures

designed to benefit local interests by burdening out-of-

state commerce.. Although it is arguably possible to fit

certain of the Supreme Court's cases into this

framework, it is clear that the Court has not adopted

this approach. . .

Cuno, et al. v. Daimler Chrysler, Inc., et al., 386 F.3d 738,

745 (2004) (emphasis supplied). Of course, this Court has

repeatedly stated that the Commerce Clause was designed as

a “barrier against protectionism.” Camps

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

564, 575 (1996); see also, Fulton Corp. v. Faukner, 516 U.S.

16

325, 330 (1994). Nevertheless, the court of appeals

abandoned this Court’s focus on protectionist measures in

favor of the virtually limitless test for discrimination urged by

the Respondents, holding that the Ohio credit is

unconstitutional because “the economic effect of the Ohio

investment tax credit is to encourage further investment in-

state at the expense of development in other states.” Cuno,

386 F.3d at 745.

This Court should reject the court of appeals’ unbridled

expansion of the Commerce Clause in favor of its existing

framework for at least three reasons. First, this Court’s

longstanding distinction between protectionist burdens on

interstate commerce and purely intra-state incentives is

economically meaningful because it protects interstate trade

while leaving States free to reduce tax burdens on in-state

businesses. Because this Court’s approach is grounded in an

analysis of the economic effects, it provides a workable test

with discernable limits to courts’ supervision of the nation’s

economy. Second, this Court’s focus on protectionist trade

barriers is consistent with the intent of the Framers, who

enacted the Commerce Clause in response to interference with

interstate commerce—protectionist tariffs. Third, this Court’s

existing Commerce Clause jurisprudence properly requires no

artificial distinction between subsidies and tax credits, which

are economically equivalent and should be treated alike for

tax purposes. While Dormant Commerce Clause

jurisprudence has been criticized as inconsistent, in the area

of business incentives a workable rule consistent with original

intent has emerged. That rule should be applied to the Ohio

tax credit at issue—a purely intra-state incentive that imposes

no trade barrier burdensome to businesses outside that State.

17

A. This Court’s Commerce Clause jurisprudence is

grounded in an economically meaningful distinction

between protectionist trade barriers and lawful in-

state efforts to create a favorable business climate.

The decision of the court of appeals expands the concept

of Commerce Clause discrimination into an entirely new

economic realm. To date, this Court has only used the

negative Commerce Clause to strike down statutes which have

had a particular effect on the nation’s economy—creating

direct or indirect barriers to trade. As this Court observed in

Fulton Corp.:

In its megative aspect, the Commerce Clause

“prohibits economic protectionism - that is ‘regulatory

measures designed to benefit instate economic

interests by burdening out-of-state competitors.’”

516 U.S. at 330 (quoting Associated Industries of Mo. v.

Lohman, 511 U.S. 641, 647 (1994) (quoting New Energy, 486

U.S. at 273-74)). A classic example of such a protectionist

burden is that struck down in Boston Stock Exchange—a

transaction tax which increased when part of the targeted

transaction, the sale of a share of stock, occurred outside the

taxing State in interstate commerce. 429 U.S. 318 (1977).

As the Court noted, the effect of such taxes, if replicated

nationally, would be to make interstate trade artificially

expensive and thereby hinder trade among the States—to

“invite a multiplication of preferential trade areas

destructive’ of the free trade which the [Commerce] Clause

protects.” Jd. at 329 (quoting Dean Milk Co. v. Madison,

340 U.S. 349, 356 (1951)).

The economic effect of intra-state incentives like the Ohio

investment tax credit is entirely different. A credit or subsidy

awarded ¢> in-state companies merely reduces the cost of

doing business in a given State. Replicated nationwide, such

18

business incentives have the primary effect, as critics of

incentives have observed, of reducing businesses’ aggregate

tax rates. Enrich, supra, at 387. To the extent such laws have

an incidental effect on interstate commerce, it is to promote

such commerce by “driv[ing] down the level of state taxation

of mobile capital to its economically optimal level.” /d. at

401 (paraphrasing Charles E. McClure, Tax competition: is

what’s good for the private goose also good for the public

gander?” 39 NAT’L TAX J. 341, 341-43 (1986)). While some

academic commentators might view low business tax rates as

a social problem, it is clearly a different “problem” than

protectionist trade barriers—the sole problem at which the

Commerce Clause is directed.

The significance of the economic distinction inherent in

this Court’s anti-discrimination cases is effectively illustrated

by an example developed by Professor Clayton P.

Gillette—the competition by law schools for qualified

professors. Gillette, supra, at 482. As Professor Gillette

notes, law schools use incentives, such as pay and benefits, to

lure law professors from law schools in other States. This

practice is designed to influence, and undoubtedly does

influence, interstate commerce, but one “would be surprised

to hear anyone claim that B State ought to be constrained by

the Commerce Clause from bidding for Professor A’s

services.” Jd. By contrast, few would be surprised if the

Commerce Clause were invoked to strike down a requirement

that professors teaching in a given State be graduates of that

State’s law schools or pay a tax not levied on graduates of

those schools. The difference lies in the effect of such

policies on the national economy. Just as business incentives

have an aggregate effect of creating a favorable low tax

business climate, the competition to offer salaries and benefits

to law professors has the effect of creating a favorable

employment environment which in the aggregate benefits all

19

professors. By contrast, a discriminatory tax or prohibition

against professors from out-of-state law schools imposes, like

a tariff on goods, costs on law professors as a group,

hindering their movement to the States in which they are in

greatest demand and thereby impoverishing the law teaching

profession and the nation. Tax incentives like Ohio’s

investment tax credit affect commerce in precisely the same

way as a high salary offer to a law professor, a well-

engineered bridge or a low aggregate corporate income tax

rate - by making a State an attractive place to do business.

Such government activities erect no barrier to interstate

commerce, however, and have never been deemed

discriminatory by this Court.

In one case, this Court specifically applied these principles

to a tax incentive statute designed to make a State attractive

to business investment by lowering the income taxes of in-

State taxpayers and held that the incentive did not run afoul of

the Commerce Clause. See Moorman Manufacturing, 437

U.S. 267 (1978). In Moorman Manufacturing, this Court

evaluated Iowa’s single factor income-tax apportionment

scheme, which apportioned income to Iowa based on a

taxpayer’s in-state sales, without consideration for in-state

property and payroll. /d. - The effect of the single factor

apportionment scheme is to reduce taxes on businesses with

property and payroll in Iowa as compared with States using

the more typical three factor apportionment formulas, which

apportion tax based on in-state sales, property and payroll.

This Court rejected any notion that lowa’s business-friendly

tax scheme violated the Commerce Clause:

Appellant also contends that the Iowa formula

discriminates against interstate commerce in violatior

of the Commerce Clause and the Equal Protection

Clause, because an Illinois corporation doing business

in lowa must pay tax on a greater portion of its

20

income than a local lowa company, and an Iowa

company doing business in Illinois will pay tax on less

of its income than an Illinois corporation doing

business in lowa. The simple answer, however, is that

whatever disparity may have existed is not attributable

to the Iowa statute. It treats both local and foreign

concerns with an even hand; the alleged disparity can

only be the consequence of the combined effect of the

Iowa and Illinois statutes, and Iowa is not responsible

for the latter.

Id. at 278, n. 12 (emphasis supplied). The same logic applies

to Ohio’s investment tax credit, to a low corporate tax rate,

or to a well-paved road. To the extent such business-friendly

governmental actious attract or influence interstate commerce,

it is not because they impose a discriminatory trade barrier

but because they have created favorable business conditions.

Should other States choose to replicate the favorable

conditions, taxes or other burdens on businesses will be

reduced. Should they choose not to provide equivalent

business conditions, any resultant disparity will proceed from

that decision, not from any discrimination inherent in one

State’s passage of laws designed to attract business with

apportionment rules, low tax rates, or other provisions

favorable to business operations.

Because this Court has never suggested that incentives

which benefit businesses by simply reducing their tax burden

are, by virtue of that reduction, discriminatory, the

Respondents are forced to divorce the language in this Court’s

Commerce Clause cases from its economic context to

construct support for their challenge to Ohio’s investment tax

credit. It is certainly true, as Respondents note, that this

Court has stated that the Commerce Clause prohibits taxes

which “[provide] a direct commercial advantage to local

businesses” and noted that “[t}]he determination of

21

constitutionality does not depend on whether one focuses on

the benefited or the burdened party.” Bacchus Imports, Ltd.

v. Director of Taxation, 468 U.S. 263, 273 (1984). But such

statements only have meaning if viewed in the context that

they were made. Bacchus involved a tax scheme which

effectively created a tariff on liquor produced outside Hawaii

by exempting local producers from a generally-applicable tax.

Id. at 273. Unsurprisingly, this Court, noting that “[a]

finding that state legislation constitutes ‘economic

protectionism’ may be made on the basis of ... discriminatory

purpose,” determined that such a scheme was protectionist

and unconstitutional. /d. at 270. The fact that the scheme

was structured as a “benefit”—an exception from tax

effectively available only to local producers—did not make it

any less a trade barrier. /d. at 271.

By separating Bacchus from its economic context—from

the plainly protectionist effect of the tariff effectively created

by Hawaii’s liquor tax scheme—the court of appeals has

abandoned this Court’s Commerce Clause jurisprudence for

an unworkable rule of law that has no discernible or

justifiable limits. If, in fact, any law which provides a

“benefit” to businesses and thereby attracts investment to a

State violates the Commerce Clause, then virtually any tax

credit, subsidy, low tax rate, business friendly apportionment

scheme, or, for that matter, road, convention center or other

investment designed to make a State attractive to business

violates the Constitution. The court of appeals’ cencern that

“the economic effect of the Ohio tax credit is to encourage

further investment in-state at the expense of development in

other states” would apply with equal force to any of these

activities. Cuno, 386 F.3d at 745. Such a standard would

run directly contrary to this Court’s holding in Moorman

Manufacturing. More fundamentally, it would defy common

sense and detach this Court’s Commerce Clause

22

jurisprudence from its longstanding economic moorings.

Having created a body of case law which establishes an

economically meaningful standard for discerning

unconstitutional protectionist legislation, this Court should

reject the court of appeals’ unprincipled departure from that

standard.

B. The court of appeals’ holding departs from the

original purpose of the Commerce Clause.

In distinguishing between unlawful trade barriers and

lawful intra-state incentives, this Court has carried out the

intent of the Framers. As this Court has observed, striking

down protectionist tariffs

effectuates the Framers’ purpose to ‘prevent a State

from ... jeopardizing the welfare of the Nation as a

whole, as it would do if it were free to place burdens

on the flow of commerce across its borders that

commerce wholly within those borders would not

bear.’

Fulton Corp., 516 U.S. at 330 (quoting Oklahoma Tax

Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 180 (1995))

(emphasis supplied). The central purpose of the Commerce

Clause was to eliminate such “burdens on the flow of

commerce,” which had plagued the States under the Articles

of Confederation. See GERALD GUNTHER, CONSTITUTIONAL

Law 93 (12" Ed. 1991) (emphasizing that “[t}he national

Commerce Power, it was hoped, would put an end to ...

protective tariffs on imports from other states”). As James

Madison observed:

[t}he defect of power in the existing Confederacy tc

regulate the commerce between its several members is

.. Clearly pointed out by experience. ... A very

material object of [the power to regulate foreign

commerce] was the relief of the States which import

23

and export through other States, from the improper

contribution levied upon them by the latter. Were

these at liberty to regulate the trade between State and

State, it must be foreseen that ways would be found to

load the articles of import and export, during the

passage through their jurisdiction, with duties which

would fall on the makers of the latter and the

consumers of the former.

THE FEDERALIST No. 42 (James Madison) (emphasis

supplied). This Court’s application of the Commerce

Clause’s anti-discrimination principle thus addresses the

particular econorsic problem that Madison and the other

authors of the Constitution designed that Clause to solve. The

court of appeals’ interpretation of the Commerce Clause

Strains to address a very different issue—the reduction and

elimination of taxes on businesses. While whether reducing

taxes on business through incentives of the sort at issue is

wise public policy may be open to debate in the legislative

context, low taxes on business were simply not an issue that

concerned the Framers. Accordingly, it has no relevance to

the issue in this case.

C. The court of appeals’ holding necessitates a

formalistic distinction between credits and

subsidies.

The court of appeals’ analysis necessarily requires this

Court to abandon its focus on the economic substance of

challenged legislation and adopt a formalistic distinction

between subsidies and other, equivalent economic

development incentives such as tax credits. This Court has

long recognized “that direct subsidization of domestic

industry does not ordinarily run afoul of the negative

Commerce Clause.” West Lynn Creamery v. Harris, 512

U.S. 186, 199, n. 15 (1994) (quoting New Energy, 486 U.S.

24

at 278); see also, Carbone, Inc. v. Town of Clarkstown, 511

U.S. 383 (1994) (noting that a town could avoid a burden on

interstate commerce by directly subsidizing a private solid

waste operation). In striking down Ohio’s investment tax

credit, the court of appeals concedes that “a direct subsidy ...

would no doubt have the same economic effect” as the

challenged credit. Cuno, 386 F.3d at 746. This is consistent

with the analysis offered by Professor Hellerstein in the law

review article cited by the court of appeals, in which he notes

that “[e}conomists know that the real-world impact of such a

subsidy mirrors the effect of the credit.” Walter Hellerstein

and Dan T. Coenen, Commerce Clause Restraints on State

Business Development Incentives, 81 CORNELL L. REV. 789,

835 (May 1996). The court of appeals offers no legally

coherent basis for distinguishing economically equivalent

subsidies and credits other than the conclusory statement that

“the distinction ... results from the fact that the tax credit

involves state regulation of interstate commerce through its

power to tax”—in other words, taxes and subsidies are

different because taxes are taxes and subsidies are subsidies.

Cuno, 386 F.3d at 746.

The court of appeals’ approach is a complete departure

from this Court’s historic application of the Commerce

Clause, which “eschew(s] such formalism for a sensitive,

case-by-case analysis of purposes and effects.” West Lynn

Creamery, 512 U.S. at 201. True to that approach, this Court

has never endorsed an artificial rule that subsidies are a

distinct class of incentives that are excluded from scrutiny

under the Commerce Clause. To the contrary, where

subsidies have been used as part of a scheme designed to erect

a trade barrier to interstate commerce by allowing in-state

taxpayers to evade a facially neutral tax, this Court has not

hesitated to strike down such schemes. See West Lynn

Creamery, 512 U.S. 186 (1994). As this Court observed in

25

New Energy, subsidies that pass constitutional muster do so,

not because of some special Commerce Clause doctrine

applicable to subsidies, but because subsidies, by their nature,

“are not generally ‘connected with the State’s regulation of

interstate commerce.’” Cuno, 386 F.3d at 746 (quoting New

Energy, 486 U.S. at 278). As Justice Stevens has observed,

the Commerce Clause does not “inhibit a State’s power to

experiment with different methods of encouraging local

industry” —a principle that is not dependent on the form of

method chosen; “/w/hether the encouragement takes the form

of a cash subsidy, a tax credit, or a special privilege intended

to attract investment capital, it should not be characterized as

a ‘burden’ on commerce.” Hughes v. Alexandria Scrap

Corp., 426 U.S. 794, 816 (1976) (Stevens, J. concurring)

(emphasis supplied). This Court’s treatment of subsidies is

simply an expression of the Commerce Clause principles that

inform its analysis of other incentives; protectionist tariff

barriers are prohibited while statutes which simply lower the

cost of doing business within a taxing State generally pass

muster.

Commentators cited by the court of appeals have

suggested that tax credits should be distinguished from

subsidies because unlike subsidies they do not have to be

budgeted and are therefore subject to less political scrutiny.

See, e.g., Hellerstein and Coenen, supra, at 847. Whatever

the significance of this purported distinction from a public

policy standpoint, it has nothing to do with the proper

application of the Commerce Clause. “It is not a purpose of

the Commerce Clause to protect state residents from their

own state taxes.” Goldberg v. Sweet, 488 U.S. 252, 266

(1998). To the extent that citizens of a State become

concerned that their legislators enact tax credits too readily,

they can effectively address that problem through the political

process.

26

If1.AS IN QUILL CORP. V. NORTH DAKOTA, THIS

COURT SHOULD DEFER TO CONGRESS THE

COMMERCE CLAUSE PUBLIC POLICY ISSUES

ARISING OUT OF STATE AND LOCAL BUSINESS

TAX INCENTIVES.

This Court should take into consideration the “substantial

reliance” by countless industry and public officials on

longstanding tax incentives and properly “leave essentially

legislative judgments to the Congress” regarding the benefits

and burdens on interstate commerce created by such

incentives. Bendix Autolite Corp. v. Midwesco Enterprises,

Inc., 486 U.S. 888, 897-898 (1988) (Scalia, J., concurring in

Judgment). This Court could follow the fair and prudent

course set by it in Quill, 504 U.S. at 298. In Quill, this Court

was called upon to address whether the Due Process Clause

and Commerce Clause prohibit States from taxing out-of-state

mail-order vendors. /d. The Court reversed its earlier

precedent with respect to the Due Process issue, but, noting

that existing precedents had “engendered substantial reliance

and ha[d] become part of the basic framework of a sizable

industry,” the Court declined to reverse its longstanding

Commerce Clause position that mail-order businesses could

not be taxed by States in which they had no substantial

physical presence. /d. at 317. Important to this Court’s

determination was the recognition that

[t}his aspect of our decision is made easier by the fact

that the underlying issue is not only one that Congress

may be better qualified to resolve, but also one that

Congress has the ultimate power to resolve. No matter

how we evaluate the burdens that use taxes impose on

interstate commerce, Congress remains free to

disagree with our conclusions.

27

Id. at 318. Would it therefore not be better that this Court

similarly consider the reliance interests of manufacturers who

have invested substantial sums induced to do so by significant

tax incentives and hold that incentives of the sort at issue do

not run afoul of the Dormant Commerce Clause?

Certainly, the reliance interests implicated in this case are

far weightier than those protected by this Court in Quill.

Quill involved a single industry; the court of appeals’ decision

in this case calls into question a vast framework of incentives

relied on by manufacturers operating in virtually every State

in the Union. See Chris Micheli, A 50-State Comparison of

Tax Incentives for Manufacturing Equipment Purchases, 12

STATE TAX NOTES 1739 (1997).

As in Quill, this Court should reverse on substantive

grounds the court of appeals, reinstate the district court

decision, and leave to Congress the task of balancing these

extensive reliance interests, as well as the significant

economic benefits that have motivated State legislatures to

adopt the incentives on which industries now rely, against the

anti-tax incentive policy agenda advocated by the

Respondents. While this case does not involve a question of

law to which this Court has directly spoken as did Quill, it

does involve an issue as to which informed taxpayers could

have reasonably inferred from this Court’s precedents that tax

incentives such as those at issue were well within acceptable

limits set under the Commerce Clause, and made informed

investment decisions in reliance on those references. The

Respondents concede that this Court’s Dormant Commerce

Clause jurisprudence does not directly mandate the court of

appeals’ decision to strike down the most commonly available

type of business tax incentive in the United States. See

Walter Hellerstein, supra, at 805. Indeed, the Respondents

themselves characterize their position as a “novel legal

28

theory.” (No. 01-3960, Cuno v. DaimlerChrysler Corp. (6"

Cir.), Pl. Br. at viii).

This Court has recognized that “novel legal theor[ies}” of

evaluated and promulgated by Congress. Quill, 504 U.S. at

318 (refusing to adopt an “economic” rather than “physical”

presence Commerce Clause nexus requirement); Moorman

Manufacturing, 437 U.S. at 278-280 (refusing to mandate a

formula for apportionment of income of multi-state

enterprises on the grounds that such action would necessitate

“extensive judicial lawmaking”); see also, Camps

Newfound/Owatonna, Inc., 520 U.S. at 620 (Thomas, J.,

dissenting) (“the Court should confine itself to interpreting the

text of the Constitution, which itself seems to prohibit in plain

terms certain of the more egregious state taxes on interstate

commerce ... and leaves to Congress the policy choices

necessary for any further regulation of interstate commerce” ).

As in Quill and Moorman, this Court should decline

Respondents’ invitation to impose such a novel legal theory

on the States by judicial fiat and thereby avoid opening the

Pandora’s Box of when and to what extent application of the

novel theory must, cannot, should, or should not be given

retrospective effect. See, e.g., James B. Beam Distilling Co.

v. Georgia, 501 U.S. 529 (1991); see also; HARTMAN AND

TROST, FEDERAL LIMITATIONS ON STATE AND LOCAL

TAXATION 2D, § 7.5, pp. 64-104 (2003) (analyzing cases

addressing the validity of claims for retroactive relief in tax

cases).

Business development incentives are an area of law

particularly suited to Congressional action. Unlike this Court,

which must address the issue from the narrow perspective of

the specific facts and statute at issue, Congress can create a

national scheme which broadly addresses such incentives in

the totality of their various iterations and circumstances,

29

either by allowing them, or banning them entirely, or placing

all or certain types of incentives in protected safe harbors.’

Not only would such a Congressionally mandated scheme

place States in all Circuits on an equal footing, but it would

immediately increase the value of those incentives to both the

States and the businesses that rely on them by eliminating the

legal uncertainty created by the decision of the court of

appeals. Congress is also in a unique position to address the

interests of those businesses that have made substantial

investments in reliance on such incentives, often after

evaluating opportunities in many competing States and

nations. To the extent Congress agrees with the Respondents

that, irrespective of the opinion of legislatures throughout the

United States, certain incentives are bad public policy and

place an unreasonable burden on interstate commerce, it can

readily enact “grandfather” or “sunset” provisions carefully

tailored to preserve tax benefits for which businesses have

already bargained-in good faith.

A decision of this Court reversing the holding of the court

of appeals on the ground that the Dormant Commerce Clause

does not prohibit the incentive at issue will leave Congress,

should it so choose, free to form a national policy on business

development incentives. As this Court observed in Quill,

“Congress has the power to protect interstate commerce from

intolerable or even undesirable burdens. In this situation, it

may be that ‘the better part of wisdom and valor is to respect

the judgment of the other branches of the Government.’”

Quill, 504 U.S. at 318-319 (quoting Commonwealth Edison

Co. v. Montana, 453 U.S. 609, 637-638 (1992)).

. A bill has been introduced in Congress to protect commonly used

incentives, including credits for in-state investment of the sort challenged

in this litigation, from Commerce Clause challenge. S. 2881, 109th

Cong., 1* Sess. (2005).

30

CONCLUSION

For the foregoing reasons, and those set out in the briefs

of Petitioners, this Court should reverse the court of appeals.

Respectfully submitted,

Charles A. Trost

Counsel of Record

Michael G. Stewart

WALLER LANSDEN DORTCH

& Davis, PLLC :

511 Union Street, Suite 2700

Nashville, Tennessee 37219

(615) 244-6380

Robin S. Conrad

Amar D. Sarwal

NATIONAL CHAMBER LITIGATION

CENTER, INC.

1516 H Street, N.W.

Washington, DC 20036

(202) 463-5337

Attorneys for the Chamber of Commerce of

the United States of America, Kentucky

Chamber of Commerce, Michigan

Chamber of Commerce, Ohio Chamber of

Commerce, Tennessee Chamber of

Commerce & Industry, Detroit Regional

Chamber of Commerce, and Toledo Area

Chamber of Commerce

Amici Curiae