Amicus Curiae Brief — DaimlerChrysler Corp. v. Cuno

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that it is based on an outdated understanding of the global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 _ unconstitutionality 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 recently

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 employing “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

_ Fepresenting 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 1OA. 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 comraunities,

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 Ohic’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 meaningfvl 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 negative 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 to in-state companies merely reduces the cost of

doing business in a given State. Replicated nationwide, such

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.” Jd. 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.” ./d. 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, fhe 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 violation

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 lowa

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 lowa 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 actions 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’ concern 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 to

regulate the commerce between its several members is

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

material object of [ihe 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 economic 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; “/wjJhether 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 chrough the political

process.

26

Ifl.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 protecied 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

State taxation with broad national application are best tested,

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

IN THE

Supreme Court of the United States

DAIMLERCHRYSLER CORPORATION,

Petitioner,

Vv.

CHARLOTTE CUNO, ef al.,

Respondents.

WILLIAM W. WILKINS, ef. ai.,

Petitioners,

Vv.

CHARLOTTE CUNO, ef al..,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF AMICI CURIAE COUNCIL ON STATE

TAXATION AND NATIONAL ASSOCIATION OF

MANUFACTURERS IN SUPPORT OF PETITIONERS

JAN S. AMUNDSON, DOUGLAS L. LINDHOLM, President

Senior Vice President & Counsel of Record

General Counsel DIANN L. SMITH, General Counsel

QUENTIN RIEGEL, STEPHEN P. B. KRANZ, Tax Counsel

Vice President, Litigation & WILLIAM D. PeLtz, Co-Chair

Deputy General Counsel Bossy L. BURGNER, Co-Chair

NATIONAL ASSOC. OF J. HUGH MCKINNON, Counsel

MANUFACTURERS Lawyers’ Coordinating

1331 Pennsylvania Avenue, N.W. Subcommittee

Washington, D.C. 20004-1790 COUNCIL ON STATE TAXATION

(202) 637-3000 122 C Street, N.W., Suite 330

Washington, D.C. 20001

(202) 484-5215

RE

WitSON-Epes PrRinTING Co., INC. — (202) 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

TABLE OF AUTHORITIES. ........c:cce:sessesssssesseeseseseneeess

INTRODUCTORY STATEMENT ........ccssessessesseessessess

STATEMENT OF INTEREST OF AMICI CURIAE.......

ARSE EE SS Da PRO FE

L.

II.

THE SIXTH CIRCUIT COURT OF AP-

PEALS CHOSE THE WRONG STANDARD

FOR DETERMINING WHETHER A TAX

SYSTEM DISCRIMINATES AGAINST

INTERSTATE COMMERCE. ...........ccccccesseeveees

THE SIXTH CIRCUIT FAILED TO GIVE

DUE CONSIDERATION TO THE CO-

EQUAL STATUS OF THE STATES AND

THE FEDERAL GOVERNMENTS AND

THE NECESSITY FOR THE STATES TO

CONTROL THEIR OWN FISCAL WELL-

(i)

il

TABLE OF AUTHORITIES

CASES | Page

Bacchus Imports v. Director of Taxation, 468

2 PE ee ne 6,7

Boston Stock Exchange v. State Tax Commission,

Sa ee SN OOD eecnetencitnitenntinnicstinntiasitinnaninns 4,6,8

Maryland et al. v. Louisiana, 451 U.S. 725

SEIU haschacbeipcrachgrenenbereeiiniititinidtaimebideaieiodiiietidinattite 6, 8

NLRB v. Catholic Bishop of Chicago, 440 U.S.

I icccrnsesenninesposeasanininscientiianinninamninentia 5

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

SIDI eal criiteipsivsniescsinentnsesnsiamseniiniaseniscnadamiadiaiiintiniglddain 6, 7

IN THE

Supreme Court of the United States

Nos. 04-1704 and 04-1724

DAIMLERCHRYSLER CORPORATION,

Petitioner,

Ve

CHARLOTTE CUNO, et al.,

Respondents.

WILLIAM W. WILKINS, et. ai.,

Petitioners,

Vv.

CHARLOTTE CUNO, et al. :

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF AMICI CURIAE COUNCIL ON STATE

TAXATION AND NATIONAL ASSOCIATION OF

MANUFACTURERS IN SUPPORT OF PETITIONERS

INTRODUCTORY STATEMENT

This brief is submitted by the Counsel On State Taxation

and the National Association of Manufacturers as amici curiae

in support of the Petitioners in the above captioned matter.

' No Counsel for a party authored this brief in whole or in part, andno -

person or entity other than amicus curiae, its members or counsel has

made a monetary contribution to the preparation or submission of this

2

STATEMENT OF INTEREST OF AMICI CURIAE

COST is a non-profit trade association formed in 1969 to

preserve and promote equitable and nondiscriminatory state

and local taxation of multi-jurisdictional business entities.

COST represents nearly 600 of the largest corporations in the

United States, including companies from every industry seg-

ment. Many of the 45 states that impose a form of corporate

income tax also incorporate some form of investment tax

credit—the concept at issue in this case-—or similar incentive

and many COST members have utilized investment tax

credits from one time to another. Thus, COST members

have a financial interest in whether the investment tax credits

are valid.

The National Association of Manufacturers (“NAM”) is

the nation’s largest industrial trade association, representing

small! and large manufacturers in every industrial sector and

in all 50 states. The NAM’s mission is to enhance the

competitiveness of manufacturers by shaping a legislative and

regulatory environment conducive to U.S. economic growth

and to increase understanding among policymakers, the

media and the general public about the vital role of manu-

facturing to America’s economic future and living standards.

The members of NAM thus also have a financial interest in

whether the investment tax credits are valid.

ARGUMENT

The constitutional analysis adopted by the Sixth Circuit in

invalidating the investment tax credit offered by the state of

Ohio to DaimlerChrysler is flawed because it needlessly

broadens the scope of the dormant Commerce Clause’s

limitations on states’ authority to implement discrete tax

systems based on each state’s unique economy and populace.

brief. Petitioners and Respondents have consented to the filing of this

brief and their letters have been filed with the Clerk of this Court.

3

As a result of this flawed interpretation of the dormant

Commerce Clause, the Sixth Circuit’s analysis and holding

create an impossible standard for determining whether a tax

‘system imposes an unconstitutional burden on interstate

commerce by impermissibly discriminating against interstate

commerce. The Sixth Circuit’s standard is impossible to

actually implement because under the central premise of the

Sixth Circuit’s reasoning all state taxes that vary from state to

state discriminate against interstate commerce. Such a result

is clearly not the intent of the Constitution of the United

States and its federalism underpinnings.

The Sixth Circuit commits two interrelated errors in find-

ing the investment tax credit at issue discriminates against

interstate commerce. First, the court should have chosen a

narrower rule defining when a tax system is discriminatory

that reconciled and acknowledged existing precedent of this

Court while at the same time limiting the scope of state tax

systems that would fail the rule. Second, by drastically

expanding the scope of the dormant Commerce Clause’s

limitations on the states, the Sixth Circuit robs the states of a

unique and highly cherished element of the governing theory

of the United States—the co-equal status of the states and the

federal government. The Sixth Circuit’s decision effectively

destroys any autonomy of the states to choose individualized

systems of taxation. While the dormant Commerce Clause

exists and is necessary to control the worst aspects of state

imposed domestic protectionism through the tax code, the

states’ loss of all control over all aspects of state fiscal

fundraising, as would ultimately be the result of the Sixth

Circuit’s underlying rationale, is fundamentally contrary to

our system of government and leaves the states as merely

emasculated administrative arms of the federal government

and the courts.

4

I. THE SIXTH CIRCUIT COURT OF APPEALS

CHOSE THE WRONG STANDARD FOR

DETERMINING WHETHER A TAX SYSTEM

DISCRIMINATES AGAINST INTERSTATE

COMMERCE.

The Sixth Circuit applied an unnecessarily overbroad inter-

pretation of the standard under the discrimination prong of

the dormant Commerce Clause in finding that the Ohio

investment tax credit was unconstitutional. The Sixth Circuit

chose to use as the standard the question of whether a tax

system prevents “tax-neutral decision making.” Boston Stock

Exchange et. al. v. State Tax Commission, 429 U.S. 318 at

330 (1977). While this language does appear in this Court’s

historical decisions involving incentives and discrimination

against interstate commerce, the language is not reconcilable

with business operations and the economy and is not at the

heart of any of this Court’s decisions in the area.

First, nearly every business decision is premised on tax

considerations and it would be irresponsible for taxpayers to

ignore tax provisions in evaluating alternatives. Common

economic theory posits that all taxes distort activity and the

goal of an efficient tax system is to limit such distortions. A

classic example is an individual’s choice whether to rent a

house or to buy a house. All other things being equal

(payments, type of house), an individual will choose to buy a

house rather than rent because the interest payments on the

mortgage are deductible while no part of rental payments

are—thus lowering the net cost of buying relative to renting.

This is distortive because if the tax results were the same for

buying and renting, the individual might have chosen not to

use the available credit to buy a house, but instead would

have chosen to rent and use the credit to start a dry cleaning

business. In a tax neutral world, the dry cleaning business

would be a better investment, but once taxes enter the picture

the best use of resources is no longer the chosen route

because of the tax consequences. There are thousands of

5

similar examples as to how taxes by nature distort economic

choices—tetiring to Florida (no income tax), financing a new

business with debt instead of equity (interest is deductible,

dividends are not), etc. Thus, if the constitutionality of state

tax systems were to start with this issue of whether such a

system forecloses tax neutral decision making, no tax would

pass this threshold hurdle.

Second, not only did the Sixth Circuit latch on to an overly

broad standard, but it did so unnecessarily. It is a common

rule of statutory construction that courts should choose the

narrower rule that upholds the validity of a statute. NLRB v.

Catholic Bishop of Chicago, 440 U.S. 490 (1979) (“[A]n Act

of Congress ought not be construed to violate the Constitu-

tion if any other possible construction remains available”).

Because a narrower rule is available in this case, the Sixth

Circuit failed to adopt the appropriate rule and, thus, this

Court should reverse the decision of the Sixth Circuit Court

of Appeals and find that the investment tax credit at issue is

constitutional.

The Sixth Circuit in this case adopted a very broad

standard for applying the discrimination prong of the dormant

Commerce Clause. The rule imposed by the Sixth Circuit is

that any incentive that affects a taxpayer’s decision is per se

invalid. This rule is both over-broad (it would sweep in

legislative choices such as the corporate tax rate and the type

of corporate income tax apportionment formula used to

determine state taxable income) and unnecessary in light of

existing precedent. The rule that should be applied in deter-

mining the constitutionality of a state or local tax incentive

under the discrimination prong of the Commerce Clause in

the United States Constitution is: Does the incentive for in-

State activity penalize activities occurring in another state?

It is only if the answer to this question is “yes” that the

incentive violates the discrimination prong of the U.S. Con-

stitution (hereafter “the Narrow Rule”). This is the rule that

6

emerges from a careful reading of existing U.S. Supreme

Court precedent, and which narrowly proscribes the legis- |

lative enactments that could violate such a rule. In the

following discussion, each of the cases relied on by the Sixth

Circuit in reaching its decision in this case is analyzed in the

context of this Narrow Rule to verify consistency. Follow-

ing that analysis, the investment tax credit that the court

ruled unconstitutional is also subjected to this suggested

rule. Under the Narrow Rule, the Ohio incentive is in fact

constitutional.

The Narrow Rule is applied using four successive steps:

first the activity being taxed is defined; second, the taxed

activity is assumed to stay at the same level in the taxing

state; third, activity in another state is increased; finally, if

this increase in activity in another state results in an increase

in tax in the taxing state, the tax is unconstitutional. The

cases relied on by the Sixth Circuit and the primary United

States Supreme Court cases involving Commerce Clause

challenges to state tax incentives as discriminating against

interstate commerce are: Westinghouse Electric v. Tully, 466

U.S. 388 (1983), West Lynn Creamery v. Healy, 512 U.S. 186

(1994), Bacchus Imports v. Director of Taxation, 468 U.S.

263 (1984), Maryland v. Louisiana, 451 U.S. 725 (1981), and

Boston Stock Exchange v. State Tax Commission, 429 U.S.

318 (1977). In each of these cases this Court found the

incentive was unconstitutional because it discriminated against

interstate commerce. Applying the Narrow Rule as described

above results in the same holding in each of these cases but a

different result for the case at issue.

In Westinghouse Electric’ the issue was whether a credit

against the New York franchise tax for exports from New

? Westinghouse Electric is the case most similar to the case at hand

because it also involved a credit to a corporate franchise tax based on in-

7

York was unconstitutional. The credit was determined first

based on the ratio of New York exports to nationwide exports

and second by the ratio of New York property, payroll and

sales to nationwide property, payroll, and sales. Applying the

Narrow Rule—first, the activity taxed in this case was

business activity including export sales. Second, the overall

business activity, including export sales, in New York is

assumed to stay exactly the same. Third, the taxpayer

increases its nationwide business activity by adding more

export sales in another state. The result is that by increasing

non-New York exports but holding New York business

activity including export sales exactly the same, the New

York export credit is reduced and the New York franchise tax

is increased. This occurs because the New York credit is not

based on an absolute number related exclusively to New York

export activity, but instead varies based on the percentage of

the overall national export and business activity market that

New York shares.

In West Lynn Creamery, the issue was whether a “pre-

mium” charged by Massachusetts for milk sales that was used

to subsidize in-state milk producers violated the Commerce

Clause. The net result of this premium subsidy system was

that out-of-state producers selling into the state paid a tax to

which in-state producers were not subject. Applying the

Narrow Rule, first, the activity taxed was milk sales. Second,

the Rule assumes that a taxpayer’s sales of milk in

Massachusetts remain the same. Third, the taxpayer moves

its in-state production facilities to another state. Fourth, the

result is that the taxpayer will continue paying the same milk

sale premium but will no longer receive the subsidy—the net

effect is an increase in tax. Applying the Narrow Rule shows

that this tax/subsidy system is unconstitutional.

In Bacchus Imports, the issue involved Hawaii imposing an

alcohol wholesale excise tax but exempting from that tax the

sales of certain types of wines produced only in Hawaii.

Application of the Narrow Rule finds this incentive to be

invalid. First, the activity taxed is the sale of alcohol.

Second, the total sales of alcohol in Hawaii are assumed to

remain exactly the same. Third, the number of sales of non-

Hawaii wines increases. The result is that the alcohol excise

tax in Hawaii increases even though the total number of

Hawaii alcohol sales stayed exactly the same.

In Maryland v. Louisiana, the issue was whether a tax by

Louisiana on the use of natural gas in the state was dis-

criminatory. An exemption from the use tax was provided for

those users of natural gas in certain manufacturing busi-

nesses, including manufacturing fertilizer or producing oil, as

long as the exempted activity took place within the state.’

Applying the Narrow Rule—first, the activity taxed was the

use of natural gas in Louisiana. Second, the in-state use—

first using natural gas in the state—is assumed to stay exactly

the same. Third, a taxpayer switches exempt manufacturing

activity from in-state to out-of-state. This increase in out-of-

state activity while leaving constant the in-state taxed activ-

ity increases the in-state use tax because the taxpayer no

longer qualifies for an exemption. Thus, the tax scheme is

unconstitutional.

Finally, in Boston Stock Exchange, New York State im-

posed an excise tax on the transfer of securities in the state.

However, a credit was given against this tax if the transfer

involved an in-state sale of those securities. A taxed transfer

included any change in ownership through a sale, registration

sale, redemption, etc. Applying the Narrow Rule, the activity

taxed is the transfer of securities. Second, the Rule requires

that the number of transfers taxable in New York is assumed

to stay exactly the same. Third, the taxpayer accomplishes

> The tax in this case was considerably more complicated than this

brief description and included a credit allowed against an in-state

severance tax and a credit against other fuel related taxes.

9

more of those transfers through out-of-state sales. Fourth, the

Rule looks to see if the out-of-state activity causes an increase

in New York tax. Here, it does. As an increasing number of

securities transfers involved non-New York sales, the tax-

payer would be subject to the same transfer tax but receive

fewer credits and thus pay a higher tax. The result is that the

transfer tax credit violates the Commerce Clause.

While each of this Court’s cases resulted in an uncon-

Stitutionally discriminatory tax when applying the Narrow

Rule, the tax incentive at issue in this case does not. The

issue in this case is an investment tax credit. This investment

tax credit is awarded for certain types of investment in Ohio

and is applied against the Ohio franchise tax. Applying the

Narrow Rule—first, the activity taxed is business activity in

Ohio. Second, the Rule assumes that the taxpayer’s business

activity in Ohio stays exactly the same. Third, an increase in

investment in another state is postulated. Fourth, the result is

that Ohio’s tax will stay exactly the same, notwithstanding

the increase in out-of-state activity. This occurs because the

calculation of the Ohio investment credit includes no refer-

ence to out-of-state activity, which is neither incented nor

disincented. Thus, unlike the cases noted above, this credit is

constitutional.

Il. THE SIXTH CIRCUIT FAILED TO GIVE

DUE CONSIDERATION TO THE CO-EQUAL

STATUS OF THE STATES AND THE FEDERAL

GOVERNMENTS AND THE NECESSITY FOR

THE STATES TO CONTROL THEIR OWN

FISCAL WELL-BEING.

The Sixth Circuit’s adoption of a broad standard for

finding state tax systems discriminate against interstate com-

merce, if allowed to stand, will have the ultimate effect of

creating but one, completely uniform tax system throughout

the 50 states and all local jurisdictions. While this would