The Tax Foundation’s Analyses Of The CUNO Decision: Inaccurate And Inconsistent
End Notes
[1] Walter Hellerstein and Dan T. Coenen, “Commerce Clause Restraints on State Business Development Incentives,” Cornell Law Review, 1996, pp. 789-878.
[2] Scott A Hodge, J. Scott Moody, and Wendy P. Warcholik, State Business Tax Climate Index, Tax Foundation, October 2004.
[3] J. Scott Moody, Tax Foundation Senior Economist, quoted in William Ahern, “Tax Breaks for Businesses Usually Don’t Work,” December 1, 2004. Published on the Web site of the Heartland Institute, www.heartland.org.
[4] Chris Atkins, Federal Court of Appeals Ruling May Hurt Tax Competition, State Tax Reform, Tax Foundation, September 20, 2004; Chris Atkins, Cuno v. DaimlerChrysler: A Pyrrhic Victory for Economic Neutrality, Tax Foundation, April 18, 2005. Atkins quoted in Robert S. Greenberger and Michael Schroeder, “Tax Break to Lure Employers Is Attacked,” Wall Street Journal, November 29, 2004; Malia Rulon, “Court Ruling in Ohio Could Threaten Future of Tax Incentives in 40 States,” Associated Press, November 13, 2004.
[5] Edward Zelinsky, “Cuno v. DaimlerChrysler: A Critique,” State Tax Notes, October 4, 2004.
[6] Of course, the Sixth Circuit in no way “gave its blessing” to direct business subsidies, since the constitutionality of such subsidies was not at issue in the case. The Cuno opinion merely, in passing, quoted language on the issue from an earlier Supreme Court decision.
[7] See: Michael Mazerov, The “Single Sales Factor” Formula for State Corporate Taxes: A Boon to Economic Development or a Costly Giveaway?, Center on Budget and Policy Priorities, revised September 2001.
[8] See Hellerstein/Coenen article cited in Note 1, pp. 820-825.
[9] The complete quote cited above read “If Cuno is correct, virtually no state tax policy ( including a general reduction of corporate income tax rates) is immune from a Commerce Clause challenge.” (Emphasis added.) See the source cited in Note 5.
[10] It is of course beyond the scope of this report to attempt to summarize a theory of what forms of state assistance to businesses are and are not constitutional under existing Commerce Clause jurisprudence that required a 90 page law review article with 488 footnotes to lay out. The basic idea in the Hellerstein/Coenen analysis is that there is no Commerce Clause violation if a state seeks to lure an additional investment (by an in-state or out-of-state business) by partially or completely abating a tax for which a business would only be liable if it made the investment. Such an abatement does not discriminate against interstate commerce because it does not penalize the company for choosing an out-of-state location; if the company chooses the out-of-state location, there will be no tax liability whatsoever to the state offering the incentive. The same is true of a direct subsidy of the investment, whether in cash or in-kind.
What rendered the investment tax credit unconstitutional in Cuno was that it was structured in such a way that it was not restricted to abating the tax on the marginal profit that a company would earn from a new Ohio plant but rather could be used to offset profits a company was already earning in the state — either from preexisting investments or merely by making profitable sales in the state with sufficient presence for the company to be taxable on those profits. That structure was discriminatory on its face, because the ability to use the full value of the credit to offset taxes flowing from preexisting investments or sales in the state only could be realized if DaimlerChrysler decided to build its plant in Ohio. The structure of the credit effectively coerced a company with preexisting tax liability in Ohio to make subsequent investments in the state and effectively penalized it if it made those investments outside the state.
Cuts in the nominal income tax rate for all corporations would not be discriminatory under such an analysis, because they offer only a “carrot,” not a “stick,” and would apply equally to in-state and out-of-state businesses subject to a state’s corporate income tax regardless of where investments generating that income occurred.
[11] Hellerstein/Coenen anticipate and address Atkins’ first criticism on pp. 809-813 of their article. They acknowledge that “a distinction [between constitutional and unconstitutional tax incentives] that turns entirely on whether a particular taxpayer has previously engaged in some taxable activity in the state. . . may be too thin a distinction to carry the constitutional weight we are asking it to bear.” They go on to argue, in effect, that most income tax incentives are, in fact, likely to be claimed by corporations already taxable in a state. They conclude: “It is theoretically possible that a generally coercive tax incentive may, as to a particular taxpayer, be noncoercive. . . . But these exceptions should not be permitted to swallow the rule, which ought to reflect the expected impact of the tax incentive on most taxpayers.”
With respect to the criticism that most direct subsidies to business will pass Commerce Clause muster under their analysis, they echo the discussion in the paper cited in note 14, below. While the criticism may be correct, the outcome is still beneficial because such subsidies are generally subject to greater public scrutiny and accountability:
“[O]ur synthesis [of Supreme Court jurisprudence] recognizes and reflects the Court’s longstanding insistence that tax breaks and subsidies are constitutionally different. Under our approach, states will channel business incentives into the form of subsidies. They should. The use of subsidies, as we have explained, serves the salutary end of focusing state decisionmakers — and the voters to who they are accountable — on the costs and inequities that business development incentives can engender.”
[12] National Taxpayers Union spokesperson Pet Sepp quoted in: Associated Press, “U.S. Appeals Court Strikes Down Ohio’s Tax Credit Used for Jeep Plant,” Detroit Free Press, September 2, 2004.
[13] Atkins is also correct that if consistently applied, Cuno would ban not only investment tax credits, but also other credits granted against corporate income taxes — such as credits for employer-provided child care (which Atkins specifically mentions). There is nothing lamentable about such an outcome. If a private activity is worthy of being subsidized by state and local government, it can be subsidized directly, on-budget and on the public record. The problem with tax incentives is that they are generally ineffective in stimulating the activity they are aimed at, are substantially wasted because companies are rewarded for engaging in activities they would have undertaken without the incentive, and are not easily subjected to public scrutiny and accountability for results because their recipients are shielded by taxpayer confidentiality laws. (See the source cited in note 14 for an expanded discussion of these shortcomings.) There is substantial evidence that several of these faults apply to state tax incentives for employer-provided child care. See: Christina Smith FitzPatrick and Nancy Duff Campbell, “The Little Engine That Hasn’t: The Poor Performance of Employer Tax Credits for Child Care,” State Tax Notes, March 3, 2003.
[14] For a discussion of this legislation, see: Michael Mazerov, Should Congress Authorize States to Continue Giving Tax Breaks to Businesses?, Center on Budget and Policy Priorities, revised (with this new title) June 30, 2005.
[15] Atkins’ second Cuno paper was published months after the first version of federal legislation reversing the decision had been introduced and following substantial discussion in the media of imminent introduction of a more comprehensive version of the bill in the 109th Congress. Atkins’ second report makes no mention of the legislation. It is unclear why Atkins has not taken a position on the legislation given his opposition to the Cuno decision itself.