Wednesday, December 08, 2004

A slightly belated post of news from the legal frontier:

IN A CONTROVERSIAL DECISION, CUNO V. DAIMLERCHRYSLER, INC., CA-6, DKT. No. 01-3960, 9/2/04, 2004 WL 1944019, a three-judge panel of the federal Court of Appeals for the Sixth Circuit struck down a long-standing and wide-spread practice of states' offering tax credits as an incentive to encourage corporate investment and employment in targeted areas. The decision leaves many states (40 or more), and potentially thousands of businesses, under a cloud of uncertainty about the viability of existing tax incentive arrangements involving billions in capital investment.

The decision applies only within the Sixth Circuit, of course (Kentucky, Michigan, Ohio, and Tennessee), but within them, it is no longer legal for cities to offer cut rate taxes to businesses that want to move in. Why? Because, the court claimed, cutting taxes for an expanding business can steer commerce away from other states, and only Congress at the Federal level has the power to regulate interstate commerce.

The actual logic of the decision is even more tangled than that. States, the court claims, can make some kinds of tax concessions but not others. The upshot, per the decision: it's actually legal for a state to make tax concessions to attract new business from other states. But, say the judges, making tax concessions to try to keep or expand operations of a business that's already in the state usurps the federal power to regulate interstate commerce. As Dave Barry would say, I'm not making this up.

These deals are problematic for all sorts of reasons. The effect of allowing them is a race to the bottom in which a lot of communities find their local governments starved of tax money that they really need to provide basic services. And then there's the unfortunate tendancy of many businesses that receive these deals to take the money and run to an even sweeter deal somewhere else. So a ban would not be an entirely bad thing.

But if states can't change their tax codes to affect local commerce, what's next? Can California still have its own vehicle emissions regulations? That sure is affecting their commerce with Detroit...


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