The U.S. Court of Appeals for the Sixth Circuit recently decided not to rehear en banc the case of
Cuno v. DaimlerChrysler, 386 F.3d 738 (6th Cir. 2004), which involved a challenge to Toledo's local tax system encouraging development in economically depressed areas under the Dormant Commerce Clause. Because the chances of the Supreme Court granting certiorari are low, this decision will most likely skew the circuit's Commerce Clause jurisprudence for many years to come.
Reacting to the fact that several school districts in and around Toledo were experiencing severe financial difficulties, the city and those school districts used the power granted to them by the Ohio legislature to enact two taxes that would help boost the amount of tax revenues the school districts and municipalities took in. The first, an investment tax credit that gives a taxpayer a nonrefundable credit against the taxpayer's state corporate franchise tax on the new equipment if the taxpayer "purchases new manufacturing machinery and equipment during the qualifying period, provided that the new manufacturing machinery and equipment are installed in [Ohio]," was found to be unconstitutional under the Dormant Commerce Clause. The second, a personal property tax exemption, was not.
The basis for finding the constitutional violation was that the investment tax coerces a business to expand operations in Ohio at the expense of other states (particularly Michigan in this case). The basic premise of the Dormant Commerce Clause is that, because Congress is given the sole authority under the U.S. Constitution to regulate interstate commerce, the states cannot enact laws that burden interstate commerce. Prime examples are states that tax more heavily products that are made in another state or charge out-of-state ships more to travel the state's waterways than in-state ships, thus discouraging persons and companies from doing business in another state. In continuing the shipyard theme, the Sixth Circuit missed the boat on this decision.
While the investment tax does certainly provide an incentive to companies to expand in Ohio, it does not prevent the company from expanding in other states as well. Toledo does not tax more heavily companies that do not expand operations in Ohio or those companies that expand in states other than Ohio—the tax liability of those companies remains steady. The state and local laws also do not prevent other states from enacting similar legislation providing for tax breaks on investment in equipment and machinery. Finally, it does not coerce businesses into pulling up stakes in their current state and move to Ohio. In short, this investment tax does nothing to discourage companies from expanding operations elsewhere and engaging in interstate commerce, which is the ultimate inquiry in a Dormant Commerce Clause analysis.
The Dormant Commerce Clause seems to be at its zenith in Ohio at the moment. Let us hope that the Supreme Court sees through the Sixth Circuit's attempt to strengthen the federal interest at stake by weakening the states' interest in promoting growth at home.