Daimlerchrysler v. Cuno: the Supreme Court Hits the Brakes on Determining the Constitutionality of Investment Incentives Given by States to Corporate America - Jonathan Edwards

• Publication year: 2007

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DaimlerChrysler v. Cuno: The Supreme Court Hits the Brakes on Determining the Constitutionality of Investment Incentives Given by States to Corporate America

I. Introduction

In DaimlerChrysler Corp. v. Cuno,¹ the United States Supreme Court, under the pen of Chief Justice Roberts, unanimously held that state taxpayers did not have Article III standing to challenge local property tax abatements and investment tax credits given to DaimlerChrysler Corporation ("Daimler").² Claiming standing as municipal and state taxpayers, the plaintiffs challenged the City of Toledo and the State of Ohio's decisions to offer Daimler certain exemptions from and reductions of its local property and state franchise taxes.³ The Court held that the plaintiffs failed to satisfy the injury-in-fact and redressability requirements of standing because their alleged injury was too "'conjectural or hypothetical.'"⁴ As a result, the Court never reached the merits of the case where the plaintiffs had claimed that the tax breaks violated the dormant, or negative, Commerce Clause.⁵ Therefore, whether state tax incentives to corporations violate the dormant Commerce Clause is a question that will remain unanswered for now. This note (1) considers the broader implications of the Court's refusal to reach the merits of dormant Commerce Clause analysis as it relates to states granting investment incentives to big businesses and (2) analyzes several scholarly options for a better dormant Commerce Clause analysis of state tax incentives. Ironically enough, DaimlerChrysler is noteworthy for what it did not decide.⁶

II. Factual Background

In an effort to encourage the large automobile conglomerate, "Daimler," to expand its manufacturing facilities, the City of Toledo and the State of Ohio offered Daimler local and state tax breaks for new investment within the state.⁷ The Ohio Franchise Tax Credit allowed businesses to receive credit against the state franchise tax for qualifying investments of "new manufacturing machinery and equipment" used within the state.⁸ Additionally, municipalities in Ohio have authority to waive property taxes for businesses who invest in certain areas so long as the local school districts consent.⁹ In 1998 Daimler received the benefit of both tax breaks when it contractually agreed to expand its Jeep assembly plant in Toledo.¹⁰ Daimler's proposed investment in the state was valued at $1.2 billion, and the conglomerate was forecasted to provide the region with several thousand jobs.¹¹ Because of the tax break, Daimler saved approximately $280 million in taxes.¹²

Taxpayers in Toledo sued in state court, alleging that the tax benefits violated the Commerce Clause.¹³ Specifically, the plaintiffs claimed that the Ohio Franchise Tax Credit discriminated against interstate economic activity by coercing businesses already subject to the franchise tax to expand in-state rather than out-of-state.¹⁴ The plaintiffs claimed they had standing because the tax breaks diminished the pool of funds available to the city and state, causing the plaintiffs to suffer a disproportionate tax burden because the government had less revenue and thus had to forego other expenditures.¹⁵ These taxpayers essentially argued that they would have to make up the difference in this deficit with future taxes.¹⁶

While the action was pending in state court, the defendants successfully removed the case to the United States District Court for the Northern District of Ohio.¹⁷ The plaintiffs filed a motion to remand the case to state court because they doubted they satisfied the constitutional standing requirements imposed by Article III's "case or controversy" limitation.¹⁸ The district court rejected the plaintiffs' motion to remand, stating that the plaintiffs had proper standing under the " 'municipal taxpayer standing' rule" laid down in Massachusetts v. Mellon.¹⁹ In analyzing the merits, the district court held that neither tax benefit violated the Commerce Clause.²⁰ On appeal, the Sixth Circuit agreed with the district court regarding the municipal property tax exemption, but held that the state franchise tax violated the Commerce Clause.²¹ The court of appeals, however, wholly failed to consider whether the plaintiffs had standing.²² The Supreme Court granted certiorari to consider whether the Ohio Franchise Tax Credit violated the Commerce Clause but failed to reach this issue.²³

III. Legal Background

The Commerce Clause—found in Article I, Section 8, Clause 3, of the Constitution—is an affirmative grant of power to Congress "[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."²⁴ Since the United States' early beginnings as an independent nation, the government has sought to prevent states from waging economic war on one another.²⁵ To help deter states from using protectionist measures against one another, the Supreme Court interpreted, and continues to interpret, the Commerce Clause such that states cannot discriminate or unduly burden interstate commerce "'to benefit in-state economic interests by burdening out-of-state competi-tors.'"²⁶ In applying the dormant Commerce Clause to investment incentives given by states to big businesses, the Court has caused incredible confusion both in the scholarly and judicial world.²⁷ Nevertheless, the Supreme Court has used the dormant Commerce Clause to invalidate two basic areas of state tax law: (1) taxes—mostly transac-tional taxes—that act like tariffs, and (2) taxes that penalize in-state businesses for engaging in out-of-state activities.²⁸

A. The Dormant Commerce Clause As Applied to Taxes and Subsidies: The Doctrine's Moorings

The dormant Commerce Clause, as applied to taxes and subsidies, has been developed and refined over many years. In Complete Auto Transit, Inc. v. Brady,²⁹ the Supreme Court outlined its most celebrated test for determining the constitutionality of state tax laws under the dormant Commerce Clause.³⁰ In applying the Complete Auto test, a state tax provision satisfies the dormant Commerce Clause so long as (1) a substantial nexus exists between the taxing state and the taxed activity; (2) the tax is fairly apportioned to income; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to the benefits the state provides.³¹

In Complete Auto the State of Mississippi assessed a sales tax against a Michigan corporation engaged in the business of transporting automobiles to Mississippi dealers.³² The Michigan corporation argued that its operations were part of a large interstate movement and that the sales tax as applied to the interstate movement violated the dormant Commerce Clause.³³ The Supreme Court held that because the corporation failed to allege that the tax lacked a substantial nexus, that the tax discriminated against interstate commerce, or that the tax was unrelated to the services provided by the state, it was not per se unconstitutional.³⁴ Instead of arguing the absence or presence of any of the four factors—substantial nexus, discrimination, fair apportionment, or that the tax is fairly related to the services provided by the state—the Michigan corporation relied solely on Supreme Court decisions that held that "a tax on the 'privilege' of engaging in an activity in the State may not be applied to an activity that is part of interstate commerce."³⁵ The antidiscrimination principle stated in Complete Auto has been the most important principle in the development of dormant Commerce Clause jurisprudence because courts have had the hardest time developing, defining, and refining it.³⁶

B. Development of the Antidiscrimination Principle—Some Problems Along the Way

Courts have had a tough time developing the antidiscrimination principle because it lacks mutuality in application when comparing taxes with subsidies. To help illustrate some of the problems that the Supreme Court's dormant Commerce Clause jurisprudence—as applied to state tax laws—has caused, consider the holding in New Energy Co. of Indiana v. Limbach.³⁷

In New Energy an Ohio statute awarded a tax credit against its motor vehicle fuel sales tax for each gallon of ethanol sold by fuel dealers. However, the credit only applied if the ethanol was produced in the state or, if it was produced in another state, the credit applied only to the extent that the other state granted similar tax credits to companies who produce ethanol in Ohio.³⁸ Under the law, New Energy Company benefited from Ohio's tax credit for the ethanol it produced in Indiana because Indiana granted Ohio producers of ethanol similar tax credits. Indiana, however, subsequently repealed its tax credit and replaced it with a direct subsidy to Indiana ethanol producers, making New Energy Company ineligible for Ohio's tax credit.³⁹ New Energy argued that the tax credit violated the dormant Commerce Clause because it discriminated against out-of-state ethanol producers to the advantage of in-state producers by favoring the latter in granting tax breaks.⁴⁰

The Supreme Court held that because the Ohio tax credit violated the dormant Commerce Clause's cardinal rule of nondiscrimination, it was unconstitutional.⁴¹ The Court did note, however, that New Energy Company received a direct subsidy from Indiana, which was potentially no less discriminatory than the Ohio tax credit.⁴² The Court further stated in dicta that direct subsidization does not run afoul of the dormant Commerce Clause but that discriminatory taxation of out-of-state manufacturers does.⁴³ Therefore, because Indiana converted its prior discriminatory tax scheme into a direct expenditure program, its effect seemingly became innocuous under dormant Commerce Clause jurisprudence, whereas Ohio's tax credit violated the dormant Commerce Clause because it ran afoul of the antidiscrimination principle.⁴⁴

C. Taxes that Act Like Tariffs

The area in which the Court has invalidated most state statutes is where...