Yesterday’s decision by the U.S. Supreme Court in Daimler-Chrysler v. Cuno (May 15, 2006) dashed the hopes of opponents of state legislative practices granting special tax incentives to induce companies to locate in their jurisdiction. These groups see the tax competition inherent in these state practices as part of a "race to the bottom", which ends up harming the local tax base and enriching corporate coffers. (And they are probably right.) They are raising a challenge under the Commerce Clause, contending that this practice discriminates in favor of companies locating in their state. The Sixth Circuit bought that argument, and the issue was ultimately before the Supreme Court in a case being watched carefully in the tax and business communities.
As suggested in an earlier post in this blog,
the standing issue presented an important alternative for the Court not to reach the substance of the Commerce Clause claims. The standing question involved whether these taxpayers, by virtue of their status as persons generally affected by the credit provisions granted had a basis to challenge the law.
The Supreme Court said they did not, and I think they made the right call. As the Court explained, the case or controversy requirement imposed as a precondition for jurisdiction had important origins in the structure of the government. The court quoted from Chief Justice John Marshall on this point:
“If the judicial power extended to every question under the constitution it would involve almost every subject proper for legislative discussion and decision; if to every question under the laws and treaties of the United States it would involve almost every subject on which the executive could act. The division of power [among the branches of government] could exist no longer, and the other departments would be swallowed up by the judiciary." 4 Papers of John Marshall 95 (C. Cullen ed. 1984).
Standing is the doctrine that enforces the limitation of this requirement. Broad taxpayer standing has the potential to move what should be a legislative matter into the realm of the courts, which can then substitute their judgment on what amounts to fundamental political issues. Of course, since a Commerce Clause challenge was involved, there would always be the chance for Congress to speak on the issue in order to clarify the powers of the states to enact incentive provisions if they wanted to do so. However, getting them to act can also be problemtic, as we have witnessed in many respects during the past year.
The most appropriate approach for getting rid of tax incentives is to convince your legislators not to enact them. There are many examples where these provisions end up affecting a location decision, but where the real cost of employment created (in terms of foregone taxes) is ridiculously high. (For a list of some incentive provision packages, I found this website:
http://www.siteselection.com/ssinsider/incentive/archive.htm You may find it interesting.)
However, it is tempting to perform an end-run around the legislature. Getting them to act in the interests of an informed citizenry is difficult. In fact, this relates to my post earlier today. If the legislators continue to claim that they are creating jobs by offering tax incentives for companies to locate in their jurisdictions, and taxpayers continue to believe them and vote them into office again (or into higher office, where responsibility for these decisions is now on someone else’s desk), we will continue to have irrational behavior in the incentives area. The jobs they are creating, in this case, are being paid for with public money. Whether that turns out to be a good deal or not may not be known for some time -- and by then the people have forgotten and the legislator is in a higher position because people believed his or her boasting about job creation.
I do think it is important to create a competitive and stable tax environment, which when combined with hard-working people with a solid and sensible legal system will be an effective incubator for entrepreneurial activity. I think this is a valid campaign issue. But that is a different position from making claims about creating jobs. Be careful out there, folks.