U.S. Court of Appeals Strikes Down

Ohio Corporate Franchise Tax Breaks

by Mark D. Tucker,Esq and N. Victor Goodman, Esq

(November 2004)

In a case filed at the urging of presidential candidate Ralph Nader (Cuno v. DaimlerChrysler, Inc.), the United States Court of Appeals for the Sixth Circuit recently ruled that Ohio's investment tax credits violated the U.S. Constitution's Commerce Clause. The tax breaks had provided taxpayers a credit against the state's corporate franchise tax for new equipment and machinery installed in Ohio. The court invalidated approximately $70 million in tax credits given to DaimlerChrysler for its new Jeep vehicle assembly plant in Toledo but, significantly, its decision upheld the approximately $210 million in personal property tax exemptions given to the company for the project.

The court observed that the tax credits "encourage[d] further investment in-state at the expense of development in other states." The court noted that an Ohio corporate franchise tax payer that installs new equipment or machinery in Ohio is eligible for the tax break, but an Ohio corporate franchise taxpayer that installs new equipment or machinery in another state is not. Thus, the court reasoned, the state statutory provision coerces businesses "to expand locally rather than out-of-state," and unconstitutionally discriminates against interstate commerce.

The Sixth Circuit's decision could have profound effects not only in Ohio, but throughout the country, as 40 states have similar tax incentives in place. The Ohio Department of Commerce recently reported that, from 1995 through 2004, corporate franchise taxpayers claimed eligibility for nearly $2 billion in tax credits for $31.7 billion in investments in Ohio.

The Department considers the court's decision to be a major setback in the state's continuing efforts to attract new manufacturing investment to Ohio, and the high-paying jobs associated therewith. The State, City of Toledo, and DaimlerChrysler have already asked the entire Sixth Circuit to rehearing the case, and, if the rehearing is unsuccessful, will most likely appeal the decision to the United States Supreme Court. The decision also provides new ammunition for those, such as the Ohio Chamber of Commerce, who argue that Ohio's entire corporate tax structure is in urgent need of comprehensive reform and restructuring. The decision is particularly detrimental to Ohio businesses because the tax credits were intended to offset Ohio's relatively high personal property tax rates.