Magazine article Real Estate Issues

Focus on Corporate Real Estate; A Taxing Decision: Here, There ... Everywhere?

Magazine article Real Estate Issues

Focus on Corporate Real Estate; A Taxing Decision: Here, There ... Everywhere?

Article excerpt

DR. SEUSS WROTE DOZENS OF CHILDREN'S BOOKS that tell us the world is not necessarily logical, nor does it always work the way we expect it to. That's why when the Sixth Circuit Court of Appeals struck down the longstanding and widespread practice of states giving businesses certain kinds of tax incentives to create local jobs, corporate real estate professionals could have been forgiven for turning Seussical with exasperation. To quote One Fish, Two Fish, Red Fish, Blue Fish: "From there to here, from here to there, funny things are everywhere."


The quote seems particularly apt because, for the moment, the court ruling has left us in limbo--uncertain about where or when or how the tax incentive decision will come into play. Among the possibilities:

* Now that the U.S. Supreme Court has accepted the Cuno case, a decision affirming the Sixth Circuit ruling would make it the law of the land; a rejection of the Sixth Circuit reasoning would bring us back to where we were when the case started.

* The decision could be limited to Ohio, Kentucky, Michigan and Tennessee, the four states covered by the Sixth Circuit Court, which has stayed the implementation of its ruling until appeals play out. The full appeals court has refused to reconsider the issue, leaving the U.S. Supreme Court as the next level of appeal. If the Supreme Court refuses to take up the matter, the decision will stand--but only for the four states.

* Congress may render the court process moot. Bills have been introduced that will specifically empower states to offer these types of tax incentives. A GOP-dominated legislative branch and a business-friendly executive branch may well see this as the best solution.

How did we get to this point? The story begins in 1998 with the state of Ohio, the city of Toledo and two school districts using tax incentives to entice DaimlerChrysler to build a new vehicle assembly plant near its existing facility in Toledo. DaimlerChrysler estimated it would spend $1.2 billion on the project and bring several thousand new jobs to the area. The city and school districts agreed to forego collecting all property taxes on the project for 10 years; the state kicked in a 13.5 percent investment tax credit to offset DaimlerChrysler's state corporate franchise tax, based on the purchase of new manufacturing equipment and its installation in an Ohio plant. The combined tax incentives were valued at $281 million.

There was little unusual about the package, except perhaps for its size. Across the country, cities, counties and states engage in similar deals to demonstrate to businesses that the jobs and economic stimulus they bring are valued. And in this case, Ohio seems to have struck a bargain that worked. The plant opened in 2001, employing about 3,800 workers.

The package was challenged in a lawsuit initiated by then-presidential candidate Ralph Nader, who said he opposed the use of subsidies and incentives by state and local governments to attract or retain businesses and jobs. Formally filed by a dozen taxpayers and three small businesses, the suit--Cuno v. DaimlerChrysler--argued that both the tax credit and the property tax abatement violated the Commerce Clause of the U.S. Constitution by favoring instate over out-of-state business expansion.

Cuno was rejected by the first court to hear it. However, on October 19, 2004, a three-judge panel of the Sixth Circuit Court of Appeals overruled the lower court with regard to the tax credit. The judges agreed with the lower court and rejected the plaintiffs' argument on the property tax abatement issue, finding such a subsidy constitutional since it is well established in law that a state may use its collective wealth to benefit the local economy. This form of tax abatement is an enticement that can be offered to any business, whether they are within or outside the state.

But the tax credit offset for DaimlerChrysler is seen by the court as completely different because it reduced the company's existing franchise tax liability. …

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