The Original Impetus for the Commerce Clause and Cuno v. DaimlerChrysler

August 29, 2005

There are generally two ways for states to alter their tax codes to encourage new labor and capital: by penalizing out-of-state companies or by rewarding in-state investment. Taxes levied on imports are a classic example of the former. Tax cuts, credits or subsidies are a classic example of the latter.

In Cuno v. DaimlerChrysler, the Sixth Circuit Court of Appeals ruled that the Commerce Clause of the U.S. Constitution restricted the state of Ohio from offering a reward for in-state investment. The Court reasoned that Ohio’s investment tax credit (given to companies who installed equipment or machinery for use in Ohio) coerced Ohio companies into investing in Ohio, as opposed to other states, and thus discriminated against interstate commerce. Is this reading of the Commerce Clause—one that would forbid rewards for in-state investment—consistent with its original impetus? The short answer is “no.”

In his preface to Notes of Debates in the Federal Convention of 1787, James Madison recounts the reasons behind the calling of the Constitutional Convention. It turns out that a lack of a congressional power to regulate commerce was one of the major reasons that the states decided to hold the convention. The frustration was over discriminatory taxes levied on products shipped from other states:

“[One] source of dissatisfaction was the peculiar situation of some of the States, which having no convenient ports for foreign commerce, were subject to be taxed by their neighbors, thro whose ports, their commerce was carried on. New Jersey, placed between [Philadelphia] & [New York], was likened to a cask tapped at both ends; and [North Carolina], between [Virginia] & [South Carolina] to a patient bleeding at both arms. The Articles of Confederation provided no remedy for the complaint: which produced a strong protest on the part of [New Jersey]; and never ceased to be a source of dissatisfaction & discord, until the new Constitution superseded the old.” (Adrienne Koch, ed., of Debates in the Federal Convention of 1787, at 7).

Madison did not report on any frustration over the encouragement of industry through rewards for in-state investment.

The investment tax credit struck down in Cuno is nothing like the discriminatory taxation of out-of-state commerce, prevalent in the 1780s, which led to creation of the federal Commerce Clause. Ohio’s credit gives a tax benefit for investment in Ohio, no matter where the machinery is purchased and no matter whether the company has a prior presence in Ohio. The credit does not seek to increase Ohio investment by laying a discriminatory tax on companies in other states. Rather, it merely gives a tax subsidy to any company that increases its Ohio investment.

In sum, Ohio’s investment tax credit creates nothing like the structural problems revealed by the trade wars among the states in the 1780s.

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