Tax Foundation Files Supreme Court Brief in Defense of State Tax Competition

July 15, 2005

Supreme Court Should Review Flawed Ruling in Cuno v. DaimlerChrysler

For immediate releaseMedia contact: Chris Atkins (202) 464-5106

Washington, D.C.—The Tax Foundation today filed an amicus brief with the U.S. Supreme Court recommending review of the ruling in Cuno v. DaimlerChrysler—which invalidated an Ohio tax credit for business investment—on grounds that it is legally flawed and threatens state tax competition. (View full brief here.)

“Handing out tax incentives to lure companies may be poor tax policy, but the Cuno ruling imperils all forms of state tax competition, not just tax incentives,” said Staff Attorney Chris Atkins, co-author of the brief.

The investment tax credit in the Cuno case gives a corporation a tax credit against its Ohio corporate franchise tax liability in exchange for the purchase and installation of machinery at an Ohio production facility. The Sixth Circuit Court of Appeals ruled the credit illegally discriminated against interstate commerce in September 2004—a ruling Atkins argues is overly broad and threatens to make both good and bad forms of tax competition illegal.

“The Commerce Clause of the Constitution was designed to encourage competition, including tax competition, between the states,” said Atkins. “It was not designed to broadly suppress competition for jobs and investment, which is what Cuno threatens to do.”

The Sixth Circuit’s decision represents a significant departure from precedent. In previous rulings the Court has held that the Commerce Clause “does not prevent States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry.” The Court has also held that it is a “laudatory goal in the design of a tax system to promote investment that will provide jobs and prosperity to the citizens of the taxing State”—something the Cuno decision threatens to make illegal in states within the Sixth Circuit, including Kentucky, Michigan, Ohio, and Tennessee.

“The Ohio taxpayers who brought this suit have turned the Commerce Clause on its head,” said Atkins. “They’re using it to shield themselves from tax competition, which is the opposite of the Clause’s intent.”

While Cuno was aimed at eliminating preferential tax credits, it also threatens to make sound tax changes illegal. For example, under the broad ruling of Cuno a state that reduced tax rates or eliminated a tax would run afoul of the law, since it might encourage companies to relocate to the low-tax jurisdiction from another state.

“Cuno’s sweeping interpretation of the Commerce Clause threatens a whole range of tax policy decisions, not just tax incentives aimed at luring new companies,” said Atkins. “The Supreme Court should therefore grant a writ of certiorari and review the flawed Cuno decision.”

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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(View full brief here.)

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