Utah's Economic Development Tax Incentive Program - Constitutional?
Sam Meziani
Most states now use tax incentives to lure new investment within their borders. New investment spurs state economies by creating jobs and ultimately increased tax revenue. In the current competitive national and global economy, where investment easily flows to the point of least resistance, state tax incentives play an increasingly important role in contributing to the development of state economies. For example, the fact that the 10 lowest-tax states have grown about one-third faster than the 10 highest-tax states proves that Americans and businesses vote with their feet and checkbooks.
Utah's tax incentive program, Economic Development Tax Increment Financing ("EDTIF"), has made significant contributions to the state's economy. The EDTIF program works by giving companies a tax rebate as a function of tax revenue actually received in state coffers. The State does not grant the rebate until the following taxable year, ensuring that the nominal cost to the State in lost tax revenue is supported by actual tax receipts, rather than speculative projections. A well-known example of EDTIF financing is IM Flash Technologies' investment in Lehi, Utah. According to the Governor's Office of Economic Development, IM Flash Technologies will be eligible to receive approximately $14 million in tax rebates as part of its incentive package. IM Flash Technologies' investment in Utah will ultimately create $123 million in new tax revenue, result in capital expenditures of approximately $1 billion, and create over $1 billion, (with a "B"), in new wages for the state.
Despite the benefits of state tax incentive programs, they are under attack nationwide. In North Carolina, for example, the N.C. Institute for Constitutional Law sued state and local government officials challenging on Commerce Clause and Equal Protection grounds tax incentives enacted to encourage Dell Computers to locate a facility in Winston-Salem. Similarly, Minnesota plaintiffs sued alleging that state enterprise zone programs violate the Commerce Clause.
The Commerce Clause grants Congress the power to "regulate Commerce... among the several States." The goal of the Commerce Clause was to control economic rivalry among the states and to create an area of free trade free from interference from the states. The Commerce Clause, however, was not intended to eliminate the power of the states to tax for the support of their own governments. Nevertheless, as tax incentives have become part of the national economy, plaintiffs have argued that the incentives grant preferential treatment to out-of-state economic interests in violation of the Commerce Clause.
The United States Supreme Court, in DaimlerChrysler v. Cuno, recently had the opportunity to set the record straight on whether Ohio's tax incentive program violated the Commerce Clause. In the late 1990s, the City of Toledo and the State of Ohio sought to encourage DaimlerChrysler to expand its Jeep manufacturing operations in Toledo by offering $280 million in local and state tax benefits. Charlotte Cuno, a Toledo resident and taxpayer, along with other similar plaintiffs, sued DaimlerChrysler, the State of Ohio and the City of Toledo. The plaintiffs claimed the tax incentives violated the Commerce Clause by granting preferential treatment to out-of-state economic interests.
On May 15, 2006, the Supreme Court issued its decision finding that the plaintiffs had not suffered an actual injury sufficient to grant standing. In particular, and to the rejoice of supply-siders, the Court explained that plaintiffs could not claim an injury based on an alleged depletion of the state treasury because "[t]he very point of the tax benefits is to spur economic activity, which in turn increases government revenues." Because the plaintiffs lacked standing, the Court dismissed the lawsuit. Because the Court did not address the underlying Commerce Clause issue, however, the decision leaves the validity of tax incentive programs in a state of confusion and uncertainty. For example, although citizen taxpayer plaintiffs are now barred from bringing these suits in federal court, the Court did not address whether another state, or a competing business that was denied tax incentives, could be a proper plaintiff.
Without clear guidance from the Supreme Court on the ultimate question of whether tax incentive programs violate the Commerce Clause, litigants will likely continue to bring similar actions in state courts. The Supreme Court may eventually be called to resolve a conflict between state supreme courts, but until then, the Constitutional validity of state tax incentives is uncertain.
Utah's tax incentive program, Economic Development Tax Increment Financing ("EDTIF"), has made significant contributions to the state's economy. The EDTIF program works by giving companies a tax rebate as a function of tax revenue actually received in state coffers. The State does not grant the rebate until the following taxable year, ensuring that the nominal cost to the State in lost tax revenue is supported by actual tax receipts, rather than speculative projections. A well-known example of EDTIF financing is IM Flash Technologies' investment in Lehi, Utah. According to the Governor's Office of Economic Development, IM Flash Technologies will be eligible to receive approximately $14 million in tax rebates as part of its incentive package. IM Flash Technologies' investment in Utah will ultimately create $123 million in new tax revenue, result in capital expenditures of approximately $1 billion, and create over $1 billion, (with a "B"), in new wages for the state.
Despite the benefits of state tax incentive programs, they are under attack nationwide. In North Carolina, for example, the N.C. Institute for Constitutional Law sued state and local government officials challenging on Commerce Clause and Equal Protection grounds tax incentives enacted to encourage Dell Computers to locate a facility in Winston-Salem. Similarly, Minnesota plaintiffs sued alleging that state enterprise zone programs violate the Commerce Clause.
The Commerce Clause grants Congress the power to "regulate Commerce... among the several States." The goal of the Commerce Clause was to control economic rivalry among the states and to create an area of free trade free from interference from the states. The Commerce Clause, however, was not intended to eliminate the power of the states to tax for the support of their own governments. Nevertheless, as tax incentives have become part of the national economy, plaintiffs have argued that the incentives grant preferential treatment to out-of-state economic interests in violation of the Commerce Clause.
The United States Supreme Court, in DaimlerChrysler v. Cuno, recently had the opportunity to set the record straight on whether Ohio's tax incentive program violated the Commerce Clause. In the late 1990s, the City of Toledo and the State of Ohio sought to encourage DaimlerChrysler to expand its Jeep manufacturing operations in Toledo by offering $280 million in local and state tax benefits. Charlotte Cuno, a Toledo resident and taxpayer, along with other similar plaintiffs, sued DaimlerChrysler, the State of Ohio and the City of Toledo. The plaintiffs claimed the tax incentives violated the Commerce Clause by granting preferential treatment to out-of-state economic interests.
On May 15, 2006, the Supreme Court issued its decision finding that the plaintiffs had not suffered an actual injury sufficient to grant standing. In particular, and to the rejoice of supply-siders, the Court explained that plaintiffs could not claim an injury based on an alleged depletion of the state treasury because "[t]he very point of the tax benefits is to spur economic activity, which in turn increases government revenues." Because the plaintiffs lacked standing, the Court dismissed the lawsuit. Because the Court did not address the underlying Commerce Clause issue, however, the decision leaves the validity of tax incentive programs in a state of confusion and uncertainty. For example, although citizen taxpayer plaintiffs are now barred from bringing these suits in federal court, the Court did not address whether another state, or a competing business that was denied tax incentives, could be a proper plaintiff.
Without clear guidance from the Supreme Court on the ultimate question of whether tax incentive programs violate the Commerce Clause, litigants will likely continue to bring similar actions in state courts. The Supreme Court may eventually be called to resolve a conflict between state supreme courts, but until then, the Constitutional validity of state tax incentives is uncertain.
Copyright 2006. Published for general informational purposes only, and should not be construed as legal advice. If you need legal advice please consult with your attorney.