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Justices will review constitutionality of Ohio program

Development incentives before U.S. Supreme Court

Late last month, the U.S. Supreme Court said it would decide how states may use tax incentives to lure companies to build automotive plants and other high-profile projects, which has become a controversial test of job creation strategies nationwide.

The justices will review an Ohio tax program that had been used countless times over the last decade until an appeals court ruled last year it was unconstitutional. Taxpayers had challenged the law after footing the bill for an investment tax credit that Ohio gave DaimlerChrysler to build a Jeep assembly plant that opened in Toledo in 2001.

Because the Cuno v. DaimlerChrysler case could have a sweeping national impact on the way states are allowed to recruit big business — virtually every state offers some type of incentive program — economic developers are closely monitoring the case.

“I have been following this for some time, as have the leading economic development professional groups, such as IEDC and SEDC,” said Robert Ingram, executive director of the Greenwood-Leflore Industrial Board. “There is obvious concern by economic developers because we live and operate in a global economy, not a U.S. economy. The countries we compete against often have very low labor rates, very low construction and operating costs, and offer unbelievable incentives as well, meaning we are already at a competitive disadvantage. Hundreds of thousands of U.S. jobs — both manufacturing and back office — have already moved offshore. Many more will be lost if the Supreme Court rules that a broad variety of incentives are unconstitutional. The global competition issue, alone, is reason enough for incentives to be offered in the U.S.”

Incentives act as an equalizer within the U.S. and represent just about the only advantage that allows many smaller rural communities to survive, explained Ingram.

“Mississippi’s poorer communities are allowed to have more and better incentives than its richer communities to level the playing field,” he said. “Without such special incentives, there is no way that many Mississippi communities would ever land substantial new jobs.”

Limited scope

Pete Walley, director of long-range economic development and planning at the University Research Center, a division of the Institutions of Higher Learning, said even though the Cuno case is important to states and economic developers, it is limited in scope because it affects incentives structured as income tax credits.

“Most states have a wide variety of tax incentives in the form of property, sales, and excise taxes,” he said. “States also have workforce development incentives, low interest financing, infrastructure improvement bonds and other forms of direct subsidies used to attract out of state businesses. Most economic research on the kind of tax incentives as seen in the DaimlerChrysler case shows that they have a small, marginal impact on business investment decisions. They tend to affect where jobs are located rather than how many jobs are created.”

Mississippi has major structural weaknesses in its workforce and in the innovation and entrepreneurial capability of its three million citizens, Walley pointed out.

“This has been accentuated as technology rapidly improved and low-cost communications and global transportation intensified,” he said. “As a state, we have never really valued education, nor understood the significance of education to the economic development process. While we are not the only state in this boat, we have been impacted greater than other states. Our response to overcoming the inability of our people to start, manage and grow our own businesses has been to offer incentives for out-of-state firms to locate a plant within the state. Mississippi was on the cutting edge of incentives for economic development with the passage of the BAWI program in 1936. Incentives have been and, in my opinion, will remain a key strategy for the economic development of the state.”

Earlier this month, South Carolina Manufacturers Alliance (SCMA) told The Greenville News that South Carolina has not been aggressive enough in recruiting new companies and the state should develop incentive packages to draw additional investment and jobs.

“Part of that is going to involve whether or not we’re willing on occasion to put some money on the table,” SCMA president and CEO Lewis F. Gossett told The News, adding that other states “dwarf us” with the amount of money they use to close corporate deals and lure investment.

“Large corporations have become very adept at playing states against each other to obtain large incentives in the form of tax credits,” said Walley. “If this lower court ruling is upheld by the U.S. Supreme Court, it may do what an individual state is unable to do: stop giving corporate income tax credits as economic development incentives.”

A slippery slope?

William Gunther, Ph.D., economics professor at the University of Southern Mississippi School of Business, said economists have long held a unified position on the role of incentives in economic development: they’re not the way to go.

“The Federal Reserve system has held conferences to deal with them, and basically said that unless the federal government outlaws incentives, states are in a race to the bottom,” he said. “The winner’s curse is closing the deal with no positive economic impact on the state because you’ve given away so much.”

If the U.S. Supreme Court upholds the decision, economic developers would have their hands tied because any type of government incentive could be ultimately interpreted as tax-based. “This includes land bought or donated because if the city or county develops it, that’s tax-based,” he said.

“If your company gives you a car to use to the extent that it allows you to also use it in your personal life, you’re supposed to claim that as income,” said Gunther. “Well, if we give $500 million to a company, why isn’t that income to that company? If it is, and they have to pay taxes on it, the bigger the incentive you give, the more income tax they’re going to have to pay on it, and that might tend to neutralize the effects of this big race to the bottom.”

A total free market in economic development recruiting, with no incentives, is a wonderful philosophical concept, Ingram pointed out, “but in my opinion, this would result in a mass exodus of our country’s highest paying manufacturing and manufacturing support jobs — and probably engineering and technical jobs as well; a huge percentage of this country’s engineering graduates are foreign students — and a mass exodus of people from our rural communities. That leaves us with low-paying service jobs and very few base industry type jobs — manufacturing, agriculture/processing, oil and gas, etc. — which create real wealth and don’t simply circulate existing dollars.”

Some industry watchers say the issue being considered by the Supreme Court is very limited in scope and will have little effect, even if the justices rule against incentives in the Ohio case.

“But to me, any adverse ruling opens up the door for all kinds of lawsuits related to different classes of taxes and incentives, and greatly lessens an individual state’s ability to create policies to target the type of jobs it needs and can best attract,” said Ingram.

Contact MBJ contributing writer Lynne W. Jeter at lwjeter@yahoo.com.

About Lynne W. Jeter

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