Supreme Court ruling strikes down Ohio incentives challenge

by Becky Gillette

Published: May 29,2006

Tax incentives to attract new industry seem safe for now. Recently, the U.S. Supreme Court ruled that plaintiffs challenging a franchise tax credit in Ohio had no legal standing to file the lawsuit.

Whether that is good news or bad depends on attitudes about incentives that some say are necessary to be competitive attracting new business. Those opposed say there is no evidence of a positive payback on incentives.

“I think it is good news for the folks who feel it is necessary to continue giving incentives,” said Phil Hardwick, coordinator of capacity development for the John C. Stennis Institute of Government at Mississippi State University. “It is probably bad news for those who want to prohibit incentives. The reason it is bad for them is it is not likely the Supreme Court will take up the issue on the merits of the case. The Supreme Court ruled the plaintiffs didn’t have standing to bring the lawsuit in the first place, so they never got to the merits of the case.”

The plaintiffs in the case, a group of small businesses and taxpayers in Ohio, argued that the state’s paying of incentives violated the commerce clause of the Constitution. But Hardwick, who also writes a column for the Mississippi Business Journal, said courts decided years ago that taxpayers can’t bring lawsuits against the government for expenditures.

“Otherwise, citizens all over the country would be filing lawsuits against the federal government every time they didn’t like something that Congress appropriated,” Hardwick said. “This was a unanimous case. I think the court said, ‘We really can’t get into the issue on the merits because we all agree the taxpayers didn’t have standing to bring the lawsuit.’ The merits of the case were never argued before the U.S. Supreme Court.”

The Supreme Court said that because plaintiffs have no standing, the lower courts erred by considering their claims. The judgment of the Sixth Circuit was therefore vacated in part, and the challenge to the franchise tax credit dismissed.

The action shields billions of dollars in state tax incentives from a legal challenge.
In a race to win new industry, states have been providing more and more incentives. In fact, there are now consulting companies that advertise their firms as full time negotiators for incentives from states.

“I think incentives are a necessary evil,” Hardwick said. “We would be better off if we didn’t have to use incentives. I think what has happened is that all of the state and communities have gotten themselves in a situation where companies that were going to move to areas ask for incentives when they were going to be moving there anyway. The argument is it would be nice to have a level playing field. But if we had a level playing field, some states would probably never get any new companies.”

Is there a payback?

Mitch Stennett, president of the Jones County Economic Development Authority, said the Supreme Court decision was obviously positive news for economic developers.

“From the perspective of someone who advocates for businesses in the state of Mississippi, professional organizations I belong to thought the lawsuit was pretty far out anyhow,” Stennett said. “When you give big incentives, you have to do economic impact studies that show there is going to be a payback. If there is a payback to the community where you can get more out of it, you go with it. If the payback isn’t there, I have known cases where people said, ‘We can’t do this.’ I have known cases where Mississippi has been in on the hunt, and wouldn’t come up with the extra millions a company wanted.”

Some studies have been done that conclude incentives don’t provide positive payback. But Stennett said the payoff may just be a long time coming.

“Will you recoup incentives or expenses in five years or seven years, or will it be 30?” Stennett asks. “There is a judgment call there.”

Since the state’s experience with “Cattlegate,” the failed beef processing facility in Oakland, there has been greater scrutiny of incentives for proposed projects in the state. Stennett said today “clawback” provisions are common. After a certain number of years, if the facility does not produce the benefits promised, the incentives have to be paid back to the state.

“Even if your economic impact analysis is flawed or skewed, there is a way to recoup some of that money if the company does not live up to its promises,” Stennett said. “There has been a lot of reform and changes under Gov. Haley Barbour. That is where a lot of the clawback provisions come in. It is much harder now to make what may seem like lavish promises than it used to be. Now economists are involved. You try to get that economic impact study.”

‘Hard-nosed looks’

But it is unlikely that critics of incentives program would be hired to do the economic impact studies. One economist who questions the value of incentives is Dr. William “Bill” Shughart, an economics professor at the University of Mississippi.

“What it is really going to take is for economists to start taking hard-nosed looks at these deals showing that they do not pay off,” Shughart said. “Certainly every time one of these is approved, there is a future tax liability associated with it. By the same token, there is no evidence whatsoever that publicly financed stadiums and convention centers ever cover operating costs, let alone capital costs. Yet people want to build new stadiums. Jackson just got a new convention center, and now it wants a new stadium.”

While it is a matter of pride for cities to have nice convention centers and stadiums, Shughart said that pride is costly because the taxpayers have to pick up the tab. In the past legislative session the proposed Wellspring Megasite project failed to get financial support from the state. Gov. Barbour opposed funding to develop infrastructure on the site without having an industry committed to locating there.

“One thing the current administration has made a priority is to maintain the state’s bond rating, and improve it by cutting back on total bonded indebtedness,” Shughart said. “They have been successful. That particular concern was decisive in the governor’s opposition to the Wellspring project, for example. But he didn’t preclude funding that in future if they had a tenant on the line.”

Political process

Shughart was disappointed about the recent Supreme Court ruling in the Ohio incentives case because the merits of the case were not discussed.

“I think at this point using the courts to bring the issue forward is pretty much been undercut,” he said. “The only avenue of redress is through the political process now rather than the judicial process. Taxpayers have to organize, and elect legislators and governors who will stop giving away the store.

“There are implicit logrolling bargains at work here. A legislator will support a project that may have a local impact in a small number of legislative districts, in return for the implicit promise that those legislators who benefit this time around will support future projects in other legislative districts. So, there is general support in the legislature for incentives, in spite of the fact there is absolutely no evidence that these things pay off.”

Shughart said since the Progressive Era, judges at both the federal and state levels have deferred to legislatures more than is healthy, and allowed legislators too much freedom to play favorites under the guise of economic development.

Incentives are a fact of life in development circles around the country. And it all started in Mississippi during the Depression with the Balance Agriculture with Industry Act.

“That whole program was clearly in violation of our state constitution, but pressure was brought to bear to get it enacted,” Shughart said. “And we have been issuing bonds to support corporate welfare for 75 to 80 years now. Unfortunately, I don’t see any stopping point to it.”

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.

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