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Supreme Court gets case of ‘location incentives,’ aka ‘endless corporate welfare’

COMMENTARY | December 15, 2005

At issue is a DaimlerChrysler/Ohio case, but this is a story almost everywhere: Are localities' subsidies to attract industries anything more than a scam?

By Henry Banta


Listening to the media these days one could get the idea that the Supreme Court is something like a big domestic relations court – refereeing "family value disputes." Not to depreciate the concerns of those for whom issues of abortion and school prayer are important, there are other matters that come before the Court.

In fact, non-lawyers would be surprised by how few of the Court's cases involve such contentious social issues. Most of its work is pretty boring stuff. But buried in there are matters that deserve a lot more attention than they get. Some cases profoundly affect the economic welfare of millions of Americans, and if understood, would also be "hot button" issues. Unfortunately, the media seem to have little interest in covering them.

Nobody seems interested in scratching through Judge Samuel Alito's papers to see where he might be on corporate law, antitrust and tax issues, for example. A cynic might suspect that a great deal of the sound and fury over the highly emotional social issues all too conveniently serves the interests of those who would prefer to keep the economic issues out of sight.

For example, there is a case on the docket of the Supreme Court this term that very few will hear about but which raises fundamental questions about the very nature of our federal union. Here a bit of grade school history may useful, particularly for those who care about the "original intent" of the framers of the Constitution.

As we all learned, a great weakness of the Articles of Confederation was that it did not prevent the states from waging economic war on each other. States were free to impose tariffs and taxes on goods from other states and promote their local businesses at the expense of those from other states. 

The Constitution, by putting the regulation of interstate commerce in the hands of the Congress, was expected to solve the problem. And since 1789, the Supreme Court has not tolerated the states using taxes or tariffs to interfere with the free flow of commerce between the states, at least not without the clear permission of the Congress. As a result, the United States has developed a strong national economy, no doubt occasionally at the expense of local interests.

Indeed, the Supreme Court has been absolutely passionate in defending the free flow of commerce between states. It has been extremely vigilant – almost to the point of silliness – in striking down state tax laws that have even a hint of discrimination against out-of-state business. For example, some years ago the Hawaiian legislature, in a moment of ill-considered boosterism, gave a tax break to two locally produced

liquors: a brandy – okolehao – distilled from taro root; and a pineapple wine – sold under the name of "Maui Blanc." The threat of this tax exemption to the constitutionally protected scheme of free trade was not obvious. These products were more like airport souvenirs than competitors of Budweiser. Nevertheless, the Supreme Court found the tax break violated the great principle of the open commerce enshrined in the Commerce Clause of the Constitution.  

More recently, the Court has shown even greater hostility to the slightest hint of discrimination against out-of-state enterprise. Maine enacted a tax break for charitable institutions operating for the benefit of its citizens. The Court struck down this tax law because it discriminated against a summer camp that catered to out-of-state campers. Again the threat to the grand scheme of interstate commerce was, by any standard, minuscule, if not wholly theoretical. It is hard to imagine how aid to impoverished campers was much of a threat to national commerce. But a principle is a principle.

However, the forces of balkanization are not so easily defeated. While the Court has vigilantly watched the front door, the real action has been at the back. Foiled in their efforts to promote local business with discriminatory taxes, these forces adopted a simple and effective tactic: "forget about the tax break, just give us the money." State and local political leadership responded with shameless enthusiasm. They devoted boundless energy and imagination to the invention of a host of "location incentives."

In effect, the states now do what they can't do with their tax codes, with, more or less, direct subsidies. There is hardly a county or municipality that does not provide some kind of "location incentive." If they don't, it is because they have not been asked. In effect, corporations have found in state and local treasuries an endless source of welfare.

This, of course, inevitably has become for the states a "zero-sum game," a preposterous race-to-the-bottom. But the public almost never hears about the issue except when a politician issues a congratulatory press release claiming to have brought a host of jobs to some community. Rarely is the public told about the cost of such deals. One exception is the splendid work of Don Barlett and Jim Steel for Time Magazine. They have relentlessly documented the persistent failure of these policies to produce any public benefit.

In his new book, "Jobs Scam," Greg LeRoy details how these incentives cannot, and do not, create jobs, increase tax revenues or bring any other benefits to communities. They simply redistribute tax revenue from taxpayers to corporations. The loss of revenue has been estimated to be about $50 billion a year.

The failure of such incentives should not come as any surprise. First, businesses do not make location decisions on the basis of state and local taxes or even revenue give-aways. Second, such ploys cannot work if everyone uses them. 

LeRoy cites IRS data showing that state and local taxes make up only 1.2 percent of the typical firm’s costs - which actually comes to 0.8 percent since they are deducted from federal taxes. He quotes Paul O'Neill (former Secretary of the Treasury and CEO of Alcoa) as saying, "I never made an investment decision based on the Tax Code. . . . [I]f you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see they are going to be able to earn the cost of capital out of their own intelligence and organization of resources."

It is the big things that really matter: labor, infrastructure, especially transportation, access to inputs and markets. This is of course the reason that tax breaks are destructive in the long run - they drain revenue from the services needed for real economic growth. Declining schools, congested roads, and lack of government services harm a local economy more than the lack of tax incentives. 

The issue is now before the Supreme Court. A suit was brought against the State of Ohio and DaimlerChrysler challenging incentives given by Ohio to the auto manufacturer for putting a plant in Ohio. It is scheduled for argument in March. If ever there was a case that cried for the application of the concept of "original intent", this is it. This scheme of competing subsidies not only violates the constitutional principle embodied in the commerce clause, it mocks one of the very reasons behind the Constitution itself.

[A confession: Barlett, Steel, LeRoy, and Peter Enrich – who will argue for the plaintiff in Cuno v DaimlerChrysler before the Supreme Court on March 1 – are all friends of mine.] 

The impending collision between the doctrine of original intent and powerful corporate interests surely deserves some public discussion aside from footnotes in law journals. The issue is particularly notable since the loud and passionate partisans of original intent are usually equally passionate in their promotion of corporate interests. But it is unlikely that this aspect of the case will get much coverage. More likely the focus of any coverage will be on politicians complaining about the loss of their ability to create jobs. The stark irrationality of this claim will pass unnoticed. 

The Court may not decide this case on the merits, since it has asked the parties to brief the issue of the plaintiff's standing to bring the case. (Obscure legal technicalities can matter a lot.) But, if they do get to the merits, does anyone want to make a bet on where the stalwart supporters

of "original intent" will come out? It is one thing to champion original intent regarding school prayer, gay rights, or abortion, but $50 billion is $50 billion. I'm willing to wager a reasonable sum on the issue; any takers?

This case is just one example of an important case that will not be properly covered. What else lurks in the Supreme Court docket? And who will tell us about it?

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