State economic development incentives.

A recent Sixth Circuit case challenged the validity of un Ohio income tax investment credit. In Charlotte Cuno v. DaimlerChrysler, Inc., 386 F3d 738 (6th Cir. 2004), rev'g in part and aff'g in part 154 FSupp2d 1196 (ND OH 2001), the court found that an investment tax credit Ohio offered for increased in-state investment violated the U.S. Commerce Clause. On Sept. 27, 2005, the Supreme Court granted certiorari.

Facts

The credit in question allowed DaimlerChrysler to reduce its Ohio franchise tax liability by 13.5% of the amount of the new investment made in a Toledo auto manufacturing plant. The taxpayer also received city and school district property tax abatements on the new investment.

Holding

The Sixth Circuit held that the credit violated the Commerce Clause nondiscrimination test in Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977), in that it favored expansion in Ohio, to the exclusion of expansion by Ohio-nexus businesses in other states. The credit was found to be discriminatory, because it did not reduce Ohio taxes by a percentage of non-Ohio investment. The property tax abatement was upheld.

Analysis

If Cuno's reasoning stands, the decision will have far-reaching effects an the types of economic development incentives states can offer to new and existing businesses. Currently, 22 states offer tax credits based on machinery and equipment purchases that are similar to Ohio's investment tax credit. Of states with a corporate income tax, only Alaska, Hawaii and New Hampshire do not use broad-based income tax credits to encourage economic development.

William A. Raabe, Ph.D., CPA, The Ohio State University, and Roby B. Sawyers, Ph.D., CPA, North Carolina State University Members, AICPA Tax Section