Justices grill foes of tax breaks to foster jobs

Critics say incentives amount to state bias

March 02, 2006|By KNIGHT RIDDER/TRIBUNE

WASHINGTON -- The Supreme Court seemed unlikely yesterday to second-guess a plan by Ohio legislators to offer lucrative tax incentives to companies that expand their investments in the state.

In arguments before the justices, Ohio and Michigan taxpayers who object to the plan had a hard time on several fronts. The justices seemed skeptical that the taxpayers even had standing to challenge the plan in federal courts. Beyond that, the justices who spoke up during the hearing seemed to think that the dispute over such tax-incentive plans was political in nature, and best left to elected officials to settle.

"I'll grant that these are politically controversial," Justice Antonin Scalia said. "But isn't that the place to fight it out? Why should the courts decide?"

Peter Enrich, attorney for the taxpayers, said the issue raised important constitutional issues. "It's a discriminatory practice that implicates competition between the states. It would be a tariff by any other name."

The case springs from a burgeoning national squabble over state giveaways that have become a staple of economic development plans. To lure new businesses or persuade existing ones to expand, states promise huge tax breaks or outright tax waivers. The idea is that the jobs and tax revenue created by the businesses' investment will offset the losses created by the incentives.

Increasingly, though, taxpayers have become skeptical that the agreements deliver what they promise, and question whether they're good policy. In states across the country, there are shuttered plants, empty industrial parks and rotting buildings that were once the subject of economic hopes built on tax breaks.

The high court case springs from a 1998 effort by Ohio legislators to help Toledo persuade DaimlerChrysler AG to construct a $1.2 billion Jeep plant in the city.

The state said it would waive 10 years' worth of property taxes for the company, and under an existing tax-credit program DaimlerChrysler would get enhanced breaks from the state corporate franchise tax, because it was a business expanding its operations in Ohio.

Taxpayers complained, saying the tax incentive program cast Ohio in the role of influencing interstate commerce, which is prohibited by the U.S. Constitution. By offering incentives to existing, expanding businesses that weren't available to others, critics argued, the state was discriminating against businesses in other states.

The taxpayers sued first in state court, but DaimlerChrysler and Ohio had the litigation removed to federal courts. A federal district court ruled against the taxpayers, but an appeals court split on the issue, saying the investment tax credit was an inappropriate encroachment on interstate commerce. The Supreme Court is expected to decide the case by late June.

Also yesterday, the high court sided with a company that makes printhead components for paper printers and the ink that goes in them, in a decision that may make it harder for competitors to sue over market power.

Justices, in the 8-0 decision, ordered a new round of consideration in lower court in a dispute between Illinois Tool Works Inc. and Independent Ink Inc.

Illinois Tool Works has a patent for its printheads, but not for the ink that goes in them. However, the company requires purchasers to buy the ink. The company was sued by a maker of ink refills, on grounds that it was illegally trying to dominate the ink market.

Justice John Paul Stevens wrote for the court that Independent Ink must show that Illinois Tool Works has market power.

"Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer market power upon the patentee. Today, we reach the same conclusion," he wrote.

The Associated Press contributed to this article.

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