State seeks proposal to amend decision on Ohio's tax credit

A bill introduced by Voinovich would salvage Ohio's tax incentive.
WASHINGTON (AP) -- A federal court decision in Ohio threatens tax incentives used in at least 40 states to lure or keep companies and create thousands of jobs.
States are reviewing their own rules, and officials nationwide are rallying around a proposal to amend Ohio's law to allow the tax break.
"An essential function of local government is to maintain and sustain jobs in local communities, and that is at risk," said Cassandra Matthews, a spokeswoman for the National Association of Counties.
Tax credits give states a way to lower the price tag even more for companies that are looking for the best possible deal. But it's a tradeoff. Critics say the taxpayer dollars lost to corporate coffers could be used to lower taxes for all residents or businesses in a state or go toward social programs.
The decision
The 6th U.S. Circuit Court of Appeals in Cincinnati ruled in September that a tax break in Ohio for buying new equipment unfairly rewards companies for investing in the state by not offering a similar credit to the company if it invests elsewhere.
The case involved a dozen taxpayers and three small businesses in Toledo that sued over the investment tax credit Ohio granted DaimlerChrysler AG to build a Jeep assembly plant that opened in 2001.
Although the ruling applies to one type of tax break in one state, tax experts say its impact could be broader.
"The general fear is that if this decision became the law of the land, states could not take any action that would lead companies to locate in their state," said Chris Atkins, a lawyer at the Tax Foundation.
Lower rates
When states are forced to compete for businesses, they often lower their tax rates to become more attractive, thus keeping taxes low, Atkins said. If states didn't have to compete, taxes might rise, causing more U.S. companies to move overseas.
"It's a potentially very complicated mess," Atkins said.
Terry Lodge, a Toledo lawyer who represented the businesses in the court case, called the Ohio incentives corporate welfare. He said the decision is a win for taxpayers and small businesses that don't qualify for the giveaways.
Joan Claybrook, president of Public Citizen, said the national consumer group opposes tax credits to companies because that means other state needs -- updating old sewer systems, fixing bridges or paying court costs -- aren't addressed.
"There are many of those kinds of things that are really important in a community, but they aren't very sexy," Claybrook said, adding that tax credits are risky because you don't know if a company will leave after it gets what it wants or continue to demand more credits.
Proposed bill
U.S. Sen. George Voinovich, R-Ohio, has proposed a bill to clarify that Ohio's tax incentives for investment in new machinery and equipment are a reasonable regulation and not an undue burden on interstate commerce.
"States should be allowed to use these growth tools in their borders, and yes, states should be allowed to compete for new businesses and jobs," said Voinovich, who was governor of Ohio when the tax credit was created.
Since 1995, companies have qualified for Ohio's tax credit more than 16,000 times through the purchase of $31.7 billion in new equipment. The companies, many of which could qualify multiple times, were eligible for nearly $2 billion worth of tax credits, according to the Ohio Department of Development.
Mixed feelings
Some tax credit opponents have mixed feelings about the court ruling. While they oppose tax credits as a matter of principle, they don't necessarily support the court's declaration that direct subsidies to companies are constitutionally allowed.
"For us, it's been very difficult to know who to root for in this decision. We've never been big fans of tax credits," said Pete Sepp, spokesman for the National Taxpayers Union. "A lot depends on how this decision will be carried forward."
Sepp said Voinovich's bill isn't the answer because it deals only with Ohio's tax credit.
"Congress ought to be working to preserve tax competition in a broad sense rather than focusing on a narrow question of one tax credit in one court's jurisdiction," Sepp said.
Scott Milburn, a Voinovich spokesman, said the bill would convey the sense of Congress that courts shouldn't get involved in state tax issues.