IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT. No

Transcription

1 IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT No CHARLOTTE CUNO, et al., Plaintiffs-Appellants, v. DAIMLERCHRYSLER, et al., Defendants-Appellees. On Appeal from a Decision of the United States District Court for the Northern District of Ohio BRIEF FOR THE NATIONAL ASSOCIATION OF MANUFACTURERS AND THE CHAMBER OF COMMERCE OF THE UNITED STATES AS AMICI CURIAE SUPPORTING APPELLEES PETITION FOR REHEARING OR REHEARING EN BANC Jan S. Amundson Roy T. Englert, Jr. Senior Vice President & General Counsel Damon W. Taaffe Quentin Riegel ROBBINS, RUSSELL, ENGLERT, Vice President, Litigation & Deputy ORSECK & UNTEREINER LLP General Counsel Suite 411 NATIONAL ASSOCIATION OF 1801 K Street, N.W. MANUFACTURERS Washington, D.C Pennsylvania Ave, N.W. (202) Washington, D.C (202) Robin S. Conrad Stephanie A. Martz NATIONAL CHAMBER LITIGATION CENTER, INC H Street, N.W. Washington, D.C (202) Counsel for Amici Curiae

2 TABLE OF CONTENTS Page(s) TABLE OF AUTHORITIES...ii INTEREST OF THE AMICI CURIAE...1 SUMMARY OF ARGUMENT...3 ARGUMENT...4 I. The Panel Opinion Would Have Profound and Disturbing Consequences...5 II. The Panel Opinion Runs Contrary to the Very Purpose of the Dormant Commerce Clause...8 CONCLUSION...15 i

3 TABLE OF AUTHORITIES CASES Page(s) Bacchus Imps., Ltd. v. Dias, 468 U.S. 263 (1984)...3, 13 Boston Stock Exch. v. State Tax Comm n, 429 U.S. 318 (1977)...9, 13, 14 Chemical Waste Mgmt., Inc. v. Hunt, 504 U.S. 334 (1992)...14 Gregory v. Ashcroft, 501 U.S. 452 (1990)...10 Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976)...14 New State Ice Co. v. Liebmann, 285 U.S. 262 (1932)...10 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959)...14 Oregon Waste Sys., Inc. v. Dep t of Envtl. Quality, 511 U.S. 93 (1994)...11 Trinova Corp. v. Michigan Dept of Treasury, 498 U.S. 358 (1991)...3, 4, 14 West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994)...14 Westinghouse Electric Corp. v. Tully, 466 U.S. 381 (1984)...13 STATUTES Ala. Code to Ala. Code (e)...6 Alaska Stat Ariz. Rev. Stat. Ann , 7 ii

4 Ark. Code Ann Cal. Rev. & Tax Code Cal. Rev. & Tax Code Colo. Rev. Stat Colo. Rev. Stat Conn. Gen. Stat. Ann (e)...6 Iowa Code 260E Mass. Gen. Laws ch. 63, 38M...7 MISCELLANEOUS Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 HARV. L. REV (2000)...9 Miles Benson, Forget Don Quixote, Believers See a Nader vs. Goliath Battle, Newark Star-Ledger (March 9, 2004)...4, 8 Peter D. Enrich, Saving the States from Themselves: Commerce Clause Constraints on State Tax Incentives for Business, 110 HARV. L. REV. 377 (1996)...5, 7, 10 Chris Micheli, A 50-State Comparison of Tax Incentives for Manufacturing Equipment Purchases, 12 STATE TAX NOTES 1739 (1997) Jim Provance, U.S. Court overturns Toledo, Ohio, Jeep plant tax credit (Sept. 3, 2004) available at iii

5 Richard L. Revesz, Rehabilitating Interstate Competition: Rethinking the Race-to-the-Bottom Rationale for Federal Environmental Regulation, 67 N.Y.U. L. REV (1992)...11 Charles J. Spindler, Winners and Losers in Industrial Recruitment: Mercedes-Benz and Alabama, 26 STATE & LOC. GOV T REV. 192 (1994)...5, 6 2 THE RECORDS OF THE FEDERAL CONVENTION OF 1787 (Max Farrand ed., 1911)...9 iv

6 INTEREST OF THE AMICI CURIAE The National Association of Manufacturers (NAM) is the nation s largest industrial trade association, representing small and large manufacturers in every industrial sector and in all 50 States. The NAM s mission is to enhance the competitiveness of manufacturers by shaping a legislative and regulatory environment conducive to U.S. economic growth and to increase understanding among policymakers, the media, and the general public about the vital role of manufacturing to America s economic future and living standards. The NAM has been an advocate of pro-growth, pro-investment tax policy for all manufacturers. The Chamber of Commerce of the United States is the world s largest business federation. With a substantial presence in all fifty States and the District of Columbia, the Chamber represents an underlying membership of more than three million businesses and organizations of every size and kind. As the principal voice of American businesses, the Chamber regularly advocates the interests of its members in federal and state courts throughout the country on issues of national concern. This appeal involves issues of substantial importance to the NAM s and the Chamber s members. The panel s decision holds that Ohio cannot limit tax credits for increased capital investment to investment made in Ohio. That decision threatens literally hundreds of tax laws across the country that contain indistinguishable limitations. Every State in the Union limits tax incentives based on the location of the

7 activity in question, and millions of businesses have made critical long-term decisions in reliance on the presence and predictability of those incentives. By holding, in staggeringly broad language, that in-state requirements render state tax incentives unconstitutional, the panel s decision dramatically raises the cost to States of offering such incentives, a fact that almost certainly presages the end of many procompetitive arrangements that States and businesses consider to be mutually beneficial. The NAM and the Chamber will focus on two issues: the devastating effects of the panel s opinion, particularly in light of plaintiffs stated plan to leverage it to revolutionize States taxation of businesses, and the extent to which the opinion uses dormant Commerce Clause analysis to reach a result that violates the Clause s purpose and common sense in equal measure. The dormant Commerce Clause was intended to promote interstate competition by foreclosing States protectionist tendencies, but the panel has allowed a group of local plaintiffs to invoke it against an interstate commercial enterprise, the plaintiffs goal being to prevent States from competing in a nationwide market for capital investments. Amici s members, many of which are interstate businesses and all of which benefit from competition among States to provide environments hospitable to business, have a substantial interest in preserving incentives like Ohio s investment tax credit. 2

8 SUMMARY OF ARGUMENT The Supreme Court has emphasized repeatedly that it is a laudatory goal in the design of a tax system to promote investment that will provide jobs and prosperity to the citizens of the taxing State. Trinova Corp. v. Michigan Dep t of Treasury, 498 U.S. 358, 385 (1991). Ohio did precisely that, offering a 7.5% credit against its corporate franchise tax for any business that invested in Ohio for the first time or expanded its existing Ohio investment, and offering an even larger credit for businesses that invest in economically troubled regions. DaimlerChrysler, a global automobile manufacturer with the option of locating its manufacturing facilities virtually anywhere, explicitly relied on that incentive in choosing to build a new automobile plant (which would create 4500 jobs) in inner-city Toledo, Ohio, rather than in Michigan. In crafting the tax incentive that persuaded DaimlerChrysler to build locally, Ohio complied perfectly with the Supreme Court s vision that competition among the States for a share of interstate commerce is a central element of our free-trade policy. Bacchus Imps., Ltd. v. Dias, 468 U.S. 263, 272 (1984). Nevertheless, the panel opinion holds that Ohio s incentive violates the dormant Commerce Clause because it provides a direct commercial advantage to local business, thereby discriminating against interstate commerce. But DaimlerChrysler is as far from a local business as one can imagine the only local players in this case are the plaintiffs. 3

9 The ambitions of those behind the plaintiffs, however, are far from local. They have declared publicly that this was their test case, and that they will use its holding to challenge hundreds of pro-business tax incentives across the country. Should those attacks be successful, States will be unable to use their tax systems to encourage development in destitute areas, and they will cease to offer many other incentives designed to provide jobs and prosperity to the[ir] citizens, a practice the Supreme Court has emphatically endorsed. Trinova Corp., 498 U.S. at 385. And, in a great irony, the reason will be that a panel of this Court has interpreted the dormant Commerce Clause meant to ensure a vibrant, business-friendly interstate market to prevent States from competing in an efficient national regulatory market. This court should grant rehearing to avoid having the panel opinion spearhead a crusade to throw state tax regimes into chaos. ARGUMENT Ralph Nader, who funded the local plaintiffs in this case, 1 has declared that this is a test case for a far broader attack on hundreds of laws across the country that give incentives to millions of businesses to take actions such as investing in destitute regions that States believe promote social welfare. Nader and like-minded re- 1 See Miles Benson, Forget Don Quixote, Believers See a Nader vs. Goliath Battle, Newark Star-Ledger (March 9, 2004). 4

10 formers seek ultimately to save States from themselves by foreclosing their opportunity to compete for businesses, a process that they claim leads to lower business tax revenue. 2 But the dormant Commerce Clause was never intended to protect States ability to tax businesses quite the opposite, its purpose was to preclude States from enacting tariffs, which are taxes on businesses that compete in interstate markets. Dormant Commerce Clause analysis focuses on creating efficient markets. Ohio s investment tax credit is the product of such a market. The credit gives businesses an incentive to invest in areas badly in need of capital, and, by accepting Ohio s offer, businesses like DaimlerChrysler make Ohio and its citizens better off. That is the efficient outcome, and one dormant Commerce Clause analysis endorses. I. The Panel Opinion Would Have Profound and Disturbing Consequences Every State in the Union provides tax and other incentives for exclusively local activity. Indeed, appellants admitted in their opening brief that measures such as the investment tax credit challenged here [] have become virtually ubiquitous. Br. 16. See Charles J. Spindler, Winners and Losers in Industrial Recruitment: Mercedes- Benz and Alabama, 26 STATE & LOC. GOV T REV. 192, 201 (1994) (reporting that, by 1992, 37 States had adopted an investment tax credit); Chris Micheli, A 50-State 2 Peter D. Enrich, Saving the States from Themselves: Commerce Clause Constraints on State Tax Incentives for Business, 110 HARV. L. REV. 377 (1996). 5

11 Comparison of Tax Incentives for Manufacturing Equipment Purchases, 12 STATE TAX NOTES 1739 (1997) (listing statutes). Because virtually none of those statutes meets plaintiffs interstate neutrality test, 3 the reasoning in the panel opinion would hold almost all of them unconstitutional because they discriminate against interstate commerce by providing an advantage to local businesses. The result would be a crisis among States even if the opinion s reasoning were limited to investment tax credits. For example, States would suddenly find themselves unable to offer tax incentives to businesses that invest in enterprise zones, destitute regions (such as inner-city Toledo) badly in need of economic stimulus. Unfortunately, the opinion s language and reasoning is not so limited it would also preclude tax credits for worker training costs and job creation, 4 and research and 3 See, e.g., Ala. Code (e) (income tax credit for new investment in Alabama); Alaska Stat (income tax credit for investment in gas processing and mineral development facilities built in Alaska); Ariz. Rev. Stat. Ann (income tax credit for taxpayers that increase research activities in Arizona); Ark. Code Ann (income tax credit for companies that spend more than a specified amount on filming or producing a motion picture in Arkansas); Cal. Rev. & Tax Code (income tax credit for qualified equipment placed in service in California); Colo. Rev. Stat (income tax credit for investment in qualifying property used in Colorado); Conn. Gen. Stat. Ann (e) (income tax credit for investment in certain new manufacturing facilities in Connecticut). 4 See, e.g., Iowa Code 260E.5 (granting a credit to defray costs of employer agreements with community colleges for worker education and training). See generally Spindler, Winners and Losers, 26 STATE & LOC. GOV T at 201 (noting that, in 1992, 44 States offered some form of job-creation credit). 6

12 development costs, 5 as well as many tax-increment financing arrangements 6 and preferential programs for investors who provide funds for in-state businesses. 7 And those are just the beginning. Future plaintiffs are certain to use the panel opinion to challenge every one of these incentives. The case against DaimlerChrysler was brought by 15 individuals and three local businesses, but what seems like a local grassroots action is in fact the culmination of years of planning by groups intent on saving states from themselves by eradicating business tax incentives to the fullest extent possible. Professor Enrich, who argued the case for plaintiffs, wrote an article in 1996 that discussed which groups might be both qualified to bring such suits and interested in doing so. See Enrich, supra, 110 HARV. L. REV See, e.g., Ariz. Rev. Stat. Ann (granting a credit of 20% of in-state incremental research and development expenses); Mass. Gen. Laws ch. 63, 38M (establishing a corporate excise credit of either 10% or 15% of incremental research expenses for defense-related activities). 6 See, e.g., Ala. Code to (granting a corporate tax credit for debt-service payments on industrial revenue bonds). 7 See, e.g., Cal. Rev. & Tax Code (exempting 50% of the gains from sales of stock in qualifying in-state small businesses); Colo. Rev. Stat. Ann (waiving the state capital gains tax on the sale of an interest in a Colorado business or property held for at least five years). 7

13 Ralph Nader has expressed a particularly strong interest in using the panel s opinion to spearhead a nationwide assault on business tax incentives. Terry Lodge, one of plaintiffs attorneys, stated publicly that Mr. Nader was looking for the perfect test case and found it in Toledo. Miles Benson, supra, Newark Star-Ledger (March 9, 2004). Nader proclaimed that the panel opinion is a major blow against the most insidious form of corporate welfare the extortionist demands by large companies for subsidies from cowering cities and states. See Jim Provance, U.S. Court overturns Toledo, Ohio, Jeep plant tax credit (Sept. 3, 2004), available at His public view is that state legislatures are too cowardly to scale back tax incentives, and he and like-minded reformers are therefore determined to circumvent that defective legislative process by turning their campaign to the courts. II. The Panel Opinion Runs Contrary to the Very Purpose of the Dormant Commerce Clause The panel opinion adopts a view of the dormant Commerce Clause that borders on the surreal. When the Framers included the Clause in the Constitution, their purpose was to prevent States from disrupting efficient interstate commerce by enacting Balkanizing tariffs and other barriers to trade. They recognized that the peoples of the several states must sink or swim together, and that in the long run prosperity and 8

14 salvation are in union and not division. Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 523 (1934) (quoting 2 THE RECORDS OF THE FEDERAL CONVENTION OF 1787 at 308 (Max Farrand ed., 1911)). In other words, they envisioned the country as an area of trade free from interference by the States. Boston Stock Exch. v. State Tax Comm n, 429 U.S. 318, 328 (1977). Yet the panel opinion invokes the dormant Commerce Clause to disrupt an efficient market in which States compete with one another other to attract interstate commerce. It s an Alice-in-Wonderland outcome. Plaintiffs motive in challenging business tax incentives like Ohio s is their alarm that States are engaged in a fierce regulatory competition to convince businesses to invest locally. States bid against one another by offering increasingly low tax rates and generous tax incentives, and the result is that States on balance collect less revenue from businesses interests. For example, in their opening brief, plaintiffs note that businesses share of state income tax revenues declined from 29% in 1979 to 15% in Br Plaintiffs ultimately seek to save States from themselves by using dormant Commerce Clause challenges to foreclose their ability 8 Oddly, in their discussion of declining business tax revenues, plaintiffs omit any mention of international competition for business locations, a factor that economists consider to be a primary cause. See, e.g., Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 HARV. L. REV. 1573, 1577 (2000) ( [T]here is evidence that as an [Organisation for Economic Cooperation and Development] member country s economy becomes more open, its taxes on capital tend to go down while its taxes on labor go up. ). 9

15 to engage in a race to the bottom that drains their coffers. Br. 17. See also Enrich, Saving the States from Themselves, 110 HARV. L. REV. at 380. The purpose of the dormant Commerce Clause, however, is not to protect state revenue, and it is certainly not to protect States ability to tax businesses, like DaimlerChrysler, that are primary players in interstate commerce. Rather, its purpose is to ensure that States do not disrupt the efficient allocation of resources that a competitive market would yield. In that regard, its goals mirror perfectly those of modern antitrust law. The Clause certainly was not intended to protect States from market forces while exposing businesses to those same forces; indeed, the Framers concern was to protect markets from States, not to protect States from markets. In fact, there is every reason to believe that regulatory competition among States promotes social welfare. The Supreme Court has long recognized that federalism allows for more innovation and experimentation in government, and makes government more responsive by putting the States in competition for a mobile citizenry. Gregory v. Ashcroft, 501 U.S. 452, 458 (1990). See also New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting) ( It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory. ). Notably, recent studies have rejected plaintiffs race-to-the-bottom theory as a likely result of regulatory competition among States. 10

16 In evaluating claims that competition among States would lead to unacceptable erosion of environmental standards, a prominent scholar stated: The conclusions that emerge from [my] review of the theoretical literature point strongly against race-to-the-bottom claims. Tiebout, Fischel, and Oates and Schwab all conclude * * * that interstate competition is not inconsistent with the maximization of social welfare. There are no formal models supporting the proposition that competition among states creates a prisoner's dilemma in which states, contrary to their interests, compete for industry by offering progressively laxer standards. Richard L. Revesz, Rehabilitating Interstate Competition: Rethinking the Race-tothe-Bottom Rationale for Federal Environmental Regulation, 67 N.Y.U. L. Rev. 1210, 1242 (1992). The same is true here. The panel opinion, however, concludes that the fatal defect in Ohio s investment tax incentive is that it coerces businesses with existing Ohio operations to place future investments in Ohio. (The opinion does not attempt to reconcile this concern with plaintiffs allegations that those same businesses are exploiting States.) It explains that Ohio s investment credit would be constitutional only if it were offered to Ohio taxpayers no matter where they choose to invest their capital, for only then would it avoid differential treatment of in-state and out-of-state economic interests. Slip op. 6 (quoting Oregon Waste Sys., Inc. v. Dep t of Envtl. Quality, 511 U.S. 93, 99 (1994)). In other words, Ohio would have to act with neutrality toward businesses decisions to locate facilities and create jobs in other States. The panel 11

17 opinion s vision of neutrality, however, would create a market failure the efficient outcome requires allowing States to impose location conditions on investment credits. The relationship between States and businesses is best described as a quid pro quo: States provide services to businesses by enforcing laws and providing a suitable workforce, in return for which businesses pay taxes to States and provide jobs for their citizens. In an efficient regulatory market, both businesses and States benefit from this bargain businesses value the State s services in an amount equal to or greater than the taxes they pay to that State, and the State s cost of providing services to the businesses is equal to or less than the value it places on the taxes and jobs it receives in return, in a successful competition with other States to provide a businessfriendly regulatory environment. Ohio simply recognized that in some areas such as inner-city Toledo its need for jobs and capital investment was greater than its need for tax revenue. It therefore offered businesses the ability to pay less tax if they, in return, invested in impoverished regions. Ohio determined ex ante that its citizens would benefit from that tradeoff, and the businesses that availed themselves of the investment tax credit likewise looked to benefit. That efficient outcome is precisely the one envisioned by dormant Commerce Clause theory. It is, moreover, the state legislature s determination about how to balance competing burdens and benefits for its citizens, not an effort to do anything extraterritorial. 12

18 Under the panel opinion, however, that efficient outcome would not prevail, and the legislature s balance of burdens and benefits need not be respected. The panel s holding allows States to offer businesses tax incentives to create more jobs, but it denies States any guarantee that the jobs will be created within their borders. Ohio could give DaimlerChrysler a $70 million tax credit in exchange for Daimler- Chrysler s increasing its capital investment, but DaimlerChrysler could then create the jobs in Michigan. What the panel opinion describes as neutrality toward interstate commerce is revealed to be a system in which States that offer investment tax credits are forced to subsidize business investments in other States. That outcome is particularly perverse given that a primary purpose of investment tax credits is to compete against other States for those investments. If a State cannot internalize the expected benefit from a lower-taxes-for-morejobs bargain with businesses, the State will simply refuse to enter into that bargain even though efficiency dictates that it should occur and the legislature sees it as appropriate for its citizenry. That reasoning cleanly distinguishes this case from Bacchus, Westinghouse, and Boston Stock Exchange (all cited in the panel opinion, and all decisions unlike the panel opinion ruling in favor of interstate or out-ofstate businesses), for in none of those cases was a location restriction needed to ensure that efficient transactions could take place. Nevertheless, there is no need for 13

19 this Court to undertake the Herculean task of synthesizing the Supreme Court s dormant Commerce Clause jurisprudence in an attempt to divine the reasoning the Supreme Court would apply to this case. 9 It is enough that the Court has approved precisely what Ohio is doing, explaining that it is a laudatory goal in the design of the tax system to promote investment that will provide jobs and prosperity to the citizens of the taxing State, Trinova Corp., 498 U.S. at 385. It has also made clear that subsidy provided only to local businesses ordinarily imposes no burden on interstate commerce, but merely assists local businesses, West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 199 (1994). 10 If the panel opinion stands, many efficient, pro-competitive, and socially beneficial arrangements, such as tax credits for capital investment, job creation, and 9 The Court itself has noted that its case-by-case approach has left much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation. Boston Stock Exch., 429 U.S. at 329 (quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 457 (1959)). 10 Justices have indicated that they see no distinction between subsidies and tax incentives in this context. See Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 816 (1976) (Stevens, J., concurring) (the Commerce Clause does not inhibit a State s power to experiment with different methods of encouraging local industry. Whether the encouragement takes the form of a cash subsidy, a tax credit, or a special privilege intended to attract investment capital, it should not be characterized as a burden on commerce. ); Chemical Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 351 (1992) (Rehnquist, C.J., dissenting) ( There seems to be nothing * * * that would prevent [a State] from providing subsidies or other tax breaks to domestic industries. ). 14

20 environmental remediation, will simply disappear. This Court should grant rehearing to avoid sponsoring that revolution. CONCLUSION Appellees petition for rehearing or rehearing en banc should be granted. Respectfully submitted, Jan S. Amundson Roy T. Englert, Jr. Senior Vice President & Damon W. Taaffe General Counsel ROBBINS, RUSSELL, ENGLERT, Quentin Riegel ORSECK & UNTEREINER LLP Vice President, Litigation & Deputy Suite 411 General Counsel 1801 K Street, N.W. NATIONAL ASSOCIATION OF Washington, D.C MANUFACTURERS (202) Pennsylvania Ave, N.W. Washington, D.C (202) Robin S. Conrad Stephanie A. Martz NATIONAL CHAMBER LITIGATION CENTER, INC H Street, N.W. Washington, D.C (202) September 17,

21 CERTIFICATE OF SERVICE I, Damon W. Taaffe, hereby certify that on this 17th day of September, 2004, copies of the foregoing Brief Supporting Appellees Petition for Rehearing or Rehearing En Banc were mailed by overnight courier to: Terry J. Lodge 316 N. Michigan St., Suite 520 Toledo, OH Peter D. Enrich Northeastern University School of Law 400 Huntington Avenue Boston, MA Charles A. Rothfeld MAYER, BROWN, ROWE & MAW LLP 1909 K Street, N.W. Washington, DC John T. Landwehr EASTMAN & SMITH LTD. P.O. Box Toledo, OH Jim Petro Attorney General 30 East Broad Street, 17th Floor Columbus, OH Theodore M. Rowen SPENGLER, NATHANSON PLL 608 Madison Ave, Suite 1000 Toledo, OH Damon W. Taaffe 16