Site Selection
From Site Selection magazine, January 2005


Groundbreaking Appeals
Court Decision Could
Slow Down Groundbreakings



eptember 2004 saw hurricanes on two coasts and a major earthquake on another, but it was a federal appeals court decision in the U.S. heartland that packed an economic development wallop still awaiting measurement.
      On Sept. 2, the U.S. Court of Appeals for the Sixth Circuit — whose jurisdiction encompasses automotive corridor states Michigan, Ohio, Kentucky and Tennessee — ruled after 19 months of deliberation that the State of Ohio's machinery and equipment investment tax credit program violates the Commerce Clause of the U.S. Constitution. The same ruling
At press time, the Toledo DaimlerChrysler plant at the heart of the court decision was proceeding with an expansion announced this summer.
determined that the state's property tax abatement program passed federal and state muster.
      An immediate move was made to file an en banc petition, placing the case — Charlotte Cuno, et al. v. DaimlerChrysler, Inc., et al — before the entire 13 active judges on the Sixth Circuit's roster, rather than just the panel of three that issued the ruling. Whether ruling on that petition will be expedited remains to be seen. In the meantime, professionals on all sides of the site selection equation are scrambling to determine what the ruling means in the short and long term for projects either already under way or pending across the country. Many of them saw some confounding rationale in the 18-page document.
      "It's a very broad and troubling decision, based on peculiar legal reasoning," says Jay Biggins, managing director, national incentives, for Stadtmauer Bailkin Biggins, based in Princeton, N.J. "It injects uncertainty into a process that craves predictability. It's turned a lot of planning involving billions of dollars on its head."
      Briefs of support for Ohio and DaimlerChrysler have been filed by a wide cross-section of industry players. That includes the United Auto Workers, whose membership includes 3,628 active members at the Jeep plant in Toledo, Ohio, where incentives related to its 1998 construction precipitated the lawsuit. The original project was a $1.2-billion blockbuster, and the company, along with several suppliers, just announced another $900-million investment in the complex in the summer of 2004.
      "We don't expect it to derail the project," says Eileen Granata, interim COO for the Regional Growth Partnership in Toledo, noting another ongoing expansion at Libbey Glass. In fact, Toledo industrial activity is booming at its highest level in years. As for other prospects, "it's early to say it's driving projects away," she says, but it "hasn't been a helpful part of those discussions, particularly against other states not in the sixth district. Look at projects in which we're competing with Indiana — we have seen that in a couple of those cases, we're significantly more at risk. From a manufacturing standpoint, one of your biggest tools is suddenly gone."
      In contrast to the court panel's apparent aim to level the proverbial playing field, the UAW attorneys note that the decision, by not taking into account the historical development of different states' economies, "creates a situation in which the playing field has not been leveled but rather has been tilted — even if unintentionally — in favor of some states."
      The brief goes on to cite a 2003 study by the Center for Automotive Research: Because of differences in how their regional economies have developed, northern states offer incentive packages averaging 83 percent tax abatements and 13 percent infrastructure improvements, while southern states' packages include only 38 percent tax abatements, 44 percent infrastructure improvements and 18 percent employee training and recruitment.
      Other briefs in support come from Nissan North America and Ford Motor Co.
DaimlerChrysler and the State of Ohio are receiving across-the-board support from rival manufacturers and states alike.

Prelude to Tax Reform?
      "Stunned" was one adjective used by Bruce Johnson, director of the Ohio Dept. of Development, and others in describing their reactions to the ruling." 'Curious' would be another one," Johnson tells Site Selection, "and frankly, reading the decision doesn't give me any more confidence."
      Johnson appeared with other dignitaries in Columbus in September to honor Honda's 25 years of operations in the state, including five plants and a major R&D center. Part of the festivities was devoted to noting that for every dollar of the $27 million in direct incentives Honda has received in that time, the company has invested $226 in Ohio operations. But away from the spotlight, "the manufacturing community is extremely concerned about it," Johnson says of the ruling. "How do we handle our credits already offered? How is the state tax department going to handle various filings?"
      "The only way to compete on a global basis is to keep costs down for these companies," says Michael Mullady, senior associate with the Industrial Properties division of CB Richard Ellis, based in Columbus, Ohio. "Issues with labor rates or tax incentives are typically why we're losing." He says " 'our abatements are burning off, so we're moving' " is a constant threat, but notes that "the states do a great job of balancing out each other on incentives."
      As several experts point out, the language of the decision casts no aspersions on direct subsidies —"according to this decision, just handing them cash is okay," says Johnson. This and other aspects of incentives will no doubt be front and center on the agendas of several state legislatures.
      "In the spring, the legislature will have to confront this," says Johnson, hopeful of comprehensive tax reform that addresses "lowering rates, broadening the base, reducing the penalty on capital expenditures and regulatory reform too."
      Meanwhile, he doesn't want to exaggerate the impact on Ohio's competitiveness of this one legal ruling: "We think Ohio started out and continues to be competitive," he says. "The bottom line is how do we encourage people to make investments in our state? Some [incentives] create jobs and some just create productivity. Both are critically important."

In the Same Boat
      In some ways, Granata adds, DCX and others are as worried about the effects on other states as much as Ohio — in Michigan, a machinery and equipment tax credit is part of the single business tax. Michigan Economic Development Corp. was indeed one of many filing briefs in support of the petition. And that's fitting, since its chief, Don Jakeway, was not only at the helm of RGP when the original Jeep deal was negotiated, but headed the Ohio Dept. of Development when the investment tax credit program under scrutiny came into being.
      "This is the first real win for folks that really don't want anybody to do anything in this arena," he says. "I'm not pushing any panic buttons, and I'm not recommending anybody else do that, yet it's very important we be proactive and step forward and be supportive, because the issues that are going to be addressed are very important issues, whether this is Ohio or Michigan or Arizona or Louisiana or Mississippi. This could represent a rather dramatic change in how economic development has taken place for at least as long as I've been doing it, over 20 years."
      Jakeway is concerned about the level of risk now introduced into both past and prospective investment agreements. And he's concerned about a setback for economic development professionals, who he says have come a long way in not only professionalizing their methods, but in making incentives performance-based — something often lost on incentives critics.
      "These are the kind of programs that turned around Ohio's entire economy in the 1990s," he says. "Tax credits were used for people to spend their money when we needed them to do it. They worked. Every company that got to take advantage of them would tell you that. And a lot of factors calculated into that ROI."
      "The arguments they used for the interstate commerce clause being violated could have been applied to any tax structure a state has," says Brian Corde, director, location strategies, for New Jersey-based incentives negotiation and site selection firm, Mintax. "In the state of Ohio, they use a mulitiple factor apportionment scheme. The argument would be 'If I build this facility in Ohio, by doing that I'd create tax, increase the factor, and increase tax in that state. Why shouldn't Ohio reduce my tax then?' They're just giving back a portion of what they're taking anyway." (Ohio's apportionment scheme is 60 percent sales, 20 percent payroll and 20 percent property.)
      Consulting firms like these are analyzing the ramifications for similar credits offered in more than 40 states, "and we are exploring alternative transaction structuring strategies which would safeguard projects from this uncertainty," says Biggins.

The Ultimate Authority
      Several experts point out that tax systems themselves, with their varying apportionment formulas, create incentives to be in one state or another. In other words, it's not that big a leap from the particulars of this one case to the general principles that it calls into question. But don't make the leap too fast, cautions Corde.

The Washington, D.C.-based law firm of
Mayer Brown Rowe has established a collection site for
briefs filed in the course of the en banc appeal:

      "The broad ramifications of this decision probably aren't as widespread as some people would like to believe," he says, describing how many companies may not reach the tax level that causes the credits to kick in that quickly.
      But the fact that the original case was backed by a Ralph Nader-affiliated group means the threat of similar suits in other circuits is very real. And Jay Biggins says the protracted length of time it may take the en banc petition to slog through the legal process only further destabilizes decision-making.
      Allusions made in the ruling to Supreme Court statements prompt the question on many minds: Will the question of incentives — like the question of eminent domain currently before the justices — eventually get an answer from the country's highest judiciary authority? Jakeway and others say that's a possibility. If it does, Jay Biggins volunteers some historical context.
      "Most litigation surrounding the Commerce Clause occurred within the first 50 years of its adoption," he says, "when all the states were still trying to get used to the pre-emptive power of the federal government. This is an anachronistic interpretation of the Commerce Clause."
      The panel of judges, he goes on, "purports to premise the decision on an economic reality test, when the economic reality is that any state that chooses to compete for incremental investment can do so. States determine where on the playing field they want to stand. Companies determine what states they want to locate in. It is an open, free, functioning and efficient market, best left alone."

Hurricane Damage Only Makes National
Cement and Concrete Shortage More Acute


he building materials shortage -- exacerbated by the magnetic pull of Chinese development -- is well documented. The U.S. construction market depends on imported cement for 25 percent of its needs, and 29 states were reporting cement shortages during summer 2004. Now, in the wake of multiple hurricanes and before the forthcoming passage of a federal transportation bill, such shortages could become even more acute. So will new plants finally spring into action?
      According to data from the Skokie, Ill.-based Portland Cement Association (PCA) and from the Conway Data New Plant Database, such action may already be under way. New Plant shows some 46 cement or concrete product projects since January 2003. The PCA shows seven projects slated to come online in 2004, brandishing 3.45 million metric tons of new capacity, a 400-percent jump in expansion activity. And by 2008, another 14.9 million metric tons are expected to come available via 12 more projects, the largest being a 4,400-metric ton plant by Swiss-owned concern Holcim (US) Inc. in the Mississippi River city of Ste. Genevieve, Mo., expected to come online in 2008.
      Tom Chizmadia, vice president of communications and public affairs for Holcim (US) Inc., says the capital investment in the Missouri project will fall between $500 million and $600 million. It's just the latest in a string of expansions since 1998 that has the company seeing double: doubled capacity in Devil's Slide, Utah; doubled plant size in southern Colorado; a newly constructed parallel line at Holcim's Midlothian, Texas, plant; and most recently, doubled capacity in Holly Hill, S.C., going from 1.1 million tons to 2.2 million tons with a $240-million investment.
      "Proximity to prime markets, anticipated growth, transportation avenues in those markets -- all of those things tie in," he says. So does limestone quality, as well as the permitting process. And in June 2004, the air permit came through for the Missouri greenfield project. Chizmadia also points to the prime shipping location right on the river.
      But even though environmental groups dropped their actions against the project in October, Chizmadia notes that challenges do still exist in the permitting and regulatory realm.
Among the expansion activity being pursued by Holcim (US) Inc. is a $240-million investment and doubling of capacity in Holly Hill, S.C.  

      "There are opportunities to streamline that process," he says. "The activities and relationships with local communities in both Holly Hill and Ste. Genevieve have been very good. That has gone a long way to having both of those projects approved internally by our parent company, as well as working with the states on the permits."
      Among the other plants coming to fruition is a $250-million facility from Overland Park, Kan.-based Ash Grove Cement Co., to be constructed on the Moapa Indian reservation near Las Vegas, Nev. As with Holcim, high-quality limestone lodes were a prime factor, as was low-density population. The facility is slated to be completed by 2008.
      Perhaps the most immediate demand will be coming from Florida, where an already hungry construction market will be starved for materials in the wake of those hurricanes. That makes it all the more timely that Titan America — a division of Athens, Greece-based Titan Cement Co. — has opened a $220-million plant on a 6,000-acre (2,428-hectare) spread in Miami-Dade Co., with an output of 5,000 daily tons. The company also plans to import cement and aggregate from Greece through the expanding Port of Tampa, and is examining the possibility of expanding quarrying on another 930 acres (376 hectares) in Miami-Dade Co.
      In the meantime, the domestic shortage finally may be aided by capacity growth in Asia itself. Lafarge, for one, riding high profit growth, is looking to double capacity at two plants in China. — Adam Bruns


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