by Jay Biggins

U

ncertainty is the enemy of healthy markets. This observation has been confirmed by a controversial Federal court ruling that a broad range of economic-development incentives are unconstitutional. That ruling was issued in October 2004 by a three-judge panel of the Sixth Circuit Court of Appeals in Ohio, and, to the surprise of many, the full Circuit Court in January 2005 refused to reconsider the decision. While only the states in the Sixth Circuit (Ohio, Michigan, Tennessee and Kentucky) are immediately affected, at least 40 states have incentive programs that might be at risk; the fact that most are not directly affected by the Sixth Circuit's Cuno decision is cold comfort. Moreover, the implications of Cuno also will spread nationwide, either as a result of other cases brought in other Circuits, or an eventual Supreme Court decision.
      The court ruled that Ohio's investment tax credits against its corporate franchise tax violated the Commerce Clause of the U.S. Constitution because they "interfere with interstate commerce." The decision's details have been addressed in these pages (November 2004) and in reports nationwide. Here we address what states and companies can do about it.

      Some of our clients already have decided to eliminate jurisdictions from the "short list" because their incentives programs could be at risk under Cuno, while for others we are working on alternative incentives structures that are designed around the technical parameters of the court's reasoning.
      States are confronting the challenges of going back to their legislatures for amendments to incentives programs, and deciding whether and how to respond to the reasonable requests of companies to be held harmless from these uncertainties. States that move decisively in giving companies the assurances they need will competitively distinguish themselves.Ohio and other states have petitioned the Supreme Court to overturn Cuno, joined by the Chamber of Commerce and numerous other business groups nationwide. Some states also are taking a more holistic look at how their overall tax structures can become more competitive.
      The most important new development on the Cuno front is proposed Congressional legislation being readied for introduction by Senator George V. Voinovich (D-Ohio), which would go to the heart of the problem by confirming a state's right to intervene in specified ways in interstate commerce with incentives. The draft bill has been entitled the Economic Development Act of 2005.
      The clear advantage of this approach is that it would settle the matter promptly, relieving the market of a protracted period of uncertainty. A federal standard also would provide a level playing field for all states to make their own decisions about how to compete and with what tools.
      As of this writing, draft legislation is being circulated among potential additional congressional co-sponsors and an active lobbying effort has been mounted. We and other practitioners have been actively involved in this effort and are optimistic that it will be successful. The bill was expected to be introduced before the end of April.

      Pending resolution in Washington, companies and their public sector partners are well-advised to begin internal reviews of potential impacts and start preparing strategies.
      Companies should conduct a site-by-site and incentive-by-incentive inventory and analyze the level of potential exposure. This analysis should focus on all incentives — not just tax credits — in which the state's taxing power effectively reduces an existing tax liability. These are the most likely to be affected, while incentives limited to incremental future tax liability currently appear safer under Cuno.
      If a Cuno impact analysis reveals potential exposure, companies should develop a strategy for negotiating replacement or restructured incentives that would satisfy the standards set forth in Cuno. In some situations, companies should seek resolution for their specific transactions, whereas in others, a coalition approach will be most effective. Also, depending upon if and how they have accounted for the incentives in their financials, some companies may find it necessary to reclassify and/or reserve against any potential shortfall, should the pending legislation in Washington fail to pass.
      Building market tension may be necessary to create an environment in which Congress will act without delay. Some state officials have privately expressed the concern that if they step up with state-level remedies to the Cuno problem, which could competitively benefit their state, this could relieve the urgency just enough that Congress may not be motivated to act, leaving a patchwork of inconsistent standards and legal uncertainties to plague the market.
      As noted, a broad public/private coalition has emerged in support of the federal legislation, and important milestones are imminent. Interested parties can learn more about the legislation by going to www.senate.gov.

      Jay C. Biggins is executive managing director of Stadtmauer Bailkin Biggins LLC, an economic-development-incentives advisory firm with offices in Princeton, N.J., Atlanta and New York. He is a member of the Site Selection Editorial Advisory Board. For more information, visit www.sbb-incentives.com.