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.