howardnlby Howard Stephenson

Instead of writing another horror story about local Redevelopment Agency (RDA) tax incentives like those published in a few past Enterprise columns, this week I would like to shift focus from local RDA incentives to state financial incentives and tax breaks used by states to lure desirable employers into their borders.

According to Site Selection magazine (November 2004), the fifty states collectively provide 18 types of financial assistance for industry. These include state loans to private businesses, loan guarantees, general obligation bonds, matching funds, and direct financial assistance. Utah offers only seven of the 18 possible types of financial assistance. Only three states provide fewer types of assistance than Utah . Of the seven states which offer only single digit (1-9) types financial incentives, five are western states.

In the same issue of Site Selection magazine the fifty states were compared regarding the 15 types of tax incentives for industry. These tax incentives include income tax exemptions, property tax exemptions, sales & use tax exemptions, various tax credits, and accelerated depreciation options. Utah provides only 7 of the 15 types of tax incentives. Wyoming is the only state which provides fewer incentives than Utah . Eight states offer single digit numbers of tax incentives. Six of these are western states.

Utah’s Tax Reform Task Force will be studying this year which types of business tax breaks produce the greatest economic growth and will be debating whether to (1) eliminate the state corporate income tax, (2) to change Utah’s individual income tax to a lower-rate flat tax, (3) to eliminate business personal property taxes, and to (4) exempt sales taxes on all business inputs including machinery, equipment, parts, and items consumed in the process of doing business.

Cuno decision may affect state incentives to business

A recent decision in the federal Sixth Circuit court, Cuno v. DaimlerChrysler invalidated a $280 million Ohio tax credit for DaimlerChrysler’s in-state investment as discrimination against interstate commerce.

The Ohio investment tax credit invalidated by Cuno provided a tax credit against a corporation’s Ohio corporate franchise tax liability. The tax credit was conditional on a corporation’s purchase and installation of machinery at a specific Ohio production facility. The credit was part of Ohio ’s effort to get DaimlerChrysler to open a new production plant in Ohio .

The decision is on appeal and federal legislation was introduced last fall to reverse the Sixth Circuit decision. Numerous analysts have also grappled with the opinion since its release.

Tax Foundation Analysis
According to the Tax Foundation of Washington, D.C., the Cuno ruling suffers from three fatal flaws. First, the discrimination rule in the opinion cannot logically be limited to the most egregious forms of state corporate incentives. Second, the opinion allows state tax incentives to continue in the form of direct cash subsidies. Third, the opinion also allows state tax incentives to continue but only if they are granted to out-of-state companies as well as in-state companies.

The irony of the Cuno opinion is that it imperils broad-based state tax reform while simultaneously allowing the system of state tax incentives to continue in different or slightly altered forms. The Tax Foundation said Cuno is not the answer for those who want the states to stop carving special incentives into their tax codes. This analysis can be found at

Maxwell Miller summary
In a paper summarized before the recent Utah Taxes Now Conference sponsored by the Utah Taxpayers Association, attorney Maxwell Miller of Parsons Behle & Latimer said, “The legal basis for the Cuno decision is a nuanced reading of Commerce Clause Constitutional restraints on state incentives to stimulate in-state commercial growth. The case’s holding is often premised on razor thin distinctions.”

“Over the years,” Mr. Miller explained, “the United States Supreme Court has held that the Commerce Clause implies that states cannot regulate interstate commerce, and, more specifically to this case, cannot discriminate against interstate commerce.”

The Cuno decision itself has been stayed, and the State of Ohio has petitioned the Sixth Circuit for a rehearing en banc. An amicus brief filed by the Council On State Taxation, a Trade Association, argues what Mr. Miller believes should be the correct position. “Does the incentive for instate activity penalize activities occurring in another state? It is only if the answer to this question is “yes” that the incentive violates the discrimination prong of the United States Constitution.”

Pending action by Congress or a rehearing en banc by the Sixth Circuit, Mr. Miller said he does not believe that Utah ’s efforts to stimulate commercial development in this state, through such means as a sales tax exemption for machinery and equipment in new and expanding manufacturing operations, are in constitutional peril. On the other hand, he said he had rather hoped that Redevelopment Agencies (RDAs) could successfully be challenged under Cuno because they, in fact, discriminate against local and interstate commerce.

“Had Utah implemented RDAs using the same investment tax credit process Ohio used, those favoring RDAs would have reason to fear. Yet RDAs are, in fact, a subsidy at the expense of competitor industries. Though unfair and, in the long run, economically destructive, RDAs under Cuno are not, in my view, unconstitutional,” Mr. Miller said. However, he said they may be unconstitutional under the uniformity guarantees in Article XIII of the Utah Constitution. Mr. Miller’s complete paper can be found at