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Jewish World Review July 21, 2005 / 14 Tammuz, 5765 Big tax giveaways facing legal battle By Robert Robb
http://www.JewishWorldReview.com |
Arizona's economic development bureaucrats constantly complain that there
are not enough tools in their toolbox. By that, they mean that they don't
have the easy access to big tax giveaways that some other states provide.
This has been a chronic complaint from the economic development community
for the nearly 30 years I've been an active observer and participant in
Arizona politics. And for most of that time, Arizona nevertheless has had
one of the most productive economies in the country.
That would suggest that tax giveaways aren't really all that vital to
economic growth. Nor, for that matter, is the economic development
bureaucracy.
There is, however, a sense that the tide may be changing. Advocates of an
Arizona industrial policy are gaining strength. Gov. Napolitano is a clear
advocate. And last session, the Arizona Legislature finally established a
small state venture capital fund.
Interestingly, however, the big tax giveaways our economic development
bureaucrats so envy in other states may be on their way to being declared
illegal under federal and international law.
Last September, the Sixth Circuit U.S. Court of Appeals struck down a big
investment tax credit Ohio had provided DaimlerChrysler to build a new
assembly plant as violating the Commerce Clause of the U.S. Constitution.
Now, as in so many areas, the U.S. Supreme Court has made a hopeless muddle
of what states can and cannot do with their tax codes to promote economic
growth.
Obviously states are free to decide what they want to tax and at what rate,
provided the rate applies to all taxpayers equally. And the court has
fairly clearly said that states cannot establish discriminatory tax
treatment between in-state and out-of-state producers.
Arizona ran afoul of the latter proscription when it enacted legislation
taxing dividends from in-state companies at a lower rate than those from
out-of-state firms. The state is still paying a refund bill of over $300
million.
The new Sixth Circuit decision, Cuno vs. DaimlerChrysler, appears to stand
for the proposition that states cannot make a lower rate of taxation
contingent on new investment in the state.
That has economic development bureaucrats across the country terribly
worried. Studies have indicated that they were generally getting fleeced in
these deals. Companies were taking the tax breaks but not producing the
promised jobs. So, increasingly these economic development tax break deals
have performance clauses, requiring a certain level of investment or job
creation. Arizona, for example, just passed a manufacturing income tax
reduction contingent on significant new investment in the state.
But, according to the Sixth Circuit, it's such contingencies that interfere
with interstate commerce.
There's been an outbreak of litigation making similar challenges to tax
giveaways in other states. Ohio has appealed the decision to the U.S.
Supreme Court, which hasn't yet decided whether to take it up.
Meanwhile, such state economic development tax breaks have become part of
the global trade tussle between the United States and Europe over subsidies
to Airbus and Boeing.
The United States filed a complaint with the World Trade Organization
arguing that development aid provided by European governments to Airbus was
an illegal subsidy under international trade agreements.
Washington gave Boeing a substantial break on its gross receipts
liabilities, a healthy investment tax credit, and some sales and property
tax relief — provided production of the new plane occurred there.
The Boeing new plane auction was one of the times Arizona's economic
development bureaucrats cried the bitterest tears about not having enough
tools in their toolbox to get into the game.
There's no telling how these challenges will play out. But they do suggest
that relying on tax giveaways for big projects is an uncertain and unsteady
approach to economic growth. A pretty solid body of research indicates that
it's also a generally ineffective approach.
A sound tax and regulatory environment for all comers is a surer path. That
puts more tools in everyone's toolbox, not just that of the economic
development bureaucrats.
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JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.
© 2005, The Arizona Republic |
Arnold Ahlert | |||||||||
