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Nov 2004
01
November 01, 2004

Investment Tax Credits: These Engines of Economic Development Could Be Stalled by a Recent Sixth Circuit Decision

In a recent, seminal decision, the United States Court of Appeals for the Sixth Circuit held that investment tax credits provided by the city of Toledo were unconstitutional. Cuno v. DaimlerChrysler, Case No. 01-3960 (6th Cir. Sept. 2, 2004). Due to the broad scope of this decision, states nationwide are evaluating whether tax credits that make up a large part of their economic development programs are also unconstitutional. In Michigan, this includes programs such as Michigan Economic Growth Authority ("MEGA") credits, credits for brownfields restoration, and credits for locating in Renaissance or Enterprise Zones. In the last year, $128 million in single-business tax credits from such programs have been awarded in Michigan, while, nationwide, awards of this type have reached an estimated annual value of nearly $50 billion. After Cuno, these programs are now at risk of being held unconstitutional under similar challenges.

In 1998, the city of Toledo and two local school districts provided a $280 million incentive package to DaimlerChrysler, in exchange for maintaining Jeep production in Toledo. The Toledo plant opened in 2001 and employs approximately 3,800 workers. The incentive package had two components: a ten-year, 100 percent personal property tax exemption and an investment tax credit of 13.5 percent against the state corporate franchise tax for certain qualifying investments.

In March of 2000, the plaintiffs filed suit over the incentive package. The Ohio lawsuit was filed by a dozen taxpayers, two of whom are Michigan residents, and three small businesses, and was initiated by independent presidential candidate Ralph Nader. The lawsuit is part of a nationwide effort by Nader and his supporters to challenge financial breaks for corporations, or what Nader calls "corporate welfare." Nader's efforts were partially successful in Cuno. The Sixth Circuit struck down as unconstitutional the investment tax credits the city had awarded DaimlerChrysler - worth approximately $70 million. The Sixth Circuit upheld the personal property tax exemption, leaving this program untouched.

The Sixth Circuit held the investment tax credit to be unconstitutional, even though it was "sympathetic to efforts by the city of Toledo to attract industry into its economically depressed areas."

Other states are now carefully reviewing their own economic development programs to determine if they are in compliance with the decision in Cuno. In addition, private businesses affected by this decision are not without recourse. Both the Sixth Circuit and the United States Supreme Court allow parties affected by litigation to file amicus curiae briefs arguing for or against the decision. Businesses affected by this decision should move quickly to participate as an amicus curiae party in the Cuno litigation. As the first decision of this type in this nation, the Cuno litigation - including the amicus curiae briefs - will set the tone for similar challenges nationwide.

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Janet L. Ramsey is an associate in our Grand Rapids office. She concentrates her practice in the areas of litigation, appellate and employment and labor law and may be reached at 616.752.2736. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Holland, Metro Detroit and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.

West Michigan Commercial Development & Real Estate Quarterly

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