Originally published March 2, 2006
On March 1, 2006, the U.S. Supreme Court heard oral argument in Cuno v. DaimlerChrysler before a packed courtroom. Counsel for the two petitioners – DaimlerChrysler and the State of Ohio – and for the respondents – the Cuno plaintiffs group – engaged in lively exchanges with the Justices concerning the proper scope of standing to challenge a state tax credit in the federal courts, as well as the merits of the respondents’ underlying Commerce Clause challenge to Ohio’s Investment Tax Credit (ITC).
Counsel for DaimlerChrysler opened the argument with the statement that while the underlying issue in this case concerned the wisdom, efficacy and constitutionality of the Ohio ITC, the respondents faced two insurmountable obstacles: (1) they lacked standing to challenge the ITC in federal court, and (2) their dormant Commerce Clause challenge was without merit. The Justices immediately latched onto the standing issue and peppered DaimlerChrysler with questions that indicated their significant concern with whether, as a threshold matter, the case should have been brought in (or removed to) a federal court. In fact, several questions on the standing issue appeared to be "lay-ups" for the petitioners (e.g., Question: "Why should these plaintiffs have standing, just because no one else might have standing to challenge the Ohio ITC?" Answer: "They should not; standing is not satisfied here"), and other questions permitted DaimlerChrysler to delineate the narrow standing rules that apply to all "cases and controversies" under Article III of the Constitution.
Taken as a whole, the Justices tipped their hand on the standing issue – based on friendly questioning of the petitioners’ counsel and challenging questions posed to the respondents’ counsel, the Court seemed to not believe that Cuno had standing, either as an original matter or under novel theories urged by the respondents. One such theory concerned "ancillary standing" – in other words, because the municipal taxpayer standing doctrine arguably permits Cuno’s challenge to the property tax exemption (administered by Toledo, Ohio, as opposed to the State of Ohio), the respondents should be permitted to "piggy-back" their Ohio ITC challenge onto the property tax challenge. Note that the petitioners conceded that municipal taxpayer standing existed with respect to the property tax exemption (although Chief Justice Roberts stated that this issue in fact remained unresolved). However, the Justices were not visibly swayed by these standing theories.
While the Justices will not reach the merits of Cuno if they determine that respondents do not have federal court standing to challenge the ITC, they nevertheless engaged counsel for the parties in a discussion of the constitutionality of the Ohio ITC. Here, too, the Justices’ questions tended, on the whole, to indicate a discomfort with the position asserted by respondents -- that the ITC violates the dormant Commerce Clause by discriminating against interstate commerce. Certain Justices (including Scalia, Souter, Roberts and Stevens) appeared to be unimpressed by the respondents’ formulation of the discrimination that results from the Ohio ITC, and instead analogized the ITC – by reference to its effect on taxpayers – to a lower income tax rate (which Justice Scalia stated would clearly not violate the Commerce Clause), or to a subsidy (which the respondents acknowledged does not violate the Commerce Clause).
On the other hand, Justice Breyer posed a hypothetical to counsel for Ohio that was designed to elicit whether the unconstitutional harm resulting from the Ohio ITC is that taxpayers will not build facilities in other states; he appeared to reject the notion that the Ohio ITC results in no direct harm or penalty to out-of-state taxpayers. Chief Justice Roberts also echoed the question whether the value inuring to Ohio by virtue of taxpayer investment there, with the goal of obtaining ITC benefits, did not happen at the expense of other states.
The Court’s interaction with counsel for the parties also highlighted the Justices’ sensitivity to the political import of state tax incentives programs. Ohio’s counsel argued that respondents were lodging a generalized public grievance with the manner in which the State expended public funds, which failed to establish standing, and that the states’ behavior, as a policy matter, did not belong before the Court. Consistent with these assertions, Justice Scalia suggested to respondents’ counsel that he might well "take judicial cognizance" of the fact that tax credits are a political issue, and therefore begged the question why the Court, as opposed to the legislature, should decide this issue. Justice Souter followed immediately with the assessment that the ITC was simply a quid pro quo, and those who do forego the opportunity to invest in Ohio do not reap the benefits of the ITC.
Counsel for DaimlerChrysler had reserved time for rebuttal, and, therefore, had the last word. During rebuttal, counsel tried to reframe the constitutional question by noting that the impact of Ohio’s use of an apportionment factor to tax corporate income might well generate additional tax in situations where a taxpayer invests in a new plant in-state, even taking the ITC into account; but the Ohio apportionment formula does not tax out-of-state activity or out-of-state taxpayers. He stressed that states offer many forms of inducement to invest in-state besides tax incentives, and that the Court has frequently approved such competitive structures. He concluded that the effect of affirming the Sixth Circuit’s holding regarding the unconstitutionality of the Ohio ITC would be to nationalize state tax systems, in the name of avoiding discrimination, and this would adversely impact our federalist system.
The Sutherland SALT Group will issue another Legal Alert once the Court issues its opinion. In the interim, we will be monitoring litigation regarding the constitutionality of state and local tax incentives. Please do not hesitate to contact a member of the Sutherland SALT Group regarding state and local tax issues.
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.