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The Legality of Attracting Investment Through Tax Incentive Programs: A Preview of DaimlerChrylser Corp. v. Cuno

Ryan Roman



On September 27, 2005, the U.S. Supreme Court granted certiorari to hear two Sixth Circuit cases, DaimlerChrysler Corp. v. Cuno and Wilkins v. Cuno (hereinafter referred to collectively as “DaimlerChrysler I”). The issue that the Supreme Court will decide is whether Ohio’s investment tax credit, which involves a tax incentive for those companies that install a certain amount of new machinery in the state of Ohio, violates the dormant Commerce Clause powers of the federal government. [1]   These sorts of tax credits which are packaged together to provide incentives for businesses to locate in certain geographic areas have become increasingly popular. The overall incentive program at issue in this case was estimated at $280 million, in return for which DaimlerChrysler expected to invest $1.2 billion in the building of a plant in Toledo, Ohio. Cuno v. DaimlerChrysler, Inc., 386 F.3d 738, 741 (6th Cir. 2004) (hereinafter, “DaimlerChrysler II”).

The Sixth Circuit’s Decision

The trial court in the Northern District of Ohio found that both tax provisions violated the dormant Commerce Clause. Cuno v. DaimlerChrysler, Inc., 154 F. Supp. 2d 1196, 1204 (N.D. Ohio 2001). On appeal, the Sixth Circuit, held that the property tax abatement was an appropriate use of the State’s power to tax [2]   but that the investment tax credit violated the law. DaimlerChrysler II, 386 F.3d at 741. According to the Sixth Circuit, "[a] tax provision satisfies the requirements of the Commerce Clause if (1) the activity taxed has a substantial nexus with the taxing State; (2) the tax is fairly apportioned to reflect the degree of activity that occurs within the State; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to benefits provided by the state." DaimlerChrysler II, 386 F.3d at 742 (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)). The only factor challenged by the plaintiffs in this case was the third factor, namely whether a State “discriminatorily tax[es] the products manufactured or the business operations performed in any other State.” Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 336-37 (1977). The Sixth Circuit rejected the defendants’ contention that “the only tax credits and exemptions that would run afoul of the Commerce Clause fall into two categories: those that function like a tariff by placing a higher tax upon out-of-state business or products and those that penalize out-of-state economic activity by relying on both the taxpayer’s in-state and out-of-state activities to determine the taxpayer’s effective tax rate.” DaimlerChrysler II, 386 F.3d at 745. Instead, the Court adopted a broader view whereby both tax benefits for in-state investment and tax-burdens for those companies operating out-of-state are both invalid under the dormant Commerce Clause. DaimlerChrysler II, 386 F.3d at 745-46.

The “Dormant” Commerce Clause

Under the Commerce Clause to the U.S. Constitution (Article I, Section 8), no state can abridge the federal government’s right to control interstate commerce. The dormant Commerce Clause, while not spelled out in the text of the Constitution, prevents States from erecting barriers to prevent other States from competing for markets within any State. Essentially, the dormant Commerce Clause is meant to protect a free market among the several States. In H.P. Hood & Sons, Inc. v. Du Mond, this power was described by the Supreme Court as follows: "Neither the power to tax nor the police power may be used by the state of destination with the aim and effect of establishing an economic barrier against competition with the products of another state or the labor of its residents. Restrictions so contrived are an unreasonable clog upon the mobility of commerce." 336 U.S. 525, 539 (1949). The question that arose when this case was first brought in federal court in the State of Ohio was whether two types of taxes, a property tax abatement and an investment tax credit for capital expenditures, benefited in-state commerce at the expense of out-of-state competitors.

Issues On Appeal

The primary issue that the U.S. Supreme Court will be reviewing on appeal is “[w]hether Ohio's investment tax credit, Ohio Revised Code § 5733.33, which seeks to encourage economic development by providing a credit to taxpayers who install new manufacturing machinery and equipment in the State, violates the Commerce Clause of the United States Constitution.” Petition for Writ of Certiorari, DaimlerChrysler Corp. v. Cuno, Docket No. 04-1704 (June 17, 2005), 2005 WL 1457703. Petitioners urge a narrow reading of the dormant Commerce Clause, believing that it is meant to guard against “protectionist state legislation that provides a competitive advantage to in-state businesses, and has no role to play when - as is true in this case - the sole purpose of a challenged state law is to reward intrastate investment.” Id. at *5. This reading contradicts with the Sixth Circuit’s determination that a violation of the dormant Commerce Clause occurs regardless of whether the challenged tax provision is a benefit or a burden. DaimlerChrysler II, 386 F.3d at 745-46.


The Supreme Court will have to determine what types of tax incentives are appropriate for States to offer and which inappropriately stifle the free market between States. As the petitioners wrote in their Petition for Certiorari, “there is ‘a palpable tension in the Supreme Court’s decisions,’ marked by an ‘ill-defined distinction between the constitutional carrot and the unconstitutional stick in state tax, subsidy, and related cases.” 2005 WL 1457703 at 11 (citations omitted). At the extreme, it could be argued that a State’s decision to lower its corporate franchise tax to a rate below its neighboring States’ is a violation of the dormant Commerce Clause. Because Supreme Court precedent does not clearly delineate rules for States to follow, this case is an important opportunity for the Court to set out clearer guidelines at a time when tax and other financial incentives are an increasingly popular tool in the economic developer’s toolbox.


1) Cuno v. DaimlerChrysler, Inc., 386 F.3d 738 (6th Cir. 2004),
2) DaimlerChrysler Corp.’s Toledo, Ohio locations,,,0-5-8793-1-36901-1-0-0-0-0-0-8-7155-0-0-0-0-0-0-0,00.html.


[1] The Supreme Court has asked both parties to also prepare briefs on the issue of standing of the plaintiffs to bring suit in this matter. That issue is not dealt with in this handbook entry since it involves procedural issues and not the substantive economic development issue that this entry focuses on.

[2] Since the Sixth Circuit’s approval of the use of a property tax abatement was not challenged by the plaintiffs, it is not up for review by the Supreme Court and will not be discussed in the course of this entry.