The Multinational Monitor


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Corporate Welfare Challenged

The U.S. Constitution gives the Congress the power to regulate commerce between states, and the Supreme Court has interpreted the “commerce clause” to mean that states cannot impose special taxes or maintain protectionist barriers on goods shipped from other states. But in an anomaly, the Court has not found that state subsidies to in-state firms are unconstitutional.

Now that distinction is about to face a challenge in a lawsuit expected to be filed in Toledo in late January.

On behalf of a number of residential and small business plaintiffs, Toledo attorney Terry Lodge and his co-counsel, Northeastern University Law Professor Peter Enrich, plan to challenge a massive subsidy from Toledo and the state of Ohio to DaimlerChrysler to keep a Jeep plant in the city.

Faced with the threat of the existing Jeep plant closing, Toledo showered a $281 million local, state and federal subsidy package on the multinational to support company $1.2 billion plant expansion plans. The package includes a property exemption for 10 years, transfer of free land, including site preparation, transfer of environmental liability from DaimlerChrysler to the city and assorted other corporate welfare handouts.

In exchange, Daimler Chrysler has committed to expand its Jeep facilities — but will actually reduce the number of Jeep jobs from the current 5,600 to 4,900 (DaimlerChrysler’s public claim) or 4,200 (the level the company specifies it will try to preserve in an unenforceable provision in its agreement with Toledo) or something much lower (a likely result based on United Auto Worker estimates and recent layoffs at the plant).

The Toledo deal has also attracted national attention because it requires the displacement of a community near the plant. With the threat of a taking by eminent domain in the background, the City bought out 89 households, and will transfer the community’s land to DaimlerChrysler. In its public explanations, Jeep identifies the community’s parcel as a potential truck waiting area; but in its map, the area is to be used for landscaping — a truck waiting area is designated for another parcel of land.

The lawsuit challenging the subsidies will be based on two theories. First, small, local businesses assert that the subsidy package denies them equal protection under the law, on the grounds, Lodge says, that “they get no benefit from the corporate largess, and have not prospect of qualifying [for such subsidies] absent a threat to leave the state” — not a realistic threat for local businesses. The residents and small businesses contend that they are being asked to subsidize Daimler-Chrysler unfairly.

The second claim in the lawsuit is on behalf of Michigan residents, where DaimlerChrysler threatened to move its plant if Toledo did not provide them with subsidies. In an initially filed version of the suit (voluntarily dismissed without prejudice), the Michigan residents contend, “The purpose and effect of [the Toledo subsidy] and of the Agreement [with DaimlerChrysler] is to induce DaimlerChrysler and other business enterprises to locate their economic activities in Ohio, rather than elsewhere, by conditioning favorable tax treatment on the enterprises’ agreement concerning the location of investment and jobs.”

Such subsidies, they argued in the initial version of their suit, are unconstitutional. “The statute and Agreement discriminate in favor of in-state business activity and against out-of-state investment, in violation of the restrictions imposed on discriminatory state and local taxation by the Commerce Clause.”

Neither the City of Toledo or DaimlerChrysler responded to requests for comment about the suit.

The challenge to the Toledo subsidy seemingly would require a court to rule against the prevailing, tangled Commerce Clause jurisprudence which seems to permit subsidies.

But it also pushes the courts to make their Commerce Clause positions on penalties against out-of-state business and subsidies for in-state businesses consistent.

Moreover, Enrich argues that, as a tax matter, the Supreme Court has not had occasion to rule on business-location tax incentives.

Since the Supreme Court has held unconstitutional tax measures that penalize out-of-state firms, it should logically strike down in-state subsidies, he argues in a 1996 Harvard Law Review article, challenging the notion that a ruling such as that requested in the Toledo case would contravene Commerce Clause precedent.

“The Court has repeatedly invalidated state tax provisions if they provide an in-state business or activity with protections or benefits that are not similarly available to its out-of-state competition,” he writes. “Indeed, the case law leaves the distinct impression that any tax provision structured in such manner will be held to discriminate unconstitutionally against interstate commerce.”

The stakes are high in this innovative case. The Toledo-DaimlerChrysler agreement is a typical, if extreme, business subsidy package, with a locality desperate to attract or retain jobs bidding against all other suitors and itself. If such subsidies are held unconstitutional, corporations' ability to use job blackmail against states and localities will be severly undermined.

-Robert Weissman