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Congress goes to bat for in-state expansion tax incentives.

Members of both parties in Congress are trying to reverse an unappealing decision handed down last September by the 6th U.S. Circuit Court of Appeals, whose rulings cover the states of Kentucky, Michigan, Ohio and Tennessee. The decision said it was unconstitutional for Ohio to offer tax incentives to state companies to convince them to expand inside the state's borders.

Sometimes tax incentives, such as Ohio's manufacturing machinery and equipment tax credit, are used to lure entrepreneurs to high-priority economic development zones. Ohio had offered the incentives to DaimlerChrysler AG for expansion of a Jeep plant in Toledo, an expansion which has gone forward anyway as the company appeals the court decision. That growth has meant considerable new business for numerous small Jeep suppliers in Toledo. In its September decision, the appeals court struck down the tax credit because Ohio companies could not get the tax credit if they expanded outside the state; the court ruled that the tax credit therefore discriminated against interstate commerce.

Bills have already been introduced in both the Senate and the House (S.1066/H.R. 2471) that would legalize the Ohio tax credit and others like it. Reversing the appeals court decision is a pressing issue because similar challenges to state tax incentives are pending in Minnesota, Nebraska and Wisconsin, and a suit is expected to be filed soon in North Carolina.

"This [new] legislation is carefully crafted to protect the most common and benign forms of tax incentives, but not to authorize those tax incentives that truly discriminate against interstate commerce," says Sen. George Voinovich (R-Ohio), who was governor of Ohio when the tax credit became law and is co-sponsoring the new bill. "This legislation does not invalidate any tax incentives. It only authorizes tax incentives."

Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.

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This article was originally published in the September 2005 print edition of Entrepreneur with the headline: Border Patrol.

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