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You Be the Judge

Are tax incentives to attract businesses unconstitutional?
March 1, 2006
URL: http://www.entrepreneur.com/article/83582

In late September, the Supreme Court agreed to hear an Ohio case on state tax incentives, and its decision could affect similar incentive programs nationwide. The suit was brought by three separate plaintiffs, each alleging that incentives provided by the state of Ohio to DaimlerChrysler AG to build a manufacturing facility in the state were unconstitutional.

The decision, says Walter Hellerstein, professor of law at the University of Georgia School of Law, "has tremendous implications for the constitutionality of the garden-variety credit against income tax liability for new equipment. Many states have that kind of credit." Those states could find their incentive programs running afoul of commerce law.

But where do small businesses stand on the case? Typically, the business community as a whole supports incentives because they attract investments. But some programs have investment thresholds that make small businesses ineligible to receive them, says Jeffrey Finkle, president and CEO of the International Economic Development Council, a nonprofit organization based in Washington, DC, that helps economic developers do their jobs more effectively. However, "Small businesses end up paying a larger percentage of their revenue or income in taxes to make up for the incentives," says Finkle.

On the other hand, some states have tweaked their incentives programs to make them more accessible to smaller companies, says Jones Hooks, president and CEO of Virginia's Hampton Roads Economic Development Alliance. Hooks adds that smaller businesses can often be indirect beneficiaries of big-business incentives, since those players in turn buy supplies from or contract work to smaller companies.

This case, which has yet to be heard, won't decide which incentive programs discriminate against small businesses, but it will raise the question of the constitutionality of tax incentives. "That may be good news or bad news to a particular small business," says Hellerstein. "One person's tax incentive is another person's discriminatory tax. That's always going to be the case."