State Tax Breaks under Attack

An investment tax credit fares poorly in Ohio, and a state subsidy enters into a dispute with the European Union.
Ed ZwirnSeptember 20, 2004

It’s been a part of the American political-economic scene for a long time, usually touted as a win-win deal for a local economy and its taxpayers. But state governments are now facing legal challenges, both at home and abroad, to their longtime practice of luring companies with tax breaks.

A recent ruling by the Sixth Circuit Court of Appeals in Ohio constitutes “a bombshell” with which “state governments around the country may have to contend,” according to The National Law Journal. Ohio offers an investment tax credit intended to attract corporations by allowing to offset their corporate franchise taxes in proportion to new machinery they bring to the state, noted the Journal. Perhaps 40 other states offer similar credits, according to the plaintiffs’ attorney, Northeastern University law professor Peter D. Enrich.

The court ruled that the Ohio tax credit violates U.S. commerce law, reported the Journal. The paper added that Hollie Spade, executive director of the Office of
Legal Services in the Kentucky Cabinet for Economic Development, said that her state as well as Tennessee and Michigan may file briefs in support of Ohio when it files for a rehearing of the case.

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State aid also figures in a dispute abroad. The Financial Times reported Friday that U.S. and European Union negotiators have failed to reach agreement on regarding subsidies of rival airplane manufacturers Boeing and Airbus.

According to the FT, the European Union insists that an evaluation of the subsidy question must examine the role of U.S. states and other national governments in helping Boeing launch its 7E7 program. Washington state pledged more than $3 billion in tax incentives, and Japan and Italy offered nearly $2.2 billion to attract a share of the project, reported the paper.

The FT quoted a senior U.S. official as saying that the United States needs “a very clear, near-term path to an agreement” or it will consider taking the matter to the World Trade Organization.