You Be the Judge Are tax incentives to attract businesses unconstitutional?
By C.J. Prince
Opinions expressed by Entrepreneur contributors are their own.
In late September, the Supreme Court agreed to hear an Ohio caseon state tax incentives, and its decision could affect similarincentive programs nationwide. The suit was brought by threeseparate plaintiffs, each alleging that incentives provided by thestate of Ohio to DaimlerChrysler AG to build a manufacturingfacility in the state were unconstitutional.
The decision, says Walter Hellerstein, professor of law at theUniversity of Georgia School of Law, "has tremendousimplications for the constitutionality of the garden-variety creditagainst income tax liability for new equipment. Many states havethat kind of credit." Those states could find their incentiveprograms running afoul of commerce law.
But where do small businesses stand on the case? Typically, thebusiness community as a whole supports incentives because theyattract investments. But some programs have investment thresholdsthat make small businesses ineligible to receive them, says JeffreyFinkle, president and CEO of the International EconomicDevelopment Council, a nonprofit organization based inWashington, DC, that helps economic developers do their jobs moreeffectively. However, "Small businesses end up paying a largerpercentage of their revenue or income in taxes to make up for theincentives," says Finkle.
On the other hand, some states have tweaked their incentivesprograms to make them more accessible to smaller companies, saysJones Hooks, president and CEO of Virginia's Hampton Roads EconomicDevelopment Alliance. Hooks adds that smaller businesses canoften be indirect beneficiaries of big-business incentives, sincethose players in turn buy supplies from or contract work to smallercompanies.
This case, which has yet to be heard, won't decide whichincentive programs discriminate against small businesses, but itwill raise the question of the constitutionality of tax incentives."That may be good news or bad news to a particular smallbusiness," says Hellerstein. "One person's taxincentive is another person's discriminatory tax. That'salways going to be the case."
