Statements on Introduced Bills and Joint Resolutions

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

By Mr. VOINOVICH (for himself, Ms. Stabenow, Mr. Bunning, Mr. Levin, Mr. Alexander, Mr. DeWine, Mr. McConnell, and Mr. Frist):

S. 1066. A bill to authorize the States (and subdivisions thereof), the District of Columbia, territories, and possessions of the United States to provide certain tax incentives to any person for economic development purposes; to the Committee on Finance.

Mr. VOINOVICH. Mr. President, I rise today to introduce the Economic Development Act of 2005 to authorize States to provide tax incentives for economic development purposes.

This legislation is crucial to preserve tax incentives as an important tool for State and local governments to promote economic development in the wake of last year's decision by the Sixth Circuit Court of Appeals in Cuno v. DaimlerChrysler.

In its decision in Cuno, the Sixth Circuit struck down Ohio's manufacturing machinery and equipment tax credit, which I helped enact while I was Governor of Ohio, on grounds that it violated the ``dormant'' Commerce Clause of the U.S. Constitution. The court ruled that the tax incentive violated the Commerce Clause of the U.S. Constitution because it granted preferential tax treatment to companies that invest within the State rather than in other States.

The Cuno decision has had severe repercussions across the country. The decision immediately cast doubt on the constitutionality of tax incentives presently offered by all fifty States. As a result, States and businesses have been reluctant to go forward with new projects that depend on the availability of tax incentives out of concern that the Cuno decision may be used to invalidate those incentives. This legal uncertainty has worsened an already challenging economic environment. Furthermore, the decision threatens to undermine federalism by dramatically restricting the ability of States to craft their tax codes to promote economic development in the manner they determine is best. If left standing, this decision will handcuff the States in the Sixth Circuit, as well as States in other circuits where the court chooses to follow Cuno, in their efforts to promote economic growth and create jobs. Additionally, it will cripple their ability to compete internationally. In today's competitive economic environment, we can not afford to unilaterally discard the use of tax incentive to attract business to this country. As a former Governor who had to compete against Japan, Canada, China and Europe for new business projects, I know just how important a role tax incentives can play in attracting new businesses. I can assure you that our competitors are certainly not going to stop using tax incentives. Neither should we.

Fortunately, the U.S. Constitution gives Congress the power to determine which State actions violate the Commerce Clause. The purpose of the Economic Development Act of 2005 is therefore to have Congress override the decision in Cuno by authorizing States to provide tax incentives for economic development purposes. The legislation would remove the legal uncertainty surrounding tax incentives created by the Cuno decision and preserve the States' power to design their tax codes to promote economic development.

The history of the tax incentive struck down in Cuno demonstrates the important role tax incentives can play in promoting economic development. When I was Governor of Ohio, at my request and as part of my jobs incentive package, the Ohio Legislature enacted the manufacturing machinery and equipment tax incentive to encourage businesses to expand their operations in Ohio and to help draw new businesses to Ohio. It worked. Between 1993 and 1997, Ohio was ranked number one in the Nation by Site Selection and Industrial Development magazine three times for highest number of new facilities, expanded facilities, and new manufacturing plants. Since the program's inception, businesses have been eligible to claim a total of $2 billion in credits toward $34 billion in new equipment investments.

Currently, this incentive is part of an incentive package being offered to automobile manufacturer DaimlerChrysler in support of its plans for a $200 million expansion of their Jeep plant. The ruling by the Sixth Circuit in Cuno, however, puts that expansion in jeopardy and threatens to undermine Ohio's competitiveness in attracting new businesses.

In the Cuno decision, the Sixth Circuit ruled that the manufacturing machinery and equipment tax incentive, given by Ohio to DaimlerChrysler as part of its incentive package, violated the Commerce Clause of the U.S. Constitution because it discriminated against interstate commerce by granting preferential tax treatment to companies that expanded within the State rather than in other States.

The Cuno decision is troubling for several reasons. First, I believe the Sixth Circuit failed to appreciate the need for States to condition the availability of certain tax incentives on the undertaking of the specified economic activity within a State. In the case of the manufacturing machinery and equipment tax incentive, Ohio needed to limit the availability of the tax incentive to the investments undertaken in the State. Otherwise, Ohio would have been giving companies a tax incentive for activity that did not benefit the State. In other words, Ohio would have been effectively subsidizing investment in other States. We all know that in economics there is no free lunch and States should not be forced to provide a free lunch when they choose to give tax incentives. If Ohio or any other State is willing to forego tax revenue, it should be allowed to receive something in return, namely investment or other economic activity in the State. Accordingly, Ohio's tax incentive did not discriminate against interstate commerce. It merely required companies, if they chose to take advantage of the incentive, to undertake the investment in Ohio, the same State that would be foregoing tax revenue to provide the incentive.

There is also a little legal fiction present in the Cuno decision. The court states that Ohio could have provided a direct subsidy to companies that undertook investment in the State. Because Ohio decided to structure the program as a tax credit, however, the court said that it ran afoul of the Commerce Clause. I do not see how a direct subsidy does not violate the dormant Commerce Clause, but a tax credit does. They are economically the same.

If left standing, the Cuno decision will have a particularly detrimental effect on the U.S. manufacturing sector. From rising energy and health care costs to frivolous lawsuits and unfair international trade practices, the U.S. manufacturing sector and the hard working men and women who drive it are getting squeezed from all sides. Despite all they are up against, it's a testament to their ability and determination that they are still the most productive manufacturers in the world. This Sixth Circuit decision, however, is a new roadblock that threatens to take away one of the most effective and efficient means for assisting manufacturers who want to create new jobs here in America. The Economic Development Act of 2005 will make sure that manufacturers don't lose key tax incentives just when such incentives are needed the most.

The Cuno decision also sets a bad precedent that, if not checked, could upset our carefully balanced federal system. One of the most ingenious aspects of the U.S. Constitution is that it leaves a great deal of power with the States. It gives the States flexibility to devise their own solutions and, in the process, fosters innovation in government. Thus, the States are the laboratories of our democracy and an innovation they have developed to help create jobs and prosperity are programs that encourage new growth through tax incentives for training, job creation, and investment in new plants and equipment. The availability of tax incentives was critical to our success in Ohio and in being number one in new plant construction and expansion. Because Ohio had the ability to devise tax incentives that fit its economic development needs, we were able to create thousands of new jobs. My legislation will guarantee that the States remain our engines of innovation.

This legislation is something that Congress should have done a long time ago. The courts are not well-suited to making the often complex policy decisions regarding whether a tax incentive truly discriminates against interstate commerce and hinders the creation of a national market, or whether a tax incentive actually fosters innovation and job growth. Such decisions necessarily involve a careful weighing of competing and often mutually exclusive interests, and therefore should be made by Congress. Moreover, judicial decisions often fail to provide bright lines on which incentives run afoul of the dormant Commerce Clause, injecting uncertainty about the validity of certain tax incentives that makes businesses weary of relying on them and reduce their effectiveness. Indeed, the Supreme Court itself has called its dormant Commerce Clause jurisprudence a ``quagmire.'' Hence, it is time that Congress provide some clear rules on the treatment of tax incentives under the Commerce Clause.

As Supreme Court Justice Felix Frankfurter stated nearly a half-century ago:

At best, this Court can only act negatively; it can determine whether a specific state tax is imposed in violation of the Commerce Clause. Such decisions must necessarily depend on the application of rough and ready legal concepts. We cannot make a detailed inquiry into the incidence of diverse economic burdens in order to determine the extent to which such burdens conflict with the necessities of national economic life. Neither can we devise appropriate standards for dividing up national revenue on the basis of more or less abstract principles of constitutional law, which cannot be responsive to the subtleties of the interrelated economies of Nation and State.

The problem calls for solution by devising a congressional policy. Congress alone can provide for a full and thorough canvassing of the multitudinous and intricate factors which compose the problem of the taxing freedom of the States and the needed limits on such state taxing power. Congressional committees can make studies and give the claims of the individual States adequate hearing before the ultimate legislative formulation of policy is made by the representatives of all the States. . . . Congress alone can formulate policies founded upon economic realities. . . .

The Economic Development Act of 2005 is a good first step toward providing the prudent and carefully considered legislation that Justice Frankfurter urged the Congress to pass nearly a half century ago.

At its core, the Economic Development Act of 2005 recognizes that decisions should be made, if possible, at the State and local level. States make and should make decisions about the programs and services they want to provide with their tax dollars, not the least of which are economic development programs. Highway funding, education funding, welfare funding, and funding for seniors programs all vary from state to state because State legislatures, acting on behalf of their citizens, make choices and set priorities. This has allowed government policy to reflect the diversity of interests in our great republic and results in better and more responsive government. Accordingly, states should be allowed to prioritize economic development in an effort to create jobs and prosperity for their citizens, and, yes, attract business from outside their State. If States choose to use tax incentives to promote economic development, then that is not a violation of the interstate commerce clause, that's simply their choice. It is called federalism, and it should not be thwarted by the courts.

There are a couple of points about this legislation that I would like to discuss. First, this 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. I believe this bill strikes the right balance between protecting States' tax rights and preserving long-established protections against truly discriminatory State tax practices. Second, this legislation does not invalidate any tax incentives. It only authorizes tax incentives. Any tax incentive not covered by the legislation's authorization is simply subject to the traditional dormant Commerce Clause review by the courts. Third, this legislation does not require any state to provide tax incentives. Although I had success using tax incentives to foster economic growth in Ohio while I was Governor, I recognize that some states have concerns about whether and how to offer tax incentives and therefore believe it should be left to the states to resolve these concerns.

I am pleased that this legislation is being co-sponsored by all of the Senators representing States in the Sixth Circuit. We all realize that the right of states to make their own decisions about the programs and services they offer within their boundaries is their own and should not be taken away. Moreover, if the Supreme Court fails to review the Cuno decision, then our States, the States in the Sixth Circuit, will be at a competitive disadvantage in attracting businesses against other states which are not affected by the Cuno decision and can offer tax incentives.

The bill has also been endorsed by Governor Bob Taft of Ohio, the National Governors Association, the National League of Cities, the National Association of Counties, the National Conference of Mayors and the Federation of Tax Administrators, as well as by broad-based business coalitions and the Teamsters.

I am hopeful that the seriousness of this issue, and the severity of the ruling's possible ramifications, will allow us to see quick and positive consideration of my bill. The States are in a crisis mode because of this ruling. In Ohio, as I'm sure is the case across the country, many important projects have been put on hold as we await the court's further action.

The challenges that manufacturers and workers face today are daunting but surmountable. The last thing we need, however, is an artificial legal hurdle that threatens to trip us up. I urge my colleagues to support the Economic Development Act of 2005 so that we can preserve the ability of the States to foster economic development and help put our economy, and especially our manufacturing industries, back on the road to recovery and prosperity.

I ask unanimous consent that the text of the bill be printed in the RECORD.

There being no objection, the bill was ordered to be printed in the RECORD, as follows:

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