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Justices sound skeptical about tax-incentives case

WASHINGTON—The Supreme Court seemed unlikely Wednesday to second-guess a plan by Ohio legislators to offer lucrative tax incentives to companies that expand their investments in the state.

In arguments before the justices, Ohio and Michigan taxpayers who object to the plan had a hard time on several fronts. First, the justices seemed skeptical that the taxpayers even had standing to challenge the plan in federal courts. Beyond that, the justices who spoke up during the hearing seemed to think that the dispute over such tax-incentive plans was political in nature, and best left to elected officials to settle.

"I'll grant that these are politically controversial," Justice Antonin Scalia said. "But isn't that the place to fight it out? Why should the courts decide?"

Peter Enrich, the attorney for the taxpayers, said the issue raised important constitutional issues.

"It's a discriminatory practice that implicates competition between the states," Enrich said. "It would be a tariff by any other name."

The case springs from a burgeoning national squabble over pricey state giveaways that have become a staple of economic development plans. To lure new businesses or convince existing ones to expand, states promise huge tax breaks or outright tax waivers. The idea is that the jobs and tax revenue created by the businesses' investment will offset the losses created by the incentives.

Increasingly, though, taxpayers have become skeptical that the agreements deliver what they promise, and have begun to question whether they're good policy. In states across the country, there are shuttered plants, empty industrial parks and rotting buildings that were once the subject of economic hopes built on tax breaks.

The high court case springs from a 1998 effort by Ohio legislators to help Toledo convince DaimlerChrysler to construct a $1.2 billion Jeep plant in the city.

The state said it would waive 10 years' worth of property taxes for the company, and under an existing tax-credit program DaimlerChrysler would get enhanced breaks from the state corporate franchise tax, because it was a business expanding its operations in Ohio.

Taxpayers complained, saying the tax incentive program cast Ohio in the role of influencing interstate commerce, a constitutional no-no. By offering incentives to existing, expanding businesses that weren't available to others, the state was discriminating against businesses in other states. Such economic discrimination is unconstitutional.

The taxpayers sued first in state court, but DaimlerChrysler and Ohio had the litigation removed to federal courts. A federal district court ruled against the taxpayers, but an appeals court split on the issue, saying the investment tax credit was an inappropriate encroachment on interstate commerce.

The high court first will have to decide whether the taxpayers even can challenge Ohio's actions in federal court, a question that hasn't been addressed frequently by the court. The justices seemed dubious Wednesday that the taxpayers could bring their claims.

Even if they clear the standing hurdle, it seemed unlikely that the taxpayers would get five justices siding with their claims.

"What you call discrimination is just differentiation," Justice David Souter said. He said the state merely had created a program that companies could choose to take advantage of. If they did, they'd reap economic benefit, but that wouldn't unfairly disadvantage companies who merely chose not to participate.

"It's an investment open to anyone," he said.

The court is expected to decide the case by late June.

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(c) 2006, Knight Ridder/Tribune Information Services.

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