Long Shadow Over BEIP?

//February 17, 2006//

Long Shadow Over BEIP?

//February 17, 2006//

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A Supreme Court case could put the popular program in jeopardyNewark

With a mixture of anticipation and dread, New Jersey officials are watching as the U.S. Supreme Court prepares to take up a case that could spell the end of the state’s popular Business Employment Incentive Program (BEIP). At issue in hearings set to begin March 1 is whether $280 million in tax breaks that Ohio handed an automaker violates the U.S. Constitution.

“We’re following the case with interest,” says Caren Franzini, CEO of the New Jersey Economic Development Authority.

Technically, the only question facing the court in DaimlerChrysler Corp. v. Charlotte Cuno et al. is Ohio’s investment tax credit (ITC) for companies that build factories and other capital intensive projects.

But “Ohio is a very important case,” says Charles Davenport, a professor at the Rutgers School of Law in Newark. “Many states, including New Jersey, have similar programs. If the Supreme Court rules against Ohio, it could affect other states’ efforts too.”

Peter Enrich, a Boston lawyer and law professor at Northeastern University, is leading legal efforts to overturn the Ohio program. Enrich says a high court ruling against Ohio’s ITC could open the door to claims from businesses across the country that similar policies in other states place companies that don’t receive such breaks at a disadvantage.

Enrich says he hasn’t studied New Jersey’s BEIP, but he notes that it “sounds like it’s structurally similar” to the Ohio program.

The case stems from tax breaks that Ohio promised DaimlerChrysler for agreeing to build a Jeep factory in the city of Toledo. A group of individuals and small business challenged the deal on the grounds that it violated the Constitution’s commerce clause, which has been interpreted to bar states from creating barriers to business across state lines.

Enrich says the Ohio ITC violates the clause by putting “certain companies at a disadvantage because of their geographical location.”

New Jersey’s BEIP awards grants to companies that set up operations or expand here, and is tied to the state income tax paid by new workers. New Jersey also offers tax credits tied to companies’ local factories and other investments and the number of jobs they create.

New Jersey spends about $95.1 million of tax money each year on BEIP projects, according to an October 2005 report by the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. It says the 183 BEIP grants made from June 1997 to Feb. 2005 have generated 51,665 permanent jobs and some $350 million a year in added state tax revenue. State officials point to the document as a vindication of BEIP policies.

However, “If all the states got rid of these programs, then companies would make their location decisions based on true issues, instead of seeing which state will throw the most money their way,” says Greg LeRoy, executive director of Good Jobs First, a Washington, D.C.-based policy research center.

“Many incentive programs are simply subsidies that pay companies to do what they would have done anyway, if the subsidies weren’t there to begin with,” says LeRoy. The initial challenge to the Ohio incentives bounced through a number of lower courts until October 2004, when the U.S. Court of Appeals for the Sixth Circuit ruled in favor of the small businesses. The decision characterized Ohio’s ITC as “wholly inconsistent with the free trade purpose of the Commerce Clause.” DaimlerChrysler and Ohio then appealed to the Supreme Court.

“Although the Supreme Court accepted the case, there’s always a chance that the justices may not issue a ruling,” says Rutgers law professor Davenport. “The Supreme Court could dismiss it on procedural grounds, leaving the Sixth Circuit decision standing. While it would technically only apply in the Sixth’s jurisdictions, it could create a great deal of uncertainty across the nation.”

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