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United States Supreme Court Hears Oral Arguments in DaimlerChrysler v. Cuno

Tax Development Mar 02, 2006


The United States Supreme Court heard oral arguments on March 1, 2006 in the cases of DaimlerChrysler Corp. v. Cuno and Wilkins v. Cuno, Nos. 04-1704 and 04-1724. The cases concerned whether two incentives used to induce DaimlerChrysler to locate a new auto plant in Toledo, Ohio, near an exiting plant violated the Commerce Clause of the United States Constitution. The incentives at issue were a local property tax abatement and Ohio’s investment tax credit (“ITC”). The trial court upheld the constitutionality of both incentives and the plaintiffs appealed to the Court of Appeals for the Sixth Circuit, which upheld the property tax abatement program but struck down the ITC. Both parties appealed to the United States Supreme Court ("Supreme Court"), which agreed to hear DaimlerChrysler’s challenge to the Sixth Circuit’s invalidation of the ITC. The plaintiffs’ appeal with respect to the property tax abatement is still pending and the Supreme Court has not ruled on whether it would hear the case.

The Justices’ questions at oral argument appeared to indicate a strong likelihood that the Supreme Court will dismiss the case on procedural grounds without reaching the merits. However, if the Supreme Court does reach the case on the merits, the Justices’ questions also appeared to indicate that the Supreme Court would reverse the Sixth Circuit and uphold the constitutionality of the ITC.


The procedural issue in the case concerns whether the plaintiffs had standing to bring the case in federal court. The doctrine of standing concerns whether a plaintiff is a proper party to raise a particular issue in federal court. Under Supreme Court case law, a plaintiff has standing if (1) he/she has suffered an "injury in fact" that is concrete and particularized (not common to the entire public), and actual or imminent; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely that the injury will be redressed by a favorable decision. In tax cases where the plaintiff is a party other than the taxpayer who is contesting the tax due, an important issue is whether the plaintiff has standing to bring the suit. However, the standing issue was not raised by the parties in the lower courts but was instead raised by the Supreme Court, which ordered the parties to brief the issue.

The Cuno plaintiffs consisted of a group of Ohio and Michigan residents and their original complaint raised several claims against a large number of defendants, including not only DaimlerChrysler but also the State of Ohio, City of Toledo, two local school districts, and various officials from each of those governmental entities.

All of the Ohio plaintiffs filed their complaint collectively as citizens of and taxpayers to the City of Toledo and the State of Ohio. The Ohio plaintiffs alleged that the tax subsidies granted to DaimlerChrysler deprived their state and local governments of tax revenues that otherwise would have been available for other lawful uses and also shifted to these plaintiffs as taxpayers a disproportionate burden of supporting such governmental functions. Separately, one Ohio plaintiff, Kim’s Auto and Truck Services, Inc. ("Kim's"), also alleged that its business had to be relocated under the threat of eminent domain, that this dislocation caused Kim’s to lose profit and that the move would have been unnecessary except for the tax incentives offered to DaimlerChrysler.

The Michigan plaintiffs also relied on their status as taxpayers as the foundation for their claims, alleging that, except for the tax incentives, DaimlerChrysler might have located its new facilities in Michigan rather than Ohio. If DaimlerChrysler had located its new facilities in Michigan, then Michigan and the local municipalities would have received more tax revenues from the resulting jobs and economic development, and the Michigan plaintiffs would have benefited from the utilization of those funds by those governments. All of the plaintiffs sought the same remedy, that the provisions of the Ohio Revenue Code permitting the property tax exemption and the investment tax credit be declared unconstitutional and that the Supreme Court grant preliminary and permanent injunctions against their operation.

At oral argument the Cuno plaintiffs’ attorney conceded that none of the plaintiffs had standing with respect to the challenge to the ITC but argued that there was standing with respect to the pending appeal of the property tax abatement. Therefore, because the property tax abatement was properly before the Supreme Court, it should be able to hear the ITC claim because it arose out of the same transaction. The Justices questions indicated some skepticism with respect to the argument. In particular, Justices Ginsberg, Breyer, and Souter pointedly asked the plaintiffs’ attorney to provide a citation to any case in which the Supreme Court had allowed a plaintiff to use standing with respect to one claim to “piggyback” into standing for another claim. A humorous exchange occurred when plaintiffs’ counsel responded to these questions with a reference to a discussion of the standing doctrine in a footnote to one of Supreme Court’s decisions. Justice Scalia responded by declaring “I don’t read footnotes.” Justice Scalia then reasoned that the plaintiffs’ real concern was that the ITC was an unwise tax policy, an issue that was properly left to the political arena.

Additionally, Justice Ginsberg noted that the property tax abatement and the ITC were in fact separate transactions, with the former the result of an agreement between DaimlerChrysler and Toledo and local school districts and the later the result of a statutory credit offered by Ohio. This undercuts the plaintiffs’ argument that the two incentives arose from the same transaction.

Deciding the case on the standing issue would allow the Supreme Court to overturn the Sixth Circuit’s decision without having to resolve with the Commerce Clause issues. Further, the fact that the Supreme Court agreed to review the Sixth Circuit’s decision with respect to the ITC but not the property tax abatement, may indicate that the Supreme Court’s inclination is to resolve the case on the standing issue. If the Supreme Court determines that the Cuno plaintiffs did not have standing, the case would be dismissed and the plaintiffs would have to start all over again in the Ohio courts.

Commerce Clause

The Commerce Clause of the United States Constitution grants Congress the power to regulate interstate commerce. Congress' authority to regulate interstate commerce has been described as plenary and limited only by other constitutional provisions. On the flip side of the issue, the Supreme Court has long held that the states may not unduly burden interstate commerce in the absence of federal regulation. This restriction is founded in what is referred to as the “dormant Commerce Clause.” The Supreme Court has held that a state may use its tax system to encourage intrastate commerce and may compete with other states for interstate commerce so long as the state does not discriminatorily tax the products manufactured or the business operations performed in any other state.

The Supreme Court and other federal courts have not previously addressed whether an ITC similar to the one at issue in Cuno is discriminatory. Justices Souter, Scalia, Stevens, Roberts, and Ginsberg each asked questions which appeared to indicate that they did not think that the ITC resulted in discrimination because it did not penalize out-of-state businesses. Justice Souter noted that the credit was equally available to both resident and nonresident taxpayers that chose to locate or expand in Ohio. Justice Scalia asked if discrimination would result if a state merely lowered its tax rate to attract business. Justice Stevens’ questions seem to reflect the view that the ITC was the same in practical terms as a direct government subsidy, which would be permissible under prior cases. Justice Roberts asked whether the plaintiffs’ approach would render unconstitutional the homestead exemption for property tax. He reasoned that the homestead exemption would provide an incentive for an individual who owned property in two states to reside in the state with the homestead exemption. Justice Roberts indicated that this hypothetical implicated the identical issues as the ITC. Plaintiffs’ counsel attempted unconvincingly to distinguish the ITC and the homestead exemption.

Based on the Justices’ comments, plaintiffs’ counsel did not appear to have satisfied the Justices’ concerns. Of course, it is problematic to predict the outcome of a case based on the Justices’ statements at oral argument. However, in this case, the Justices’ comments appear to indicate a strong likelihood that, if the Supreme Court reaches the merits of the case, it will reverse the Sixth Circuit and uphold the constitutionality of the ITC. However, if the Supreme Court holds that ITC is unconstitutional, the Congress may assert its Commerce Clause power to allow the states to utilize incentives like the ITC. In particular, the Economic Development Act of 2005, which would effectively reverse the Sixth Circuit’s decision, was introduced in the House and the Senate in May of 2005. H.R. 2471 (2005) and S. 1066 (2005). Congress delayed consideration of this bill when the Supreme Court agreed to hear the case and can be expected to revisit the issue if the Supreme Court allows the Sixth Circuit’s decision to stand.