[Congressional Record Volume 151, Number 66 (Wednesday, May 18, 2005)]
[Senate]
[Pages S5443-S5446]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      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

[[Page S5444]]

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

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     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:

                                S. 1066

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Economic Development Act of 
     2005''.

     SEC. 2. AUTHORIZATION.

       Congress hereby exercises its power under Article I, 
     Section 8, Clause 3 of the United States Constitution to 
     regulate commerce among the several States by authorizing any 
     State to provide to any person for economic development 
     purposes tax incentives that otherwise would be the cause or 
     source of discrimination against interstate commerce under 
     the Commerce Clause of the United States Constitution, except 
     as otherwise provided by law.

     SEC. 3. LIMITATIONS.

       (a) Tax Incentives Not Subject to Protection Under This 
     Act.--Section 2 shall not apply to any State tax incentive 
     which--
       (1) is dependent upon State or country of incorporation, 
     commercial domicile, or residence of an individual;
       (2) requires the recipient of the tax incentive to acquire, 
     lease, license, use, or provide services to property 
     produced, manufactured, generated, assembled, developed, 
     fabricated, or created in the State;
       (3) is reduced or eliminated as a direct result of an 
     increase in out-of-State activity by the recipient of the tax 
     incentive;
       (4) is reduced or eliminated as a result of an increase in 
     out-of-State activity by a person other than the recipient of 
     the tax incentive or as a result of such other person not 
     having a taxable presence in the State;
       (5) results in loss of a compensating tax system, because 
     the tax on interstate commerce exceeds the tax on intrastate 
     commerce;
       (6) requires that other taxing jurisdictions offer 
     reciprocal tax benefits; or
       (7) requires that a tax incentive earned with respect to 
     one tax can only be used to reduce a tax burden for or 
     provide a tax benefit against any other tax that is not 
     imposed on apportioned interstate activities.
       (b) No Inference.--Nothing in this section shall be 
     construed to create any inference with respect to the 
     validity or invalidity under the Commerce Clause of the 
     United States Constitution of any tax incentive described in 
     this section.

     SEC. 4. DEFINITIONS; RULE OF CONSTRUCTION.

       (a) Definitions.--For purposes of this Act--
       (1) Compensating tax system.--The term ``compensating tax 
     system'' means complementary taxes imposed on both interstate 
     and intrastate commerce where the tax on interstate commerce 
     does not exceed the tax on intrastate commerce and the taxes 
     are imposed on substantially equivalent events.
       (2) Economic development purposes.--The term ``economic 
     development purposes'' means all legally permitted activities 
     for attracting, retaining, or expanding business activity, 
     jobs, or investment in a State.
       (3) Imposed on apportioned interstate activities.--The term 
     ``imposed on apportioned interstate activities'' means, with 
     respect to a tax, a tax levied on values that can arise out 
     of interstate or foreign transactions or operations, 
     including taxes on income, sales, use, gross receipts, net 
     worth, and value added taxable bases. Such term shall not 
     include taxes levied on property, transactions, or operations 
     that are taxable only if they exist or occur exclusively 
     inside the State, including any real property and severance 
     taxes.
       (4) Person.--The term ``person'' means any individual, 
     corporation, partnership, limited liability company, 
     association, or other organization that engages in any for 
     profit or not-for-profit activities within a State .
       (5) Property.--The term ``property'' means all forms of 
     real, tangible, and intangible property.
       (6) State.--The term ``State'' means each of the several 
     States (or subdivision thereof), the District of Columbia, 
     and any territory or possession of the United States.
       (7) State tax.--The term ``State tax'' means all taxes or 
     fees imposed by a State.
       (8) Tax benefit.--The term ``tax benefit'' means all 
     permanent and temporary tax savings, including applicable 
     carrybacks and carryforwards, regardless of the taxable 
     period in which the benefit is claimed, received, recognized, 
     realized, or earned.
       (9) Tax incentive.--The term ``tax incentive'' means any 
     provision that reduces a State tax burden or provides a tax 
     benefit as a result of any activity by a person that is 
     enumerated or recognized by a State tax jurisdiction as a 
     qualified activity for economic development purposes.
       (b) Rule of Construction.--It is the sense of Congress that 
     the authorization provided in section 2 should be construed 
     broadly and the limitations in section 3 should be construed 
     narrowly.

     SEC. 5. SEVERABILITY.

       If any provision of this Act or the application of any 
     provision of this Act to any person or circumstance is held 
     to be unconstitutional, the remainder of this Act and the 
     application of the provisions of this Act to any

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     person or circumstance shall not be affected by the holding.

     SEC. 6. EFFECTIVE DATE.

       This Act shall apply to any State tax incentive enacted 
     before, on, or after the date of the enactment of this Act.
                                 ______