The Supreme Court said yesterday it will decide whether state governments can use tax breaks to entice companies to build manufacturing facilities in their jurisdictions.
Though the court agreed to review the constitutionality of an Ohio program, similar tax incentives are used aggressively in the Washington region and around the nation, and the court's decision could have an enormous impact on how governments attract large companies and the jobs they create.
"This is a bread-and-butter issue for economic-development practitioners," said Bill Badger, chief executive of the Anne Arundel Economic Development Corp. "It could have a ripple effect on every economic-development office and chamber [of commerce] in the country, depending on what the court decides."
The Ohio case arose after taxpayers complained that the incentives had gotten out of hand.
State and local governments often get into bidding wars as they offer tax incentives, as Maryland and Virginia did in 1999 pursuing Marriott International Inc. The hotel company eventually expanded its headquarters in Montgomery County -- in return for a variety of tax credits and job-training grants worth at least $31.7 million, adjusted for inflation over 19 years.
One state official suggested that it might not be so bad if the Supreme Court review, planned for early next year, changed the ground rules.
If all states "have to play by the same rules, I am not worried about repercussions," said Aris Melissaratos, Maryland secretary of Business and Economic Development. "Then we can compete on substantive competitive elements."
The Supreme Court said it will review a longstanding Ohio tax-incentive program that an appeals court in that state ruled unconstitutional last year.
The ruling came in response to a lawsuit by taxpayers who contended that an investment tax credit given to DaimlerChrysler AG to build a Jeep assembly plant in Toledo discriminated against taxpayers who ultimately had to pay for this credit.
The taxpayers contended -- and the appeals court agreed -- that the incentives given to the car manufacturer violated constitutional provisions on interstate commerce, favoring companies expanding in the state over those expanding in another state.
DaimlerChrysler disagreed, saying the tax credit served as a reward for the company's $1.2 billion investment.
Maryland has offered similar deals, granting a $5.5 million tax incentive to encourage Winchester, Va.-based American Woodmark to build a facility in Allegany County last year, according to Melissaratos.
Maryland Gov. Robert L. Ehrlich Jr. (R) mentioned the kitchen cabinet maker -- and other companies -- in his state of the state address in January.
"A strong economic recovery added nearly 50,000 jobs to employer payrolls during 2004," Ehrlich said. "We are competing with other states for new jobs -- and winning. Recent successes include American Woodmark [with] 300 jobs created in Allegany County . . . "
Melissaratos said American Woodmark ultimately may employ as many as 500 workers at the plant. And the state's tax incentives, he said, "made it possible for them to come to Maryland."
At the state level in Virginia, there's a wait-and-see attitude about the Supreme Court's review.
"We are following this Ohio case very closely, but we won't have any comment until a decision is made," said Christie Collins, spokeswoman for the Virginia Economic Development Partnership. "This case could impact us or it could not, depending on what comes out of it."
Some local economic development officials say they rarely, if ever, use county tax dollars to lure companies.
"Fairfax County takes advantage of state incentive programs, but we don't have any of our own. What we offer is opportunity," said Gerald L. Gordon, president and chief executive of the Fairfax County Economic Development Authority.
Loudoun County has offered tax breaks to make it more attractive to selected industries, rather than companies, said Robyn Bailey, business infrastructure manager of the county's Economic Development Department.
The county offers tax breaks, for example, to Internet providers (AOL has benefited) and satellite manufacturers (Orbital Sciences Corp.).
"That incentive is good for any additional company that comes in" from those industries, Bailey said.
Staff writers Dina ElBoghdady and Elissa Silverman contributed to this report.