the problems

Each state, and locality, for that matter, sets up their business tax regime and with that a certain corporate tax rate. Theoretically, this rate should hold to each corporation who does business in State X, no matter how large or small the business is. Unfortunately, lawmakers see it as their duty to directly create jobs, rather than create the conditions that allow for optimum job creation.

From this premise, these lawmakers take credit when they grant companies (usually larger corporations) a break from the rates they had originally set. While it's great when companies are taxed at lower rates, in reality only the larger ones have access to these breaks.

I became intersted in this issue after learning about DaimlerChrysler v. Cuno. A May 16 Wall Street Journal editorial gave an good summary of the case. Cuno

concerned an Ohio law offering an investment tax credit and property tax abatements to entice [DaimlerChrysler] to build a plant in Toledo. Some taxpayers challenged the incentives arguing that they violate the Constitution's Commerce Clause. On behalf of the court, Chief Justice John Roberts wrote: "All the theories plaintiffs have offered to support their standing to challenge the franchise tax credit are unavailing. Because the plaintiffs have no standing to challenge that credit, the lower courts erred by considering their claims against it."

Some experts predicted correctly that the Supreme Court would dismiss the case on a standing issue and would not even get to the merits on whether states are allowed to offer tax credits under the Constitution. Not withstanding the standing issue, I believe that states are allowed to offer such incentives under the Constitution.

The problem is the economics behind this incentive. The same WSJ editorial commented that as "economic policy, we don't like incentives targeted at individual companies. Politicians are better off creating a low-tax climate that makes the whole state a business magnet." As the leading free market newspaper in the country, I felt, however, that the Wall Street Journal could have done much more to highlight the problem of individualized incentives. I let the WSJ know how I feel in an email:

Dear editor,

Your May 16 editorial, "Commerce-Clause Classic," was correct to point out that the Sixth Circuit's ruling in Cuno v. DaimlerChrysler was inconsistent with decades of precedent that granted states significant taxation power. But your paper failed to adequately address the key issue of tax incentives to large companies, mentioning only that "we don't like incentives targeted at individual companies. Politicians are better off creating a low-tax climate that makes the whole state a business magnet." This is a point upon which there should be much expansion. The tax incentives that companies like DaimlerChrylser receive for investing in states are unfair to smaller businesses who, without effective political clout, are unable to get the same treatment and must pay the standard tax rate. As a constitutional matter, states should be able to tax businesses at different rates. Economically speaking, the lack of uniformity in states like Ohio leaves much to be desired.

The editor did not respond and, suffice it to say, my letter was not published. But that which does not kill me only makes me stronger. Like any good American, I am now going to blog about the topic of states' individualized tax incentives.