Experience

Sample Property and Construction Law Update
Summer 2006

Tax Increment Financing Unconstitutional? …Not Just Yet.

By Allen Wheeler  

All of you real estate developers and corporations on the receiving end of tax increment financing (TIF) can let out a sigh of relief…at least for the moment. On May 15, 2006, the U.S. Supreme Court tossed out a case that had most real estate insiders wondering whether TIF would remain constitutional. 

In March, the Supreme Court heard DaimlerChrysler v. Cuno , a case that involved the constitutionality of an Ohio statute that provides lucrative tax breaks to businesses investing in new business in Ohio. DaimlerChrysler and the City of Toledo entered into an agreement under which the car manufacturer would build a $1.2 billion Jeep plant. In return, the Ohio government promised an investment tax credit of approximately $280 million. 

In a lower court ruling, the Sixth Circuit Court of Appeals declared Ohio’s investment tax credit unconstitutional. The court reasoned that the investment tax credit violated the Commerce Clause of the U.S. Constitution because it encouraged investment in Ohio at the expense of development in other states, thereby hindering free trade among the states. 

If the Supreme Court affirmed the lower court ruling, the national ripple effect could have been severe. Forty-six states use some form of tax subsidy to motivate and assist businesses to remain, relocate, and expand in their respective states. 

The Supreme Court dismissed the case, however, on the grounds that the plaintiffs lacked “standing” to challenge the constitutionality of the Ohio tax incentives. The high court held that the lower court should never have heard the case because the plaintiffs, as individual taxpayers with a grievance over state policy, could not force the courts to intervene in an essentially political controversy; the plaintiffs needed to take such matters up with their state legislature. 

Although this particular controversy was decided in a manner which favors real estate developers and other TIF users, the Supreme Court never addressed the merits of the case. Developers and corporations are by no means out of the woods. Given the lower court’s ruling, if a plaintiff with the proper standing arises, the question will almost certainly be heading back to the Supreme Court for a more thorough legal analysis. 

If you have questions, contact Allen Wheeler at 612.672.8390 or allen.wheeler@maslon.com.