Economic development challenged in high court

By Ed Ferguson
County Services Director

The use of tax incentives to lure business and industry and the power of eminent domain – tools long used by states, counties and localities to spur economic development and job growth – are under attack in two separate cases in the federal courts.

The outcome of the cases could have significant and far-reaching impact on state and local economic development programs around the country.

On Sept. 28, the U. S. Supreme Court agreed to hear the case of Kelo v. City of New London. The court will consider the Constitution’s Fifth Amendment limits on the power of eminent domain, the legal process used by governments to acquire private property for various purposes after paying the property owner. The "public use" clause of the amendment states "…nor shall private property be taken for public use without just compensation."

The City of New London, Conn. exercised its eminent domain power to condemn several residential properties in order to allow a mixture of office, recreational facilities and hotels to be built.

At issue in the case is whether the eminent domain power can be used as a means of increasing the tax base to improve the local economy. State courts are divided on the issue. Some have limited the power solely for the purpose of building public infrastructure – roads, courthouses and parks, for example. Others have interpreted the "public use" clause more broadly, allowing the eminent domain power to be used for private redevelopment intended to have long-term economic development benefit.

The case will be decided by next summer.

The second case, Cuno v. DaimlerChrysler, was decided in September by the U. S. Court of Appeals for the 6th Circuit. That case held that Ohio’s use of certain tax credits designed to lure DaimlerChrysler to the Toledo area was a violation of the Constitution’s "dormant" commerce clause.

The commerce clause gives Congress the power to regulate commerce. But court decisions have held that the clause also has the "dormant" effect of restricting state actions that would interfere with that power.

States around the country have enacted a variety of statutes that provide all kinds of incentives and programs – both tax and others – designed to attract business and industry and to stimulate job growth. Many of those programs could be in jeopardy if the decision is not overturned, or if Congress does not act to correct it.

Sen. George Voinovich (R-Ohio) has introduced legislation that would make clear that the use of such incentives does not violate the Constitution’s Interstate Commerce clause. The bill has the support of Sens. Mike DeWine (R-Ohio) and Lamar Alexander (R-Tenn.), and also has the backing of NACo, the National League of Cities, the U. S. Conference of Mayors and the National Conference of State Legislators.

"We must continue to allow states to use tax incentives to help attract business and industry and the much-needed jobs they bring," NACo President Angelo Kyle commented.

NACo will continue to follow the progress of both cases, through its Legislative Affairs Department and through the State and Local Legal Center, which tracks cases of interest to state and local government in the U. S. Supreme Court.