Big Corporate Tax Breaks Upheld

The Supreme Court threw out a taxpayers’ lawsuit Monday that challenged the widespread practice of states giving big tax breaks to lure manufacturers to build new plants within their borders.

The justices did not decide whether these tax breaks unconstitutionally discriminated in favor of certain businesses. Instead, the court ruled that taxpayers did not have standing in federal court to challenge them in the first place.

Monday’s ruling is a win, but not a final victory, for the manufacturers and state officials who have defended their pro-business tax breaks. The challengers said they would refile their lawsuit in the state courts of Ohio.

At issue is a 1998 decision by DaimlerChrysler to build a $1.2-billion Jeep assembly plant in Toledo, Ohio. The German-owned auto maker said its decision to expand there was based in part on a state law that lowered its corporate tax and the city of Toledo’s decision to waive its property tax for 10 years.

State and city officials said the new plant brought thousands of jobs to the area. Critics said they came at a price of nearly $300 million in tax breaks. They argued that it was unfair for ordinary taxpayers and small-business owners to bear the burden of subsidizing huge corporations.

Nearly all the states, including California, offer various tax breaks to persuade companies to locate or expand operations within their borders.

But those breaks were thrown into doubt in 2004 when a U.S. appeals court in Cincinnati, acting on a lawsuit by several taxpayers, ruled that Ohio was unconstitutionally discriminating in favor of home-state businesses.

On Monday, however, Chief Justice John G. Roberts Jr. said the federal judges should have thrown out the suit without ruling on it. He said the real issue was federal courts’ power, not the proper allocation of taxes.

Last year, during his Senate confirmation hearings, Roberts said he hoped federal judges would play a more “modest” role in American government. He echoed that theme Monday.

If federal judges are free to decide the legality of state programs based on a complaint from an unhappy taxpayer, there is no limit to the power of these judges to reshape the law, he said.

For that reason, the justices have strictly limited the “standing” of plaintiffs. “Determining that a matter before the federal courts is a proper case or controversy under Article III [of the Constitution] ... ensures that the federal judiciary respects ‘the proper -- and properly limited -- role of the courts in a democratic society,’ ” Roberts wrote, quoting an earlier case.

Giving taxpayers the right to challenge a state’s taxing or spending decisions in federal court is “contrary to the more modest role Article III envisions for federal courts.”

To have standing to bring a case in federal court, plaintiffs must show they have suffered a “personal injury,” the chief justice said. Taxpayers’ disagreement with the state’s tax policy is not such a personal injury, Roberts said in DaimlerChrysler Corp. vs. Cuno.

But Monday’s ruling does not prevent the same plaintiffs from bringing the same claim in the Ohio state courts. Indeed, they initially filed the suit there, and it was moved to the federal courts at the urging of DaimlerChrysler’s lawyers.

Some states have relatively liberal rules for allowing lawsuits, and the issue of special business tax breaks may well return to the high court if the plaintiffs win their claim.

Nonetheless, a spokeswoman for the nation’s manufacturers welcomed Monday’s decision. “We are pleased the court recognizes that a state’s ability to provide these important economic development incentives should not be vulnerable to lawsuits by those not directly affected by the issue,” said Dorothy Coleman, vice president of the National Assn. of Manufacturers.

But the plaintiffs’ lawyer described the ruling as a disappointing delay. “We intend to purse the case promptly and fully in” Ohio’s courts, said Peter D. Enrich, a law professor at Boston’s Northeastern University. The decision “casts no doubt on the long line of court rulings striking down discriminatory tax breaks as unconstitutional.”