Recently, the Trump administration touted a deal reached with Carrier Corporation under which Carrier will receive $7 million worth of incentives from Indiana for retaining roughly 800 jobs in the state rather than moving those jobs to Mexico. See Ted Mann, Carrier Will Receive $7 Million in Tax Breaks to Keep Jobs in Indiana, Wall Street Journal (Dec. 2, 2016, 10:01 AM), http://www.wsj.com/articles/indiana-gives-7-million-in-tax-breaks-to-keep-carrier-jobs-1480608461. The incentives provided by Indiana are a classic example of state and local tax incentives for economic development—state offerings designed to encourage the recipient to engage in in-state activities. See Hayes R. Holderness, The Unexpected Role of Tax Salience in State Competition for Businesses, 84 U. Chi. L. Rev. __ (forthcoming 2017) (comparing traditional incentives to a new form of incentive, the “customer-based incentive”), https://ssrn.com/abstract=2843567. Many commentators have observed that the incentives from Indiana are likely inconsequential for Carrier and have surmised that what really drove Carrier to retain the jobs was the favor curried with the President-elect. Whatever motivated Carrier, the Trump administration’s actions may signal a new age for state and local tax incentives for economic development, where the Federal government encourages their use as tools in the international competition for businesses. What might this age bring?
The Trump administration’s apparent endorsement of the tax incentives provided by Indiana to Carrier indicates a willingness to promote the use of state and local tax incentives to keep businesses on American soil. It is too early to know precisely what the President-elect’s position with respect to the use of such incentives is, but in his speech regarding the Carrier deal, he stated that businesses “can leave from state to state, and they can negotiate good deals with the different states, and all of that. But leaving the country is going to be very, very difficult.” Read Donald Trump’s Remarks at Carrier Plant in Indiana, Time (Dec. 1, 2016), http://time.com/4588349/donald-trump-carrier-jobs-speech/. This type of attitude towards state and local economic development incentives ignores the economic harms of such incentives to states as well as their constitutional infirmity. Further, if the Trump administration pushes states and localities to provide tax incentives to keep their businesses from relocating abroad, it may spark legal battles among the states and among the international community, potentially destroying this tool.
The Harm of State and Local Economic Development Incentives
Many analysts believe that state and local tax incentives for economic development are not effective uses of state funds. Such incentives are rarely believed to be of any consequence to businesses unlike other factors such as natural resources, infrastructure, and educated workforces, which have significant effects on locational decision-making. See generally Matthew Schaefer, State Investment Attraction Subsidy Wars Resulting from a Prisoner’s Dilemma: The Inadequacy of State Constitutional Solutions and the Appropriateness of a Federal Response, 28 N.M. L. Rev. 303 (1998). The incentives are “free money” given away to businesses that would have ended up in the state anyway.
However, when a critical mass of states engages in the economic development incentives game, the perceived risk of not playing the game becomes too high, leading the states into a race to the bottom. See id. However, budgetary pressures and urgings from watchdog groups have pushed many states into more closely examining the effectiveness of their incentive programs; perhaps demonstrating a desire to break the prisoner’s-dilemma type game they find themselves in and an unwillingness to bear the cost of retaining businesses for the Federal government. See, e.g., States Make Progress Evaluating Tax Incentives, The Pew Charitable Trusts (Jan. 21, 2015), http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2015/01/tax-incentive-evaluation-law-state-fact-sheets.
By cavalierly endorsing businesses’ ability to play the states off each other, President-elect Trump is inviting further economic harm for the states. The political pressure to engage in the economic development incentives game is already heavy, and a Federal endorsement of the game has the potential to ramp up that pressure. As the Trump administration continues in its efforts to keep American businesses from moving abroad, it would be wise to clarify its stance on what “good deals” between states and businesses are. To prevent unnecessary economic harm to the states, the President-elect might follow advice from Greg LeRoy of Good Jobs First, an incentives watchdog group: “[g]iven the nationalist economic frame that President-Elect Trump emphasized during his campaign, I would hope that on the domestic front, that frame would translate into a message that says: ‘All of our states are in this fight together for good American jobs; we’re not going to let states keep wasting taxpayer dollars stealing jobs from each other. We’re on the same team, right?’” Explaining the Real “Job Piracy” Threat: Good Jobs First Issues Second Statement on Trump’s Carrier Jobs Deal in Indiana, Good Jobs First (Dec. 5, 2016), http://www.goodjobsfirst.org/blog/good-jobs-first-issues-second-statement-carrier-deal.
Are State and Local Economic Development Incentives Legal?
Ironically, if the Trump administration embraces the apparent endorsement of the state and local economic development incentives game found in the President-elect’s speech regarding the Carrier deal, it may actually destroy the game by forcing the issue of the legality of the incentives into the national spotlight and welcoming new challengers from the international community.
The legality of state and local economic development incentives has long been a white whale in the field of state and local taxation. The Commerce Clause—a goal of which is to prevent the “economic Balkanization” of the nation by unduly burdensome actions from any individual state, e.g., Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 577 (1997)—is thought to present the primary obstruction to their use. The Commerce Clause is clearly Congress’ domain: “The Congress shall have power . . . . To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” U.S. Const. art. I, § 8, cl. 3. Thus, Congress could presumably sanction or prohibit the use of state and local economic development incentives through positive law.
However, Congress has not passed such a law; thus, the constitutionality of such incentives currently depends on the contours of the Dormant Commerce Clause doctrine. As any casual follower of the late Justice Scalia knows, the Dormant Commerce Clause doctrine is a judicial construct designed to fill the void of Congressional silence on matters of interstate commerce. E.g., Comptroller of Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1808 (2015). Under the Dormant Commerce Clause doctrine, state and local tax provisions are not permitted to discriminate against interstate commerce. Quill Corp. v. North Dakota, 504 U.S. 298, 311 (1992). This restriction has been interpreted by the Supreme Court to mean that interjurisdictional business decisions should be made in a “tax-neutral” manner; in other words, states should not use tax policy to favor in-state activities at the expense of out-of-state activities. See Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 331–32 (1977). The Court further stated that facially discriminatory tax provisions are per se invalid but that provisions with incidental discriminatory effect may pass constitutional muster under a balancing test that considers the state’s purpose against the available alternatives to achieving that purpose. Id. at 335–36.
Under the non-discrimination standard, whose practical application is far from clear, the Supreme Court has struck down several protectionist-type incentives for in-state activities that affect interstate commerce. E.g., id.; West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994). However, direct rulings from the Court on tax breaks such as income tax credits and property tax credits that are commonly promised to businesses for investing in jobs and infrastructure in a state are difficult to come by. Many believe that such incentives are unconstitutional as discriminatory against interstate commerce because the incentives encourage in-state activity at the expense of out-of-state activity, though others argue that the incentives may be constitutional as long as the offering state is not punishing out-of-state actors for not conducting in-state activities. Compare Peter D. Enrich, Saving the States from Themselves: Commerce Clause Constraints on State Tax Incentives for Business, 110 Harv. L. Rev. 377 (1996) with Walter Hellerstein & Dan T. Coenen, Commerce Clause Restraints on State Business Development Incentives, 81 Cornell L. Rev. 789 (1996). Under this second formulation, states would have more leeway to provide economic development incentives to lure businesses as long as the state is not using any coercive power over a business by promising reductions to the business’ existing liabilities to the state.
Further, when a state tax provision has international effects, the Dormant Foreign Commerce Clause jurisprudence requires that courts consider whether the state provision will “impair federal uniformity in an area where federal uniformity is essential,” with the primary concern being the prevention of retaliation from foreign nations against American businesses. Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 186, 194 (1983). In approaching this question, the Supreme Court has indicated that it will defer to clear expressions of foreign policy from the Executive Branch and Congress, as the “nuances [of foreign policy] are much more the province of [those branches] than of this Court[.]” Id. at 196.
An official Trump policy of encouraging states and localities to provide these incentives could push the issue of their legality into the spotlight. On the one hand, as more press is devoted to deals such as the Carrier deal, national awareness of the issues surrounding economic development incentives grows. Many commentators are already noting the economic harm to Indiana arising from the Carrier deal; if future deals are similarly derided and the public listens, disapproval of state and local economic development incentives could rise, causing an unfriendly Congress to reign in the executive’s actions by prohibiting their use. On the other hand, a friendly Congress might explicitly approve of the incentives, opening the door to their expanded use. Either way, explicit Congressional action would clarify the legality of the incentives, but getting to that point may embroil the Trump administration in an unexpected policy debate pitting businesses, states, and taxpayers against each other.
National attention on state and local economic development incentives is not the only way this policy debate may arise. A judicial resolution of the constitutionality of state and local economic development incentives currently appears unlikely because the Supreme Court has placed a high burden on potential legal challenges to such incentives by denying that individual taxpayers in the offering state have legal standing to challenge the incentives, leaving few willing litigants. See DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006). One might conceive of states being troubled by a Federal endorsement of state and local economic development incentives—especially if the executive claims the political credit for keeping businesses at home while the states bear the cost—or of businesses feeling bullied by the Federal government and thus bringing a challenge to the incentives and having the requisite standing to reach the merits of their legality. Even so, such challenges will probably remain unlikely given the incentives for states and businesses to continue entering into economic development deals.
However, as the world shrinks, state and local economic development incentives are having a larger effect on the international community. Recently, a World Trade Organization panel found that $8.7 billion worth of incentives provided by Washington State to Boeing Co. violated the United States’ international trade obligations. United States – Conditional Tax Incentives for Large Civil Aircraft, WTO, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds487_e.htm (last visited Dec. 19, 2016). If the Trump administration continues to encourage states and localities to offer incentives to keep businesses from moving abroad, more such challenges from the international community—as well as retaliatory measures—should be expected. International litigants could bring challenges before U.S. courts, who would search for the uniform federal policy demanded by the Dormant Foreign Commerce Clause analysis. If the Trump administration has a clear position in favor of the incentives, a court could find the use of state and local economic development incentives to be legal. Alternatively, the pressure on Congress to provide guidance on the issue could be ramped up, potentially leading to clarification regarding the legality of the incentives.
If the Carrier deal foreshadows the Trump administration’s policy with respect to the use of state and local tax incentives for economic development, the President-elect may be inadvertently opening a can of worms. His actions could enhance economic harms to the states that implement the incentives, and could thrust his administration into unexpected policy debates regarding the use of such incentives, as Congress is compelled to provide guidance on their use. If the President-elect is not careful, he may not like what Congress has to say.
* Visiting Assistant Professor of Law, University of Illinois College of Law; J.D., 2011, N.Y.U. School of Law; LL.M., 2012, N.Y.U. School of Law. I am grateful to Adam Thimmesch for his comments on an earlier draft of this Article.