BusinessTN

When the state of Texas plunked down a $35 million dollar incentive package and lured Vought Aircraft Industries with its 1,000 Nashville-area employees out of Tennessee last February, Tennessee Economic and Community Development Commissioner Matt Kisber was quoted in the Nashville City Paper as saying, “At the end of the day, the state of Texas put more cash on the table than we could reasonably justify.”

It comes as no surprise that pitted against another state in an incentives war Tennessee would come out the loser. Comparatively speaking, Tennessee offers very modest incentives packages—Dell was an anomaly—and flat out doesn’t have the tools in its recruitment kit that other states have to appease sophisticated big companies looking to milk the system. Kentucky, for instance, dedicates a portion of revenue derived from a new company’s payroll taxes to fund infrastructure improvements benefiting that company. Alabama and Mississippi routinely offer corporate incentives far in excess of what the Volunteer State offers, often including cold hard cash giveaways. That Tennessee ranks among the least generous states with regard to funneling public wealth to opportunistic big companies is a shortcoming the average taxpayer can rejoice in.

A recent unanimous decision by a three-member panel of the Cincinnati-based 6th Circuit Court of Appeals appears at first blush to level the playing field on corporate welfare. With jurisdiction over Tennessee, Ohio, Michigan and Kentucky, the court ruled that Ohio’s investment tax credit, used to snag a $1 billion-plus investment by DaimlerChysler AG in a Toledo-area Jeep plant in 2001, was unconstitutional because it granted preferential tax treatment to the company for expanding in Ohio rather than in another state. That violated the Commerce Clause of the U.S. Constitution, the court said, which is aimed at stimulating the flow of commerce across state lines. It’s a case likely destined for the U.S. Supreme Court. If upheld, the ruling calls into question the use of tax credits nationwide.

Given Tennessee’s shortcomings in the incentive wars (and vulnerability to being used merely as leverage by companies that inevitably land elsewhere) the ruling might be considered good news. Instead, state officials and economic development types in Tennessee and elsewhere have greeted the ruling as if the sky is falling, banding together with state and municipal chambers of commerce throughout the 6th Circuit to ask the court to reconsider the decision. So why all the protest?

Tennessee Commissioner of Economic and Community Development Matt Kisber declined Business Tennessee’s request to be interviewed concerning the 6th Circuit ruling. Instead, Kisber’s handlers referred the magazine to two prepared statements issued publicly regarding the decision late last year. In them, Kisber explains his department’s opposition to the ruling on the premise that it strongly believes the case constitutes “a state’s rights issue” that “impacts a sovereign state’s ability to pass legislation which best serves the economic interests of that state.”

Kisber’s comments reflect the state’s legal position, one the 6th Circuit panel heard and rejected, that a state’s decision to give tax credits to entities that want to do good things within its borders does not run afoul of the Commerce Clause. What the remarks don’t address, however, is the view that Tennessee might actually benefit from a more even playing field sans tax incentives.

Nashville attorney James Weaver of the law firm of Waller, Lansden, Dortch & Davis is the go-to guy for corporations seeking to broker corporate incentives deals with the state of Tennessee. Weaver was involved in negotiations that brought HCA, Bridgestone/Firestone, the Titans, Nissan and Saturn to Tennessee. His firm currently represents the chambers of commerce in all four states in the 6th Circuit wishing to have the case reheard by the full court.

Weaver says Tennessee stands to get hurt more by the 6th Circuit ruling than other states principally because as a non-income tax state it has traditionally relied more on business taxes as part of its overall fiscal structure than other states. Thus its ability to grant to industrial and manufacturing companies who want to grow or move to Tennessee more tax relief more often and at a larger level than other states is critical to Tennessee’s ability to stay competitive. Stripped of that ability, Weaver says the state would be at a distinct competitive disadvantage with other states who are more willing and able to offer incentives like cash handouts not covered in the 6th Circuit’s ruling. “It wouldn’t put us out of the game but we’d be playing without some of our star players,” Weaver says. “We’ve been reasonably competitive with this incentive in place. Whether or not we’d continue to be reasonably competitive without it in place is an open question.”

Former North Carolina Supreme Court Justice Robert F. Orr recently stepped off the bench to form The North Carolina Institute for Constitutional Law, a policy group dedicated to studying the public purpose of business incentives. Orr says folks like Weaver who ply their wares brokering incentives packages for big corporations simply have a fear of the unknown. But according to Orr, not all economic development types share that fear. “A prominent lawyer involved in economic development in our state told me the other day he’d love to see us prevail on the federal level because if it were a level playing field North Carolina would do great in the economic development business,” Orr says. “And the same is true in Tennessee.”

Orr points to Tennessee’s solid past record on economic development, despite the disadvantage of other states being able to provide more. Weaver agrees that Tennessee has probably done more with less than any other state in the nation. Of Kisber and Bredesen specifically Weaver says, “They routinely make a silk purse out of a sow’s ear.”

The state’s past success against the odds would seem to indicate it could continue to compete, even prosper, should all states have to rely even moderately more on livability, location and business climate—items Tennessee already is heavily reliant on—to attract companies. Tennessee is a one-day truck drive from 75% of the American populace. Its infrastructure of roads is among the best in the nation. The state has a deserved reputation nationally as a low tax, low regulation, business-friendly state. And in fact the very lack of an income tax which economic development officials say hinders the state’s ability to offer competitive incentives is conversely one of the state’s key attractions to relocating companies.

Help or hindrance, one thing is certain: A final court ruling outlawing tax incentive programs would get Tennessee out of the dirty business of playing favorites with tax incentives for billion-dollar corporations. Such incentives, Orr argues, usually come at the expense of funding for core government functions like education—a prime economic development tool—or lower taxes for smaller businesses. Though they seldom afford state officials photo ops to cut ribbons or tout the creation of 2,000 jobs in a single wallop, small businesses in the state, receivers of none of the tax incentives big corporations reap, routinely create more than two-thirds of new jobs.

Supporters of the need for states to spend money to make money need only take heed of a recent article in the Carolina Journal. The article profiled a recent conference staged for executives of companies including Wal-Mart, Proctor & Gamble and Microsoft. Attendees interested in learning how to wring more concessions from states didn’t have to look far for guidance. One available session was entitled “Turn Your State Government Relations Department from a Money Pit into a Cash Cow.”

Should the 6th Circuit’s ruling stand—and in doing so, lead to similar rulings across the nation—corporations and state officials alike might have to ween themselves from the public teat.