The Kansas City Business Journal reports that the Associated Industries of Missouri is questioning whether the proposal for a tax credit ceasefire in the Kansas City metro area is constitutional.
AIM’s Ray McCarty claims Sen. Ryan Silvey’s proposal to create a neutral zone in Missouri and Kansas would “be discriminatory” and could violate Missouri’s constitutional restriction prohibiting differential treatment of taxpayers, the dormant Commerce Clause of the federal constitution, and the Equal Protection Clause of the Fourteenth Amendment.
I think McCarty is wrong – and will explain why. But the really interesting thing is – if he’s right, then most, if not all, of Missouri’s so-called jobs tax credit programs are unconstitutional.
Dormant Commerce Clause
McCarty cites a memo by Jeffrey Dardick, a partner at Pricewaterhouse Coopers, to explain the dormant Commerce Clause argument. In short, the dormant Commerce Clause enforces a 50 state free-trade zone throughout the United States. No state may enact a law which discriminates against the free flow of commerce through its borders from another state.
Dardick cites Cuno v. DaimlerChrysler, 386 F.3d 738 (6th Circ. 2004) to argue that Sen. Silvey’s proposal is unconstitutional under the dormant Commerce Clause. The Cuno Court examined an Ohio statute which was remarkably similar to Missouri’s BUILD statute. 
The Cuno Court explains the legal test:
In general, a challenged credit or exemption will fail Commerce Clause scrutiny if it discriminates on its face or if, on the basis of a sensitive, case-by-case analysis of purposes and effects, the provision will in its practical operation work discrimination against interstate commerce by providing a direct commercial advantage to local business. Discrimination simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. A state tax provision that discriminates against interstate commerce is invalid unless it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.
I believe Sen. Silvey’s cease-fire legislation passes this test for three reasons.
- First, the alleged discrimination against Kansas businesses is not triggered solely by an act of the state of Missouri. Instead, the trigger is both states enacting reciprocal legislation. Thus, the alleged discrimination against Kansas businesses would only occur with the consent of the state of Kansas. As the
legislature learned and discussed last year with the use tax fiasco, states are free under the dormant Commerce Clause to discriminate against their own citizens.
- Second, the reciprocal arrangement ensures that Missouri businesses have the same restrictions in Kansas that the Kansas businesses have in Missouri. This puts the businesses on the same footing and there is no discrimination.
- Third, Sen. Silvey’s legislation advances a legitimate local purpose (stopping the use of tax credits which do not actually grow the region’s economy) that cannot adequately be served by reasonable nondiscriminatory alternatives.
The Cuno Court examined Ohio’s version of BUILD – and held that it violated the dormant Commerce Clause. To my knowledge, no taxpayer has ever challenged Missouri’s version. The Sixth Circuit case, while persuasive, is not binding precedent. I am not aware of any Eighth Circuit opinion on the issue. And, the Eighth Circuit could very well come to a different conclusion because these cases are in the gray area of dormant Commerce Clause case law.
AIM also lists the equal protection clause of the Fourteenth Amendment as potential grounds for a constitutional challenge. This claim is not serious. The equal protection clause prohibits states from denying any person equal protection of the laws by treating them differently than similarly situated persons.
Courts examine equal protection challenges under three standards. Suspect classifications, such as race, national origin, religion, or classifications which burden fundamental constitutional rights, are examined under strict scrutiny. A middle level of scrutiny is applied to classifications based on gender. Everything else receives rational basis review – the minimum level of scrutiny. Under rational basis review, a law is upheld if it is rationally related to a legitimate governmental reason offered to justify the differential treatment. Courts rarely strike laws as unconstitutional under rational basis review. As explained by the Missouri supreme court, “[a] classification will be sustained if any state of facts reasonably can be conceived to justify it.” Schnorbus v. Director of Revenue, 790 S.W.2d 241 (Mo. 1990).
Sen. Silvey’s cease-fire legislation does not affect a suspect class, fundamental right, or gender, and would be reviewed under the rational basis test – which it would easily survive. The cease-fire is rationally-related to the legitimate government end of want to protect resources that would otherwise be used for roads, schools, corrections, and the other typical government functions. In addition, businesses considering whether to move a few miles and create no net new jobs in the Missouri-Kansas border region are not similarly-situated to businesses from elsewhere.
Article X, Section 3 of the
AIM also cites Article X, Section 3 of the Missouri Constitution, which requires that taxes “shall be uniform upon the same class or subclass of subjects within the territorial limits of the authority levying the tax.” In Schnorbus v. Director of Revenue, 790 S.W.2d 241 (Mo. 1990), the Missouri Supreme Court explained that, under Article X, Section 3, “The power of the state to classify for the purpose of taxation is broad. For income tax purposes, the taxpayer may be classified upon the reasonable basis of legal organization or the amount or source of income.” The question in this case is whether legislation can classify taxpayers on reasonable bases of location when the programs in question create no net new jobs when used in certain geographical areas.
I am confident the Missouri Supreme Court would uphold this reasonable classification. But, as with the dormant Commerce Clause argument, if AIM is right, then it also puts in doubt industry-targeted tax credits such as the Boeing legislation passed in special session and the Ford bill passed in 2010. Considering the group making this constitutional argument, the irony is rich.
While I have serious doubt about whether any of these so-called jobs tax credits actually work, you can’t just throw stuff at the wall and hope something sticks. Accordingly, the legislature should ignore AIM’s claims on Sen. Silvey’s proposed cease-fire legislation.
 The statute, “grant[ed] a taxpayer a non-refundable credit … if the taxpayer ‘purchases new manufacturing machinery and equipment during the qualifying period, provided that the new manufacturing machinery and equipment are installed in [Ohio].”