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30–836—PDF 2006

S. HRG. 109–691

CUNO AND COMPETITIVENESS:

WHERE TO DRAW THE LINE

HEARING

BEFORE THE

SUBCOMMITTEE ON INTERNATIONAL TRADE

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 16, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON INTERNATIONAL TRADE

CRAIG THOMAS, Wyoming, Chairman

MIKE CRAPO, Idaho

TRENT LOTT, Mississippi

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

BILL FRIST, Tennessee

JEFF BINGAMAN, New Mexico

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

(II)

(III)

C O N T E N T S

OPENING STATEMENT

Page

Thomas, Hon. Craig, a U.S. Senator from Wyoming, chairman, Subcommittee

on International Trade ........................................................................................ 1

CONGRESSIONAL WITNESS

Voinovich, Hon. George V., a U.S. Senator from Ohio ......................................... 2

PUBLIC WITNESSES

Enrich, Peter D., professor of law, Northeastern University School of Law,

Boston, MA ........................................................................................................... 5

Duncan, Harley, executive director, Federation of Tax Administrators, Washington, DC ............................................................................................................. 7

Hellerstein, Walter, Francis Shackelford distinguished professor of taxation

law, University of Georgia School of Law, Athens, GA .................................... 9

Fisher, Dr. Peter, professor, graduate program in urban and regional planning, University of Iowa, Iowa City, IA ............................................................. 11

Renzas, James H., president and chief executive officer, Location Management Services, Mission Viejo, CA ....................................................................... 13

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 21

Duncan, Harley:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 22

Enrich, Peter D.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 28

Fisher, Dr. Peter:

Testimony .......................................................................................................... 11

Prepared statement with attachment ............................................................. 37

Responses to questions from subcommittee members ................................... 81

Frist, Hon. Bill:

Prepared statement .......................................................................................... 83

Hellerstein, Walter:

Testimony .......................................................................................................... 9

Prepared statement with attachment ............................................................. 84

Renzas, James H.:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 124

Thomas, Hon. Craig:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 128

Voinovich, Hon. George V.:

Testimony .......................................................................................................... 2

Prepared statement with attachment ............................................................. 129

COMMUNICATION

Tax Foundation ........................................................................................................ 135

(1)

CUNO AND COMPETITIVENESS:

WHERE TO DRAW THE LINE

THURSDAY, MARCH 16, 2006

U.S. SENATE, SUBCOMMITTEE ON INTERNATIONAL TRADE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 9:30 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Craig Thomas

(chairman of the subcommittee) presiding.

Also present: Senator Bingaman.

OPENING STATEMENT OF HON. CRAIG THOMAS, A U.S. SENATOR FROM WYOMING, CHAIRMAN, SUBCOMMITTEE ON

INTERNATIONAL TRADE, COMMITTEE ON FINANCE

Senator THOMAS. We will call to order the Cuno case hearing. We

are going to be pressed for other things today, so we will get started right on time. I hope there will be other members to join us.

Thank you for being here. We appreciate the opportunity for you

to appear before the Senate Finance International Trade Subcommittee to share your thoughts concerning the Cuno case and its

impact on domestic and international competitiveness, and I look

forward to your comments.

The actions that have given rise to this issue to be discussed

today began in 1998. DaimlerChrysler entered into agreements

with Toledo, Ohio and two school districts to construct a new vehicle assembly plant in exchange for approximately $280 million in

tax incentives.

Under two separate provisions in the Ohio law, DaimlerChrysler

was to receive a 10-year 100-percent property tax exemption and

investment credit tax of 3.5 percent against the State’s corporate

franchise tax for building the new facility in an economically depressed area in Ohio.

A group of Ohio and Michigan taxpayers sued, alleging that

these tax benefits discriminated against those deciding to do business outside of Ohio, in violation of the Commerce Clause of the

U.S. Constitution and the Equal Protection Clause of the Ohio constitution.

The Federal court agreed on the issue of the investment tax credit, and the Supreme Court heard arguments on the constitutionality of the investment credit on March 1.

While I am hesitant for the Congress to intervene in the matter

that is being litigated, I understand there is widespread interest in

the issue presented. In addition, the Supreme Court itself acknowlVerDate 11-MAY-2000 14:52 Nov 30, 2006 Jkt 095484 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 30836.000 SFIN1 PsN: SFIN1
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edged that the issue of the investment tax credit is one that may

best be dealt with in the political arena.

The issues raised by the Cuno case are far-reaching, from encouraging healthy competition for investment between various domestic and international jurisdictions, to ensuring that States do

not engage in activity that discriminates against interstate business.

We must take care to guard a State’s ability to establish its own

laws and exercise appropriate taxing jurisdiction. At the same

time, however, we must ensure that there is a clear line delineating where competition ends and discrimination begins.

I am very pleased to have a number of outstanding witnesses

here today to provide testimony on these issues. All witnesses will

be limited to 5 minutes for their introductory remarks, and your

written statements will be entered into the record without objection.

I would also like to acknowledge the interest of the Majority

Leader in this issue. While he is unable to attend today, he has

submitted a statement for the record. I remind other members that

they may submit statements and questions for the record as well.

[The prepared statement of Senator Frist appears in the appendix.]

I look forward to hearing the comments of the witnesses.

I turn, now, to Senator Bingaman.

Senator BINGAMAN. Mr. Chairman, I did not have an opening

statement. I think the issue of the hearing is extremely interesting

and one we need to understand better, and I appreciate you having

the hearing. I appreciate Senator Voinovich taking the lead on this

issue and look forward to his testimony.

Senator THOMAS. Thank you, Senator.

So, now we turn to Senator George Voinovich, sponsor of the Economic Development Act that would clarify the ability of States to

provide tax incentives to attract investment.

Senator, welcome.

STATEMENT OF HON. GEORGE V. VOINOVICH,

A U.S. SENATOR FROM OHIO

Senator VOINOVICH. Thank you. Thanks very much for holding

this hearing today. I appreciate your understanding the problem

because of your experience as a member of the legislature in your

State.

Senator Bingaman, I am very happy that you showed up this

morning. There are lots of things going on.

We are here to testify at this hearing to discuss the U.S. Court

of Appeals for the Sixth Circuit’s decision in Cuno v. DaimlerChrysler and its effect on competitiveness. I welcome this hearing,

and I believe it is an important step in enacting the Economic Development Act of 2005, which I introduced.

First, I want to make this clear. While I was Governor, the Investment Tax Credit at issue in Cuno was essential to Ohio’s economic success. During my administration, the legislature enacted

the Investment Tax Credit, as well as other incentives to help attract new business and expand existing businesses in Ohio. It

worked.

3

After the Investment Tax Credit program was enacted, Ohio

surged ahead of others in new business development and existing

business expansion. Since the Investment Tax Credit was enacted,

over 20,000 businesses have been able to claim a total of $2 billion

in credits, leveraging $34 billion in investment.

The Ohio Investment Tax Credit had concrete effects on business

decisions. For example, during a House Judiciary Subcommittee

hearing on Cuno, Michelle Kurt, currently vice president of Corporate Tax for Lincoln Electric, a 111-year-old Cleveland-based

manufacturing company, testified: ‘‘Without this tax credit, our investments in Ohio would certainly have been less. Since 1995,

when the Ohio manufacturing credit began, Lincoln Electric’s capital expenditures in Ohio have exceeded one-quarter of a billion

dollars. In many of the investment analyses we prepared, taxes are

a significant, and in some cases a deciding, factor on where to locate our capital.’’

Given that tax incentives are an important tool of economic development, and in the wake of the Cuno decision, I introduced the

EDA. The bill has bipartisan support. It is co-sponsored by all the

Senators in the Sixth Circuit.

It is also supported by the National Governors Association, the

National Association of Counties, the U.S. Conference of Mayors,

the National League of Cities, the International Brotherhood of

Teamsters, and the National Association of Manufacturers. That is

the big seven, all of them, in favor of this legislation.

In Cuno, the Sixth Circuit held that Ohio’s Investment Tax Credit was discriminatory because it granted preferential tax treatment

to in-State investments and, thus, violated the so-called ‘‘Dormant

Commerce Clause’’ of the U.S. Constitution.

As you know, the Commerce Clause grants Congress the power

to regulate interstate commerce. On the flip side, the Dormant

Commerce Clause restricts States from unduly burdening interstate commerce in the absence of Congressional action. Congress is

very much involved in dealing with these issues that the Court

deals with in terms of what is alleged to be interfering with commerce.

Applying the Dormant Commerce Clause can be challenging. In

Cuno, the Federal trial court and the Federal appellate court disagreed as to the appropriate application of that clause. The disagreement between these courts reflects the differences between

two general, but conflicting legal principles the Supreme Court has

developed regarding State taxes.

The first principle is that a State may not impose a tax that discriminates against interstate commerce by providing a direct commercial advantage to a local business.

The second principle is that a State may use its tax system to

encourage interstate commerce and may compete with other States

for interstate commerce, so long as the State does not discriminatorily tax the products manufactured or the business operations

performed in any other State.

My understanding is that the Court has never completely reconciled these two principles. That is why we need this legislation.

On March 1, 2006, the Supreme Court heard oral arguments in

Cuno, and a decision is expected later this year.

4

Now, here is the real challenge. If the Court chooses to uphold

or reverse Cuno, its decision likely will be narrowly tailored. There

is no guarantee the Court will reconcile these conflicting legal principles. If the Court dismisses the case for lack of standing by the

plaintiffs, as some think they may, then States and businesses will

be left without clear guidance as to the validity of State tax incentive programs.

Whatever decision the Court reaches, Congress is in the position

to clarify the legality of tax incentives used for economic development by exercising its Commerce Clause powers and enacting the

EDA.

If Congress enacts the EDA, it would end the legal ambiguity

surrounding such incentives once and for all. Everybody will know

where they stand. Without the EDA, other challenges to longstanding incentive programs in other States will occur.

These are not speculative possibilities. There are lawsuits similar

to the one brought in Cuno pending in a number of other States.

In other words, this is a rash that is moving all the way throughout the country. The uncertainty resulting from Cuno causes State

and local governments and businesses to not be able to rely upon

negotiated agreements with mutual benefits.

This uncertainty will trigger large expenditures of public and private monies to determine what incentives or subsidies will pass

legal muster. By enacting the EDA, Congress will prevent this confusion and waste of resources required by endless litigation, which

is why this bill has gained such widespread support.

The EDA was drafted with the input from the best tax and constitutional lawyers to ensure that the bill would be carefully crafted to protect the most common and benign forms of tax incentives,

but not to authorize those tax incentives that truly discriminate

against interstate commerce. I will be submitting for the record the

list of cases that we feel that this would not touch.

[The information appears in the appendix on page 133.]

Senator VOINOVICH. Moreover, the EDA does not require that

States offer tax incentives. The policy considerations and fiscal impact of tax incentives are complex questions that are driven by the

facts and circumstances of each State.

The EDA simply recognizes that 50 States, not the courts, are in

the best position to evaluate these decisions. States are the laboratories of democracy and innovation.

The Economic Development Programs in States create jobs and

prosperity by allowing each State to tailor packages to encourage

new growth through tax incentives for job training, job creation,

and investment in new plants and equipment.

As we all know, companies considering investment opportunities

are comparing not just different States in the United States—this

is a very important part of this—but also countries around the

globe.

As Michelle Kurt of Lincoln Electric stated, ‘‘Many other international locations offer exceptional tax incentives: low wages and

no litigation costs. For a company like Lincoln Electric, our preference is to create jobs inside the United States. However, the economic factors presented by many other jurisdictions can make an

5

investment decision to locate outside the United States overwhelming.’’

In other words, this is not now between the States. We are competing now with countries all over the world that want our businesses. As a former Governor who had to compete against Japan,

Canada, China, India, and Europe for business expansion, as well

as new business projects, I know just how important a role tax incentives play in attracting new businesses, as well as in retaining

existing businesses.

As Ms. Kurt’s statement demonstrates, and I can verify from my

experience as Governor, our international competitors are certainly

not going to stop using tax or other incentives to attract our businesses. We should not impede the States’ ability to do the same.

To compete in the global economy, States need to be able to use

tax incentive policies as one tool for economic development. By enacting the EDA, the winners will be working men and women and

their families, who will benefit from new business investment and

existing business expansion.

I certainly appreciate the opportunity to testify before you today

and hope that you give real serious consideration to this matter,

because I want you to know that, even if the Court decides this

case, there is still going to be uncertainty in the country, and it

needs to be clarified.

[The prepared statement of Senator Voinovich appears in the appendix.]

Senator THOMAS. Thank you very much, Senator. We appreciate

your being here.

Senator VOINOVICH. Thank you.

Senator THOMAS. We have an interesting panel that will follow

you with some additional ideas.

Senator VOINOVICH. Thank you. Again, thank you for the hearing.

Senator THOMAS. All right. Let us have our second panel, please.

Mr. Peter Enrich, professor of law, Northeastern University School

of Law in Boston; Mr. Harley Duncan, executive director, Federation of Tax Administrators, Washington, DC; Mr. Walter Hellerstein, Francis Shackelford distinguished professor of taxation law,

University of Georgia School of Law, Athens, GA; Dr. Peter Fisher,

professor, graduate program in urban and regional planning, The

University of Iowa, Iowa City, IA; and Mr. James Renzas, president and chief executive officer, Location Management Services,

Mission Viejo, CA.

A very impressive panel, gentlemen. We thank you so much. As

I indicated, if you can summarize your statement in about 5 minutes, then we will include your complete statement in the record.

Then perhaps we will have some questions.

So if we could begin with you, Mr. Enrich, we will start, sir.

STATEMENT OF PETER D. ENRICH, PROFESSOR OF LAW,

NORTHEASTERN UNIVERSITY SCHOOL OF LAW, BOSTON, MA

Professor ENRICH. Good morning. I want to thank you, Chairman

Thomas, and of course the subcommittee, for the invitation to testify at this hearing. It is an honor and a privilege.

6

In my statement this morning, I would like to highlight two

points that are developed at greater length in my written testimony. First, the accelerating proliferation of State tax breaks to influence business location harms the national interest, and it does

so in precisely the ways the Commerce Clause was designed to protect against.

Second, the legislation presently before the subcommittee is severely flawed as an attempt to draw a boundary between harmful

tax discrimination against out-of-State business and acceptable

State economic development measures.

On the first point, I will be very brief. The States are caught in

a vicious cycle of offering ever-larger tax breaks to large, mobile

businesses. But this is a zero-sum game that the States cannot

win. The tax breaks do not create jobs or investment; at best, they

merely shuffle them from place to place.

But this game carries very high costs, costs in the form of a dramatic shift of tax burdens onto individuals and small businesses,

and costs in the form of depleted revenues for the things that really

matter to a strong economy, like education and infrastructure.

The constitution responded to an earlier example of this same

harmful competition among the States for business, at that time in

the form of tariff wars, by placing responsibility for interstate commerce with the Federal Government, not the States.

The framers understood that the States’ rational self-interest

would inevitably trigger these vicious cycles unless the States were

precluded from this kind of competition.

Now, as then, the imperatives of international competitiveness

do not change the situation. To suggest that State tax breaks,

which at best serve as tie-breakers in interstate competition, can

significantly affect international location decisions defies plausibility, not to mention the prospect that these State tax breaks violate our trade treaty commitments.

Turning to my second point, the proponents of the legislation before you claimed that it preserves the status quo, protecting

against discriminatory tax measures, while allowing pro-economic

development policies.

But, in fact, its sets off on a novel and deeply flawed new course.

The proponents say legislation is needed because the courts’ Dormant Commerce Clause jurisprudence is ‘‘a quagmire,’’ a term that

the Court itself has used.

But while some areas of the Commerce Clause case law are

hounded by inconstancy and inconsistency, the area in question

here today, the prohibition against discrimination against interstate commerce, is not.

I cannot do better than to quote the Court’s own words: ‘‘From

the quagmire, there emerge some firm peaks of decision which remain unquestioned. Among these is the fundamental principle: no

State, consistent with the Commerce Clause, may impose a tax

which discriminates against interstate commerce by providing a direct commercial advantage to local business.

‘‘The prohibition against discriminatory treatment of interstate

commerce,’’ the Court goes on to say, ‘‘follows inexorably from the

basic purpose of the clause. Permitting the individual States to

enact laws that favor local enterprises at the expense of out-ofVerDate 11-MAY-2000 14:52 Nov 30, 2006 Jkt 095484 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 30836.000 SFIN1 PsN: SFIN1
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State businesses would invite a multiplication of preferential trade

areas, destructive of the free trade which the clause protects.’’

Senator Voinovich’s bill would turn the Supreme Court’s approach on its head. Where the Court begins with a prohibition on

discriminatory tax measures, the bill begins with a blanket authorization of tax incentives that discriminate against interstate commerce, so long as they are said to be intended to foster economic

development.

The bill then seeks to preserve the existing restrictions on discrimination by excepting from its blanket authorization seven specific kinds of tax provisions, reflecting specific measures previously

struck down by the courts.

But this approach is fatally flawed in two respects. First, it assumes that the boundaries of discrimination can be frozen in time,

that the courts have already recognized all of the kinds of tarifflike tax measures that human ingenuity can devise.

Second, it fails to provide any kind of principle that distinguishes

the forbidden practices from the permitted ones, relying instead on

an ad hoc list. One symptom of these fundamental flaws, which I

spell out in my written testimony, is that the bill would authorize

a wide range of measures of kinds the courts have forbidden, while

it likely fails to authorize the very measures—the State investment

tax credits—that it was designed to protect.

Because of its flawed structure, the bill provides neither clarity,

nor protection against the engineering of an array of new tariff-like

measures that would be immunized from scrutiny. In fact, the bill

is an open-ended invitation to such engineering.

In short, I would urge the committee that if Congress is to consider legislation in this area, it do so sensitive to the fundamental

purposes behind the Commerce Clause and that it be cautious

about superseding the Court’s careful and cogent approach, unless

it is able to offer a similarly coherent and administrable alternative

standard.

The bill before you clearly fails to provide such an alternative,

and its failings suggest the great difficulties confronting any attempt to devise legislation along similar lines.

Thank you.

Senator THOMAS. Thank you.

[The prepared statement of Professor Enrich appears in the appendix.]

Senator THOMAS. Mr. Duncan?

STATEMENT OF HARLEY DUNCAN, EXECUTIVE DIRECTOR,

FEDERATION OF TAX ADMINISTRATORS, WASHINGTON, DC

Mr. DUNCAN. Thank you very much, Mr. Chairman. My name is

Harley Duncan. I am the executive director of the Federation of

Tax Administrators, which is an association of the principle tax administration agencies in each of the 50 States, DC, and New York

City.

Our organization adopted a policy resolution in June of last year

in support of the Economic Development Act of 2005, S. 1066. The

goal of our resolution and the goal of the legislation, we believe,

ought to be that if the Cuno decision is not set aside by the Court,

that Congress should act to authorize State tax incentives for ecoVerDate 11-MAY-2000 14:52 Nov 30, 2006 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 30836.000 SFIN1 PsN: SFIN1
8

nomic development purposes, with the effort being to return to the

state of affairs as they existed prior to the Cuno decision.

I would like to emphasize three points this morning. The first is

that, if Cuno is not overturned, it is extremely important that Congress act. Every State has adopted a variety of incentives in their

tax structure to promote development and encourage business location and investment in their State. They take the form of investment tax credits, job creation credits, sales tax exemptions, credits

for investment in venture capital funds, and the like.

There are a number of arrangements in place with existing businesses in each State. If each of those were outlawed or prohibited

by the Cuno decision and there needed to be retroactive relief, the

disruption of corporate balance sheets would be detrimental and

extremely significant.

You will hear, and have heard, testimony that questions the effectiveness or efficiency of tax incentives. We really believe that the

question of, do they work, is misplaced before the Congress.

The question of whether they work is one that is best decided by

State and local officials, considering their own structure, their

unique circumstances within their State and their locality. It really

is a matter that State and local elected officials should consider in

terms of what types of incentives they want to offer, and the conditions under which they wish to offer them.

I would also make a comment on the race to the bottom, as Professor Enrich characterized it, in terms of States not being able to

help themselves and continuing to grant incentives that cause the

corporate tax to waste away. I think that sells State and local

elected officials quite short.

If you look at the pattern and the activity in State legislatures

over the past 3 years, the bulk of the tax activity that has occurred

has all been aimed at trying to shore up the corporate income tax,

make it a viable piece in State revenue structures, and to avoid

and to mitigate some of the instances and effects of what the

States have considered inappropriate tax planning or income shifting.

So, I think the State and local elected officials and State legislatures have a sense of what the corporate tax is supposed to do and

what they can do to preserve it, and they have done that.

The second point I would make to you is that, obviously, Congress cannot make an open-ended grant to use State tax incentives

for economic development purposes. There must be, of course,

guidelines that prevent impermissible discrimination.

As I said, our goal was to return to the status quo ante, prior

to, Cuno. We believe that S. 1066, the bill by Senator Voinovich

and others, strikes a reasonable balance in this regard.

As Mr. Enrich pointed out, it first authorizes incentives for economic development purposes and then sets a series of restrictions

on the types of incentives that are not to be authorized by the Act.

Whether that list is complete and perfect, of course, is one that

needs to be explored, and further work can be done. But we think

it is in the right direction. It is not a fundamentally flawed approach and is one that deserves the support of the Senate.

Finally, the third point I would like to make is that there is language in section 3B of the bill that is extremely important to the

9

States, and we think is important to the effective functioning of the

Economic Development Act.

That, just briefly, says that ‘‘nothing in this section shall be construed to create any inference with respect to the validity or invalidity under the Commerce Clause of the U.S. Constitution of any

tax incentive described in this section.’’

Briefly put, what that says is, if an incentive is found to run

afoul of one of the restrictions in section 3A, it is not, per se, invalid. Instead, there would need to be a separate determination by

the Court, whoever is considering it, that it rose to the levels of impermissible discrimination under the Commerce Clause. We think

this is important in preserving the situation as it existed prior to

Cuno, and does in fact do a lot to alleviate some of the uncertainty.

Thank you, Mr. Chairman.

Senator THOMAS. Thank you, sir. Appreciate it.

[The prepared statement of Mr. Duncan appears in the appendix.]

Senator THOMAS. Mr. Hellerstein?

STATEMENT OF WALTER HELLERSTEIN, FRANCIS SHACKELFORD DISTINGUISHED PROFESSOR OF TAXATION LAW, UNIVERSITY OF GEORGIA SCHOOL OF LAW, ATHENS, GA

Mr. HELLERSTEIN. Thank you very much, Mr. Chairman. I am

honored by the invitation to testify before you today. My testimony

can be summarized in two sentences.

Senator THOMAS. Good for you!

Mr. HELLERSTEIN. First, Congress should draw a line between

acceptable economic development incentives and unacceptable

State tax discrimination. Second, in doing so, Congress should act

very, very carefully.

Why should it draw a line? It should draw a line because the law

in this area is, as the Supreme Court itself has said, a quagmire

and, as I have said somewhat less charitably, a mess.

While the Court has said, as Professor Enrich suggests, that discrimination is one of the basic principles, what is discrimination?

The Cuno case is a poster child for this problem.

The Court held that, on the one hand, an investment tax credit

to attract business to the State is unconstitutional, but a property

tax exemption to attract business to the State is constitutional.

How can that be? Well, I must confess, I wrote a Law Review article drawing just that distinction, which the Court relied on.

But Professor Enrich, in his Law Review article, thinks all this

stuff is unconstitutional. Other people who have written Law Review articles say that none of it is unconstitutional. The point of

the matter is, there is no agreement as to what discrimination

means. The Cuno case, I think, demonstrates that.

There is, as Senator Voinovich has suggested, litigation all over

this country, and as Mr. Duncan has suggested, tax incentives all

over the country. It is anybody’s guess as to whether or not these

will or will not survive constitutional scrutiny.

The uncertainty created by this, which has been alluded to by

Senator Voinovich, is very serious, both, from a taxpayer standpoint, in terms of what they have relied on in the past and what

they may rely on in the future.

10

In terms of States, if States lose these cases, under Supreme

Court doctrine they have to provide meaningful backward-looking

relief. That could mean coughing up hundreds and millions of dollars to those who were discriminated against. In the future, budgetary considerations are quite uncertain.

The answer to this is not going to come from the courts. Supreme

Court Justice Frankfurter said, ‘‘At best, the Court can only act

negatively. It can determine whether a specific State tax is imposed in violation of the Commerce Clause.

‘‘We cannot make a detailed inquiry into the incidence of diverse

economic burdens in order to determine the extent to which such

burdens conflict with the necessities of national economic life. The

problem calls for a solution by devising a Congressional policy.’’

In short, the problem raised by Cuno is much broader than Cuno

itself. Unless Congress acts, I think we will remain in the ‘‘mess

that we are in.’’

How should Congress draw the line? Here, I think the message

is—and in this sense I agree with much of what Professor Enrich

said—very, very carefully. One person’s economic development incentive is another person’s discriminatory tax. When New York

tried to lure business to the New York Stock Exchange, that was

an economic incentive to New York. That was a discriminatory tax

to the Boston Stock Exchange.

When Hawaii decided to develop its fledgling pineapple wine industry, that was just an economic development incentive to Hawaii.

That was a discriminatory tax to those selling liquor from out of

State, and the Court struck it down. The Court struck down the

New York case.

Again, New York wanted to induce export shipment from the

State in the Westinghouse case. Westinghouse said that was a discriminatory tax, even though to others that was an incentive. So

the line between these is very thin, and I think Congress must act

with extraordinary care in doing this.

Just one recent example: Missouri. Two weeks ago today, the

Missouri legislature, by a vote of 152 to 1, did something that

makes a lot of sense. They said, look, we want people to buy cars

that are manufactured in Missouri, so we will just exempt them

from Missouri sales and use tax. Well, that is fine.

But suppose the car is manufactured in Illinois or in Michigan?

It does not take a Nobel Prize-winning economist to realize that

that may be an incentive that Congress would rather not bless. So

my point here is, simply, you must act with extraordinary care in

drawing this line, although I think it is terribly important, for the

reasons I have suggested, to draw that line.

In an attachment to this testimony, with which I will not burden

this hearing, I have suggested a number of technical suggestions

that I think address a number of the problems that Professor Enrich was referring to.

I think the Voinovich bill makes an excellent start at this process, but I do think that it needs some additional fine tuning in

order to make sure that Congress is not throwing out the baby

with the bath water.

Thank you very much.

Senator THOMAS. Thank you, sir.

11

[The prepared statement of Mr. Hellerstein appears in the appendix.]

Senator THOMAS. Dr. Fisher?

STATEMENT OF DR. PETER FISHER, PROFESSOR, GRADUATE

PROGRAM IN URBAN AND REGIONAL PLANNING, UNIVERSITY OF IOWA, IOWA CITY, IA

Dr. FISHER. Thank you. I am honored to be afforded this opportunity to present my views today on State economic development

tax incentives.

While I am a professor of planning, I have a doctorate in economics, and I have spent about the last 10 years conducting research

on State tax incentives and economic development policy.

I want to focus my remarks on the issue of whether or not it is

good national economic policy, as it has been suggested by many,

to encourage States to engage in competition with one another for

business activity through the offering of tax incentives.

I argue that such competition is counterproductive, both for the

States engaging in such activity and for the national economy. I

would, therefore, conclude that Federal legislation sanctioning or

encouraging the use of tax credits and similar incentives by State

governments is not in the national interest.

I have five points that I would like to make. First, tax incentive

competition is, at best, a zero-sum game. State tax incentives are

designed to change the location of economic activity by inducing the

firm to locate and/or move a facility to the State offering the incentive rather than another State.

To the extent that such incentives are effective, they merely

move economic activity from one State to another. There is no national interest in encouraging economic activity to move in response to such incentives, since no net gain in economic activity for

the Nation arises.

Second, tax incentive competition affirms economic efficiency. It

is likely that the State tax incentive competition is, in fact, not a

zero-sum game, but a negative-sum game. That is, it produces a

net loss for the national economy.

In the absence of incentives, firms choose locations based on economic rationality; that is, the location that minimizes the cost of

production and distribution would be selected. Labor supply and

productivity, labor costs, access to markets and suppliers, cost of

utility services; these are the major determinants of location.

Tax incentives, however, are designed to alter the location

choices of business and, in so doing, to override those kinds of market considerations. To the extent that they are effective in altering

choices, they will produce a pattern of economic activity that requires greater use of real resources and, hence, reduces national

economic efficiency.

Point three. Tax incentive competition undermines economic

growth. Our Federal system places on State and local governments

much of the responsibility—in fact, probably most of the responsibility—for providing the public services that businesses directly use

and depend on: education for entrance into the labor force, police

and fire protection, provision of streets and highways, and water

and sewer systems.

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Investment in these services provides the foundations for economic activity. By diverting tax revenues, tax incentive competition

undermines the ability of State and local governments to finance

those services and thereby degrades the quality of basic services

that the Nation needs to support economic growth.

Four. Tax incentive competition does not benefit the States. I

have concluded from a review of the extensive research on incentives within the U.S. that they are a marginally effective, and very

expensive, tool for attracting business from one State to another.

State and local taxes falling on business represent only about 1.2

percent of the total cost of doing business, so that incentives that

reduce this fraction a little provide very little leverage over the location decision.

For the vast majority of investment and location choices, tax incentives will be swamped by differences in other economic factors.

The typical incentive package offered routinely by a State to attract

manufacturing investment, for example, can be expected to be the

decisive factor in the location decisions of firms in only about 1 in

10 instances. The other 9 out of 10 times, the incentives are simply

a waste of money because the firm would have made that decision

anyway based on sound economic reasons.

My last point. Interstate tax incentive competition is an inappropriate vehicle for enhancing the competitiveness of the U.S. in the

global economy. It might be argued that interstate tax incentive

competition drives down the level of taxes on business activity and

makes the U.S. as a whole more competitive.

This is a poor argument in defense of State incentives. First of

all, State taxes are small relative to Federal. Second, State taxes

are small relative to the enormous variation in transportation

costs, labor costs, and labor productivity across Nations.

Thus, even very large State tax incentives will not cause much

variation in the overall tax bill facing the firm, and will not be

enough to offset even small differences in the other factors that are

more important in determining the profitability of U.S. versus overseas locations.

More importantly, it hardly makes sense for Congress to delegate

to the 50 States the task of ensuring that economic activity remains in the U.S. If this is a compelling national interest, surely

it calls for measures at the national level.

Incentives are a weakly effective and costly tool, even for altering

the location decisions of firms from one State to another. As a tool

for offsetting the much more substantial differences in costs between U.S. and overseas locations, they must be even less effective

and more costly.

In conclusion, States have available to them a variety of strategies for enhancing economic growth that are more cost-effective

and that do not require a beggar-thy-neighbor strategy.

Investments in infrastructure, education, and workforce development are important not only to a State’s economic growth potential,

but to the ability of the U.S. to compete in the global economy.

Encouraging States to compete with one another through tax incentives deprives them of the resources to fund the investments

that we as a Nation must depend on as we confront the challenges

of globalization.

13

We cannot afford a national economic strategy that relies on each

of the 50 States to figure out for themselves how to stem the outflow of production and jobs from the U.S. This is surely a selfdefeating strategy in the long term.

Senator THOMAS. Thank you very much, sir.

[The prepared statement of Dr. Fisher appears in the appendix.]

Senator THOMAS. Finally, Mr. Renzas?

STATEMENT OF JAMES H. RENZAS, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, LOCATION MANAGEMENT SERVICES,

MISSION VIEJO, CA

Mr. RENZAS. Mr. Chairman and members of the subcommittee,

I am honored to have been invited to testify before this distinguished body on an important issue affecting the future of this

great country.

Today you have heard from a number of brilliant and distinguished experts in the field of State taxation and economic development. These experts have a variety of backgrounds and are highly

educated, and immersed in the body of research surrounding the

effects of taxation and State economic policy on the creation of new

jobs and investment.

As CEO of Location Management Services, I am unique in the

respect that, rather than conduct research and theorize on what

makes companies choose certain locations for new corporate facilities, I have actually done it hundreds of times over in my career.

That said, I would like to discuss my life helping companies select the most appropriate locations for new investment and job creation from the standpoint of one who has been on the inside with

senior management and the board directors when comparing the

pros and cons of potential investment locations.

Location Management Services recently partnered with the National Association of Manufacturers to offer its members corporate

site-selection services in the United States through the Site Selection Network.

This network provides confidential site-selection consulting services to NAM members who are looking to establish new corporate

manufacturing facilities, distribution centers, corporate headquarters operations, and back-office support centers.

In the last 2 weeks, I have conducted field work in the States of

North Carolina and Georgia to help a U.S. manufacturer select the

final location for a half-million square-foot manufacturing plant,

which will ultimately employ over 1,000 American workers.

As part of that field work, I have interviewed numerous manufacturers in five semi-finalist counties throughout the States to assess the availability of labor skills, employment costs, benefit policies, and government cooperation. I have learned a great deal

about what these U.S. manufacturers are facing in an increasingly

competitive world market.

Some of these companies have dropped product lines as their

markets have been adversely impacted by dramatically lower prices

resulting from the movement of their competition from the United

States to offshore locations like China, India, and the Philippines.

One textile company I interviewed in North Carolina last week

downsized its workforce from over 300 manufacturing employees to

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just 65 manufacturing employees today as global competition and

pricing has eroded its profit margins.

Another consumer products company simply discontinued manufacturing in the United States and moved operations to Mexico,

where wage rates are a fraction of the wage rates in North Carolina.

This relocation resulted in the displacement of over 800 manufacturing workers who have almost no hope of finding a replacement

job paying anywhere near what they formerly made in the manufacturing sector.

As we analyze these locations for labor force availability and

skills, most employers have commented favorably on the commitment, skills, and work ethic of the American worker.

Yet, given the competitive pricing advantage that offshore locations have in labor, materials, health care, real estate, and environmental compliance, many of our manufacturing companies cannot

afford to continue employing these workers.

In the last 4 years, the United States has lost close to 1.3 million

manufacturing jobs, resulting in the displacement of honest, hardworking American workers throughout this country, including the

States that you represent.

I am sure you are all well-aware of the recent announcements of

General Motors, Ford, Delphi, and many others in the automotive

industry who have chosen to close plants and lay off thousands of

manufacturing workers in order to remain competitive.

These workers went to work every day, paid their taxes, did good

work, and did nothing to deserve this fate. Yet, thousands will pay

the price in the form of lost jobs, broken families, and lost savings

in the name of global competitiveness. Some have postulated that

incentives make no impact on the final decision of companies as to

where they will place their corporate facilities.

Having been a consultant to hundreds of companies seeking new

locations for corporate facilities, however, I can tell you unequivocally that once the basic site selection criteria have been satisfied,

incentives often do make a difference in the selection of the finalist

location, and second place does not count in site selection.

Some witnesses have calculated that State and local taxes comprise roughly 1 percent of business costs, and there could not be

sufficient enough incentive to influence the location decision one

way or the other. Yet, when one looks at the impact that incentives

have on geographically variable operating costs, that is, the business cost that can vary from one location to another, such as property taxes, real estate costs, labor costs, Worker’s Compensation

costs, et cetera, the impact of State and local incentives can often

be equal to 10 to 20 percent of the capital investment.

A cost reduction of this nature is often enough to get the attention of the chief financial officer and the board of directors, who are

instrumental in the selection of the finalist site.

Incentives are but one tool that States currently use to help level

the playing field and attract jobs and investment. If you look at

what other countries like China, India, and Ireland offer new companies by way of incentives, you will find that the incentive packages are often much more generous than any U.S. State.

15

Yet, these countries have much lower operating costs to begin

with. Looking at the economic growth these countries have

achieved over the last decade, it is difficult not to surmise that

their policies to encourage new jobs and investment in their countries have been effective.

The United States is the greatest country in the world and has

the most robust and productive economy the world has ever known.

These benefits stem from the belief in the power of competition,

and free markets to reward innovation and risk-taking.

Competition makes us all better and more focused on achieving

positive results. Federal legislation which would impede the ability

of States to control their economic destiny, in the face of increasingly intense global competition, would be short-sighted and detrimental to the American worker, American investors, and American

institutions.

In the best tradition of States’ rights, this is an area where the

State political process should be used to weigh the pros and cons

of any individual tax credit or incentives policy.

Thank you very much.

[The prepared statement of Mr. Renzas appears in the appendix.]

Senator THOMAS. Thank you. That is a very impressive panel.

We thank you so much.

We will ask some fairly short questions. I hope you can give us

some fairly short answers. We are kind of pushed. We are going to

start voting at 10:30, I believe, and maybe go on through the day.

It does not sound good.

Dr. Fisher, you have made the case that there is evidence suggesting State tax incentives are not effective. Assuming for a moment you are correct, how does it make them unconstitutional, and

how can you tell States they are not permitted to offer them without infringing on their taxing jurisdiction?

Dr. FISHER. Well, I think you started out with an economic question and ended with a legal one. Maybe I would have to defer the

latter part of that to another member of the panel.

But I would simply say that any legislation is designed to clarify

the issues in this area. I would recommend that it be drawn in a

way that is restrictive of the States and actually reduces the use

of this particular kind of weapon in the economic war among the

States.

Senator THOMAS. So you maintain it is ineffective.

Dr. FISHER. I maintain that they are largely ineffective. Not completely ineffective.

Senator THOMAS. I understand.

Dr. FISHER. And very expensive.

Senator THOMAS. Professor Enrich, you have argued incentives

are not material to the taxpayers’ investment decisions. I am curious whether you have return-on-investment information on investments made with the help of those incentives versus those without

the benefits.

Professor ENRICH. Senator, again, you are asking the legal expert

the economic question. In the course of my scholarship and in the

course of my work as a State official, I have had the occasion to

look at a lot of evidence about the size of differences the tax incentives do make to business bottom lines.

16

I do not hold myself out as an economist or an expert, but the

overwhelming evidence is that tax incentives offered at the State

level are not terribly effective.

When I was general counsel to Massachusetts’ Executive Office

for Administration and Finance, I had the opportunity to oversee

a task force that was putting together a document that was discussing how Massachusetts had effected economic growth. We

found a lot of ways that it had. We ended up deleting the entire

chapter we were planning to write about the efficacy of tax incentives because the evidence simply did not bear it out.

Senator THOMAS. Would you not imagine that if that were true,

the State tax people would not use it?

Professor ENRICH. The political pressures on State political policy

makers to adopt tax incentives, especially when other States are

adopting them, are intense.

Senator THOMAS. All right.

Professor ENRICH. And I think the whole reason that the Commerce Clause steps into these areas, is to protect States from that

inevitable competition.

Senator THOMAS. Thank you.

Mr. Hellerstein, if the Court dismisses or overturns the Sixth

Circuit decision, should Congress act to allow State and local incentives?

Mr. HELLERSTEIN. Yes, for the reasons I have suggested. The law

will remain indeterminate. All the Court will do is decide this case,

about this one particular incentive. It will leave open for debate

and certainty all of the incentives all over the country.

Senator THOMAS. All right. Thank you.

Senator Bingaman?

Senator BINGAMAN. Thank you all for your testimony.

It strikes me, what we are talking about here are several different things. First, there is the legal question that is posed by the

Cuno decision, and whether or not there is a legal prohibition

against States and localities providing these types of tax incentives.

Then there is the larger policy question about whether it is good

policy.

As regards the second of those questions, policy, it strikes me,

there are two different competitions that we are talking about. One

is the competition among States and among communities. The

other, of course, is the competition that our entire country faces

relative to the rest of the world.

Now, I do think, myself, I have seen examples in my State where

companies were solicited to move to Ireland, or to Singapore, or

whatever, and there are very substantial financial incentives offered to them to do that.

We have then, for example, the Albuquerque Economic Development Organization trying to figure out, how can it compete with

the government of Ireland or the government of Singapore, or

wherever it happens to be. Frankly, it is not a very fair competition.

It strikes me that this really, as a matter of policy, ought to be

done at the Federal level. I mean, if, in fact, we are going to provide some kind of response to the very substantial tax incentives

17

provided by other countries, we should be doing that at the Federal

level.

Our Department of Commerce or someone in the Federal Government ought to be empowered to counter those kinds of offers or

deal with it in some way. If we do not do that, if we are not willing

to do that or smart enough to do that, which has been the case so

far, it strikes me as problematic to say that States and localities

are also prohibited from competing to keep those jobs. I mean, I do

not know how effective their competition is through tax incentives,

but I would hesitate to pass a law saying you are prohibited from

doing anything.

Not only will we not do it at the Federal level, we will not do

anything at the Federal level to keep Ireland from wooing more

and more of our manufacturing to Ireland, but we will not allow

States to do it either, and we will not allow communities to do it

either. So, that is sort of the circumstance I find myself in. I do not

know exactly what question to pose to any of you.

I guess one obvious question is, if we are in fact going to restrict

States and localities from doing some of these things by statute, as

Senator Voinovich has recommended, should we not take on some

responsibility at the Federal level to at least respond in this competition we have with foreign governments? Professor Enrich?

Professor ENRICH. I think you are entirely correct, that there is

an important role for the Federal Government to play in this area.

It may even be an important role for the Federal Government to

identify specific ways in which States can use their tax systems to

further the Federal effort at competing internationally. That is not

what is happening now.

What is happening now is the States are predominantly competing among themselves. It is a grossly inefficient way to compete

internationally, and it is having the consequence of really hurting

us in international competitiveness.

I know I was out in New Mexico talking to tax practitioners

there last week. The problem they are seeing is, because of the tax

breaks that New Mexico is having to give to compete with other

States, they are losing the funding they need to support a strong

educational system and strong infrastructure, which would enhance international competitiveness.

Senator BINGAMAN. Do any of the others have comments on that

issue? Nobody?

Dr. FISHER. I would.

Senator BINGAMAN. Go ahead, please.

Dr. FISHER. I would agree with what Peter Enrich just said. I

would point out that there are lots of ways of competing. Labor

costs, for example, are about 14 times the average State and local

tax cost.

Efforts to enhance labor productivity are probably, therefore,

much more important than to make a small change—even a large

change—in the State and local tax bill, which is not going to be

able to offset much of a difference in labor costs. It would simply

be swamped by differences in labor costs. I think the question is

not whether they can occasionally be effective.

The question is, what is the most cost-effective use of limited resources? I would argue that investments in education, particularly

18

at this juncture, are a much more cost-effective use of our scarce

resources than competing with one another on the taxes.

Senator BINGAMAN. Thank you, Mr. Chairman.

Senator THOMAS. Thank you, sir.

Mr. Duncan, do you think the Court’s decision in this case, regardless of whether they uphold the law, will provide sufficient

clarity regarding what is permitted and what is not?

Mr. DUNCAN. I think it is always problematic to project what the

Court might do. They most likely will take the narrowest approach

that they can to try to deal with it in the fashion that they want.

So it is not going to clarify the field and make everything crystal

clear.

But they will certainly have an opportunity to speak to where a

lot of legal commentators believe Cuno went—which was much farther than other courts have gone—in trying to differentiate between efforts to benefit in-State as opposed to penalizing out-ofState businesses.

So I think they will probably be narrow and not clarify everything, but they can probably take away a fair amount of uncertainty over the sort of plain old vanilla investment tax credits as

well.

Senator THOMAS. Thank you.

Professor Enrich, is there precedent for Congress overturning a

Court ruling involving this type of Commerce Clause issue?

Professor ENRICH. Senator, there is no question that Congress

has the ultimate authority in areas affected by the Commerce

Clause. The challenge is to use that power wisely, and I trust the

Senate will struggle with that.

Senator THOMAS. Wisely? All right. So there is an opportunity to

do that, to come in and fill the holes that might be left by the decision.

Professor ENRICH. Not just to fill the holes.

Senator THOMAS. Even if overturned.

Professor ENRICH. It is a grant of authority to Congress. The

courts have played the role of stepping in where Congress has not

acted. Congress certainly has the power, and in previous instances

has exercised that power, to supersede decisions that the courts

have made.

Senator THOMAS. Mr. Hellerstein, do you want to comment on

that?

Mr. HELLERSTEIN. Well, again, clearly Congress has the power.

There is historical precedent for Congress reacting to Supreme

Court precedents, indeed, a precedent which allowed the States to

tax. Congress turned around and said the States could not.

I just want to return for a moment, without keeping you from

your vote, to what Senator Bingaman was suggesting. I think it is

very important to keep in mind that there are two issues here.

The one that Senator Bingaman spoke about as a bigger problem, which I think is not within my area of expertise, is terribly

important, but we should not let the problems with that issue, I

think, stop Congress from resolving the sort of narrow or legal

problem of clearing up this uncertainty. Even assuming we can

keep the law as it is, at least let us make it clearer. That is my

plea to you.

19

Senator THOMAS. Thank you.

Mr. Renzas, what ramifications, if any, do State laws like the one

at issue here have on the international trade arena, in your judgment?

Mr. RENZAS. Well, obviously the ability of States to provide incentives currently, as they are doing right now, gives them an opportunity to compete against some of these countries that are offering very lucrative incentives for American manufacturing jobs, and

other types of jobs. We have one right now, for example, a $500

million investment, high technology, that is looking at Canada and

the United States. It is down to the point where there are two finalist locations, one in the United States and one in Canada. It is

a German company.

They stated, if this location in the United States is not able to

provide enough incentives, they will go to Canada. That will be

high-technology jobs in a very lucrative industry that will be moving to another country as a result of this.

So, yes, it is very important. To the extent that you can give

States—or the U.S. Government can provide those kinds of incentives to stem the tide of those jobs elsewhere, it is a very, very important issue.

Senator THOMAS. It gets to be a little sticky as to whether that

is done to compete with Canada or to compete with Colorado, is it

not?

Mr. RENZAS. That is going to be the issue that Congress is going

to have to deal with.

Senator THOMAS. Mr. Duncan, or whoever, how many States

offer investment tax credits similar to the one in question in the

Cuno case, do you know?

Mr. DUNCAN. I do not have an exact number, but I think you can

guarantee yourself it is at least 35.

Senator THOMAS. Is that right, around that? Are there States or

localities who publicly sided with the plaintiffs against the tax incentive, and, if so, what is the division among the States, Mr.

Renzas? Do you know?

Mr. RENZAS. I do not know which States have sided against the

tax incentives. I am not aware of that. Most States are reluctant

to take that position because it is really going to hurt their economic development competitiveness right now.

Senator THOMAS. Mr. Duncan, do you have a thought on that?

Mr. DUNCAN. I would turn to the counsel in the case.

Senator THOMAS. All right.

Professor ENRICH. There was an amicus brief on behalf of the

State of Ohio that was signed by 34 States, almost to all States,

who did have similar issues that they were appropriately seeking

to defend.

Senator THOMAS. I see. All right. Thank you.

Senator?

Senator BINGAMAN. Let me ask, Dr. Fisher, based on your analysis of the economics, if you were to assume that tax incentives can

impact on the decision to locate a plant or to maintain an operation, to some extent, to what extent does the possibility of Federal

tax incentives compare to the possibility of State and local tax incentives?

20

My impression is, and I think one of you testified to the effect

that, there is a substantially greater capability at the Federal level

to provide financial incentives through the tax code than there is

at the State and local levels, so you have State and local governments essentially giving away the fairly modest taxing authority

that they have to get these jobs to locate there, where the Federal

Government could do much more if it were so inclined. Do you have

any thoughts on that?

Dr. FISHER. I think, if you take the corporate income tax, I think

the Federal is, on average, probably about six times the State. The

top Federal rate is still 35 percent and the average State rate, I

think, is around 6 percent. So, clearly, there is a great deal more

leverage internationally with adoption of incentives as part of the

Federal tax than State and corporate income tax.

Senator BINGAMAN. All right. That is all I have, Mr. Chairman.

Senator THOMAS. I cannot help but think, as you talk, that this

is sort of a challenge to the Federal Government, to make their

taxes competitive with the rest of the world if we are going to have

people come to this country.

Gentlemen, thank you so very much. I think this is a most interesting issue, certainly one in which both the courts and the Congress is involved. You have brought us some very important issues

and information, and we thank you so much for it. Some might

have some further questions for you in the next 24 hours, and I

hope you will respond to them. Thank you.

The hearing is adjourned.

[Whereupon, at 10:29 a.m., the hearing was concluded.]

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