DaimlerChrysler Corp. v. Cuno

547 U.S. 332 (2006)

(Taxpayers and Tax Laws)

 

Context

On November 12, 1998, the automobile manufacturer DaimlerChrysler Corporation entered into an agreement with the city of Toledo, Ohio to build its new assembly plant in the city in exchange for tax exemptions and credits worth $280 million. The plaintiff, Charlotte Cuno, along with 17 other taxpayers, filed suit against DaimlerChrysler, the city and school districts, and other Ohio taxpayers, claiming that the tax incentives violated the Commerce Clause of Article One of the Constitution as well as certain provisions in the Ohio State Constitution, and caused the plaintiffs to suffer personal injury and undue burden. The case was taken to the US District Court for the Northern District of Ohio because it involved a question of the Commerce Clause, which was a federal issue. The District Court granted DaimlerChrysler’s request to dismiss the case, but the plaintiffs appealed to the US Court of Appeals for the Sixth Circuit, where the appeals court ruled that the tax credits violated the Commerce Clause because it coerced businesses to expand their businesses within the state of Ohio rather than expanding into other states, and therefore caused unconstitutional harm to interstate commerce. After an appeal to the Supreme Court, the unanimous Court determined that the plaintiffs solely by virtue of their status as taxpayers did not have standing to challenge state tax laws in federal court since the plaintiffs showed no clear injury that had been done to them or to the taxpayers of Michigan and Ohio.

DaimlerChrysler Corp. v. Cuno

DaimlerChrysler Corp. v. Cuno

Facts:

Ohio levies a franchise tax "upon corporations for the privilege of doing business in the state, owning or using a part or all of its capital or property in [the] state, or holding a certificate of compliance authorizing it to do business in [the] state." A taxpayer that purchases "new manufacturing machinery and equipment" and installs it at sites in the State receives a credit against the franchise tax. Municipalities in Ohio may also offer partial property tax waivers to businesses that agree to invest in qualifying areas. With consent from local school districts, the partial property tax waiver can be increased to a complete exemption.

In 1998, DaimlerChrysler entered into a contract with the city of Toledo. Under the contract, DaimlerChrysler agreed to expand its Jeep assembly plant at Stickney Avenue in Toledo. In exchange, the city agreed to waive the property tax for the plant, with the consent of the two school districts in which the plant is located. Because DaimlerChrysler undertook to purchase and install "new manufacturing machinery and equipment," it was also entitled to a credit against the state franchise tax.

Plaintiffs filed suit against various state and local officials and DaimlerChrysler in state court, alleging that these tax benefits violated the Commerce Clause. Most of the plaintiffs were residents of Toledo, who paid taxes to both the city of Toledo and State of Ohio. They claimed that they were injured because the tax breaks for DaimlerChrysler diminished the funds available to the city and State, imposing a "disproportionate burden" on plaintiffs.

Defendants removed the action to the United States District Court for the Northern District of Ohio. Plaintiffs filed motions to remand the case to state court. One of the grounds on which they sought remand concerned their standing. They professed "substantial doubts about their ability to satisfy either the constitutional or the prudential limitations on standing in the federal court," and urged the District Court to avoid the issue entirely by remanding.

The District Court declined to remand the case, concluding that, "at the bare minimum, the Plaintiffs who are taxpayers have standing to object to the property tax exemption and franchise tax credit statutes under the 'municipal taxpayer standing' rule articulated in Massachusetts v. Mellon. " On the merits, the District Court found that neither tax benefit violated the Commerce Clause The Court of Appeals for the Sixth Circuit agreed with the District Court as to the municipal property tax exemption, but held that the state franchise tax credit violated the Commerce Clause. The Court of Appeals did not address the issue of standing.

Defendants sought certiorari to review the Sixth Circuit's invalidation of the franchise tax credit and plaintiffs sought certiorari to review the upholding of the property tax exemption. We granted certiorari to consider whether the franchise tax credit violates the Commerce Clause; the Michigan Supreme Court had decided a similar question contrary to the Sixth Circuit's analysis here. We also asked the parties to address whether plaintiffs have standing to challenge the franchise tax credit in this litigation.

Issue:

Do plaintiffs have standing to challenge the franchise tax credit?

Does the franchise tax credit violate the Commerce Clause?

Reasoning:

We are obligated before reaching this Commerce Clause question to determine whether the taxpayers who objected to the credit have standing to press their complaint in federal court. We conclude that they do not, and we therefore can proceed no further.

We have "an obligation to assure ourselves" of litigants' standing under Article III. We therefore begin by addressing plaintiffs' claims that they have standing as taxpayers to challenge the franchise tax credit.

As this Court has explained, "'no principle is more fundamental to the judiciary's proper role in our system of government than the constitutional limitation of federal-court jurisdiction to actual cases or controversies.'"

The requisite elements of this "core component derived directly from the Constitution" are familiar: "A plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful conduct and likely to be redressed by the requested relief." We have been asked to decide an important question of constitutional law concerning the Commerce Clause. That requires plaintiffs, as the parties now asserting federal jurisdiction, to carry the burden of establishing their standing under Article III.

B

Plaintiffs principally claim standing by virtue of their status as Ohio taxpayers, alleging that the franchise tax credit "depletes the funds of the State of Ohio to which the Plaintiffs contribute through their tax payments" and thus "diminishes the total funds available for lawful uses and imposes disproportionate burdens on" them. On several occasions, this Court has denied federal taxpayers standing under Article III to object to a particular expenditure of federal funds simply because they are taxpayers.

In rejecting a claim that improper federal appropriations would "increase the burden of future taxation and thereby take [the plaintiff's] property without due process of law," the Court has observed that a federal taxpayer's

"interest in the moneys of the Treasury . . . is shared with millions of others; is comparatively minute and indeterminable; and the effect upon future taxation, of any payment out of the funds, so remote, fluctuating and uncertain, that no basis is afforded for an appeal to the preventive powers of a court of equity." 

This logic is equally applicable to taxpayer challenges to expenditures that deplete the treasury, and to taxpayer challenges to so-called "tax expenditures," which reduce amounts available to the treasury by granting tax credits or exemptions. 

Standing has been rejected in such cases because the alleged injury is not "concrete and particularized," but instead a grievance the taxpayer "suffers in some indefinite way in common with people generally." In addition, the injury is not "actual or imminent," but instead "conjectural or hypothetical." As an initial matter, it is unclear that tax breaks of the sort at issue here do in fact deplete the treasury: The very point of the tax benefits is to spur economic activity, which in turn increases government revenues. 

Plaintiffs' alleged injury is also "conjectural or hypothetical" in that it depends on how legislators respond to a reduction in revenue, if that is the consequence of the credit. Establishing injury requires speculating that elected officials will increase a taxpayer-plaintiff's tax bill to make up a deficit; establishing redressability requires speculating that abolishing the challenged credit will redound to the benefit of the taxpayer because legislators will pass along the supposed increased revenue in the form of tax reductions. Neither sort of speculation suffices to support standing.

The foregoing rationale for rejecting federal taxpayer standing applies with undiminished force to state taxpayers. 

The allegations of injury that plaintiffs make in their complaint furnish no better basis for finding standing than those made in the cases where federal taxpayer standing was denied. Plaintiffs claim that DaimlerChrysler's tax credit depletes the Ohio fisc and "imposes disproportionate burdens on [them]." This is no different from similar claims by federal taxpayers we have already rejected under Article III as insufficient to establish standing.

State policymakers, no less than their federal counterparts, retain broad discretion to make "policy decisions" concerning state spending "in different ways . . . depending on their perceptions of wise state fiscal policy and myriad other circumstances."  Federal courts may not assume a particular exercise of this state fiscal discretion in establishing standing; a party seeking federal jurisdiction cannot rely on such "speculative inferences . . . to connect [his] injury to the challenged actions of [the defendant]." 

C

Plaintiffs argue that an exception to the general prohibition on taxpayer standing should exist for Commerce Clause challenges to state tax or spending decisions, analogizing their Commerce Clause claim to the Establishment Clause challenge we permitted in Flast v. CohenFlast held that because "the Establishment Clause . . . specifically limits the taxing and spending power conferred by Art. I, § 8," "a taxpayer will have standing consistent with Article III to invoke federal judicial power when he alleges that congressional action under the taxing and spending clause is in derogation of" the Establishment Clause. Flast held out the possibility that "other specific [constitutional] limitations" on Art. I, § 8, might surmount the "barrier to suits against Acts of Congress brought by individuals who can assert only the interest of federal taxpayers."  But as plaintiffs candidly concede, "only the Establishment Clause" has supported federal taxpayer suits since Flast.

Quite apart from whether the franchise tax credit is analogous to an exercise of congressional power under Art. I, § 8, plaintiffs' reliance on Flast is misguided: Whatever rights plaintiffs have under the Commerce Clause, they are fundamentally unlike the right not to "'contribute three pence . . . for the support of any one [religious] establishment.'" Indeed, plaintiffs compare the Establishment Clause to the Commerce Clause at such a high level of generality that almost any constitutional constraint on government power would "specifically limit" a State's taxing and spending power for Flast purposes. 

Flast is consistent with the principle, underlying the Article III prohibition on taxpayer suits, that a litigant may not assume a particular disposition of government funds in establishing standing. The Flast Court discerned in the history of the Establishment Clause “the specific evils feared by [its drafters] that the taxing and spending power would be used to favor one religion over another or to support religion in general." The Court therefore understood the "injury" alleged in Establishment Clause challenges to federal spending to be the very "extraction and spending" of "tax money" in aid of religion alleged by a plaintiff. 

Plaintiffs thus do not have state taxpayer standing on the ground that their Commerce Clause challenge is just like the Establishment Clause challenge in Flast.

III

Plaintiffs also claim that their status as municipal taxpayers gives them standing to challenge the state franchise tax credit at issue here. The Frothingham Court noted with approval the standing of municipal residents to enjoin the "illegal use of the moneys of a municipal corporation," relying on "the peculiar relation of the corporate taxpayer to the corporation" to distinguish such a case from the general bar on taxpayer suits. Plaintiffs here challenged the municipal property tax exemption as municipal taxpayers.

A

First, plaintiffs claim that because state law requires revenues from the franchise tax to be distributed to local governments, the award of a credit to DaimlerChrysler reduced such distributions and thus depleted the funds of "local governments to which Respondents pay taxes." Brief for Respondents 16. But plaintiffs' challenge is still to the state law and state decision, not those of their municipality.

And in fact events have highlighted the peril of assuming that any revenue increase resulting from a taxpayer suit will be put to a particular use. Ohio's General Assembly suspended the statutory budget mechanism that distributes franchise tax revenues to local governments in 2001 and again in its subsequent biennial budgets. Any effect that enjoining DaimlerChrysler's credit will have on municipal funds, therefore, will not result from automatic operation of a statutory formula, but from a hypothesis that the state government will choose to direct the supposed revenue from the restored franchise tax to municipalities. This is precisely the sort of conjecture we may not entertain in assessing standing.

B

The second way plaintiffs seek to leverage their standing to challenge the municipal property tax exemption into a challenge to the franchise tax credit is by relying on Mine Workers v. Gibbs. According to plaintiffs, the "supplemental jurisdiction" recognized in that case supports jurisdiction over all their claims, once the District Court determined they had standing to challenge the property tax exemption.

Gibbs held that federal-question jurisdiction over a claim may authorize a federal court to exercise jurisdiction over state-law claims that may be viewed as part of the same case because they "derive from a common nucleus of operative fact" as the federal claim. Plaintiffs assume that Gibbs stands for the proposition that federal jurisdiction extends to all claims sufficiently related to a claim within Article III to be part of the same case, regardless of the nature of the deficiency that would keep the former claims out of federal court if presented on their own.

What we have never done is apply the rationale of Gibbs to permit a federal court to exercise supplemental jurisdiction over a claim that does not itself satisfy those elements of the Article III inquiry, such as constitutional standing, that "serve to identify those disputes which are appropriately resolved through the judicial process." We see no reason to read the language of Gibbs so broadly, particularly since our standing cases confirm that a plaintiff must demonstrate standing for each claim he seeks to press.

Plaintiffs' reading of Gibbs to allow standing as to one claim to suffice for all claims arising from the same "nucleus of operative fact" would have remarkable implications. The doctrines of mootness, ripeness, and political question all originate in Article III's "case" or "controversy" language, no less than standing does. Yet if Gibbs’ “common nucleus" formulation announced a new definition of "case" or "controversy" for all Article III purposes, a federal court would be free to entertain moot or unripe claims, or claims presenting a political question, if they "derived from" the same "operative facts" as another federal claim suffering from none of these defects. 

Holding:

All the theories plaintiffs have offered to support their standing to challenge the franchise tax credit are unavailing. Because plaintiffs have no standing to challenge that credit, the lower courts erred by considering their claims against it on the merits. The judgment of the Sixth Circuit is therefore vacated in part, and the cases are remanded for dismissal of plaintiffs' challenge to the franchise tax credit.

 

Key Takeaway

Under Article III of the U.S. Constitution, state taxpayers don't have standing to challenge state tax or spending laws in federal court simply by virtue of their status as taxpayers. 


Court Syllabus

The city of Toledo and State of Ohio sought to encourage DaimlerChrysler Corp. to expand its Toledo operations by offering it local property tax exemptions and a state franchise tax credit. A group of plaintiffs including Toledo residents who pay state and local taxes sued in state court, alleging that the tax breaks violated the Commerce Clause. The taxpayer plaintiffs claimed injury because the tax breaks depleted the state and local treasuries to which they contributed. Defendants removed the action to District Court. Plaintiffs moved to remand to state court because, inter alia, they doubted whether they satisfied either the constitutional or prudential limitations on standing in federal court. The District Court declined to remand the case, concluding that plaintiffs had standing under the "municipal taxpayer standing" rule articulated in Massachusetts v. Mellon. On the merits, the court found that neither tax benefit violated the Commerce Clause. Without addressing standing, the Sixth Circuit agreed as to the municipal tax exemption, but held that the state franchise tax credit violated the Commerce Clause. Defendants sought certiorari to review the invalidation of the franchise tax credit, and plaintiffs sought certiorari to review the upholding of the property tax exemption. This Court granted review to consider whether the franchise tax credit violates the Commerce Clause, and directed the parties to address the issue of standing.

Held: Plaintiffs have not established their standing to challenge the state franchise tax credit. Because they have no standing to challenge that credit, the lower courts erred by considering their claims on the merits.

1. State taxpayers have no standing under Article III to challenge state tax or spending decisions simply by virtue of their status as taxpayers.

(a) Before this Court can address the merits of plaintiffs' challenge, it has an obligation to assure itself that the merits question is presented in a proper Article III "case" or "controversy." The case-or-controversy limitation is crucial in maintaining the "'tripartite allocation of power'" set forth in the Constitution. "Article III standing . . . enforces the . . . case-or-controversy requirement." The requisite elements of standing are familiar: "A plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful conduct and likely to be redressed by the requested relief." Plaintiffs, as the parties now asserting federal jurisdiction, must carry the burden of establishing their standing.

(b) Plaintiffs' principal claim that the franchise tax credit depletes state funds to which they contribute through their taxes, and thus diminishes the total funds available for lawful uses and imposes disproportionate burdens on them, is insufficient to establish standing under Article III. This Court has denied federal taxpayers standing under Article III to object to a particular expenditure of federal funds simply because they are taxpayers. The animating principle behind cases such as Valley Forge was announced in Frothingham v. Mellon, decided with Massachusetts v. Mellon, in which the Court observed that a federal taxpayer's "interest in the moneys of the Treasury . . . is shared with millions of others; is comparatively minute and indeterminable; and the effect upon future taxation, of any payment out of the funds, so remote, fluctuating and uncertain, that no basis is afforded for an appeal to the preventive powers of a court of equity." This rationale applies with undiminished force to state taxpayers who allege simply that a state fiscal decision will deplete the fisc and "impose disproportionate burdens on them." Because state budgets frequently have an array of tax and spending provisions that may be challenged on a variety of bases, affording state taxpayers standing to press such challenges simply because their tax burden gives them an interest in the state treasury would interpose the federal courts as "'virtually continuing monitors of the wisdom and soundness'" of state fiscal administration, contrary to the more modest role Article III envisions for federal courts.

(c) Also rejected is plaintiffs' argument that they have state taxpayer standing on the ground that their Commerce Clause challenge is just like the Establishment Clause challenge this Court permitted in Flast v. Cohen. Flast allowed an Establishment Clause challenge by federal taxpayers to a congressional action under Art. I, § 8. Although Flast held out the possibility that "specific [constitutional] limitations" other than the Establishment Clause might support federal taxpayer standing, only the Establishment Clause has been held to do so since Flast, see, e.g., Bowen v. Kendrick. Plaintiffs' reliance on Flast is misguided: Whatever rights plaintiffs have under the Commerce Clause, they are fundamentally unlike the right not to contribute even "'three pence'" to support a religious establishment that was upheld in Flast. Indeed, plaintiffs compare the two Clauses at such a high level of generality that almost any constitutional constraint on government power could be likened to the Establishment Clause as interpreted in Flast. And a finding that the Commerce Clause satisfies the Flast test because it often implicates governments' fiscal decisions would leave no principled way of distinguishing other constitutional provisions that also constrain governments' taxing and spending decisions. Yet such a broad application of Flast's exception to the general prohibition on taxpayer standing would be at odds with Flast's own promise that it would not transform federal courts into forums for taxpayers'"generalized grievances." 

2. Plaintiffs' status as municipal taxpayers does not give them standing to challenge the state franchise tax credit at issue.

This Court has noted with approval the standing of municipal taxpayers to enjoin the illegal use of a municipal corporation's funds. But plaintiffs' attempts to leverage the notion of municipal taxpayer standing into standing to challenge the state tax credit are unavailing. 

(a) Plaintiffs argue that because state law requires revenues from the franchise tax to be distributed to local governments, the award of a credit to DaimlerChrysler reduced such distributions and thus depleted the funds of local governments to which plaintiffs pay taxes. But plaintiffs' challenge is still to the state law and state decision, not those of plaintiffs' municipality. Their argument thus suffers from the same defects that the claim of state taxpayer standing exhibits.

(b) Also rejected is plaintiffs' claim that their standing to challenge the municipal property tax exemption supports jurisdiction over their challenge to the franchise tax credit under the "supplemental jurisdiction" recognized in Mine Workers v. GibbsGibbs held that federal-question jurisdiction over a claim may authorize a federal court to exercise jurisdiction over state-law claims that may be viewed as part of the same case because they "derive from a common nucleus of operative fact" as the federal claim. Plaintiffs assume that Gibbs stands for the proposition that federal jurisdiction extends to all claims sufficiently related to a claim within Article III to be part of the same case, regardless of the deficiency that would keep the former claims out of federal court if presented on their own. This Court's general approach to the application of Gibbs has been markedly more cautious. The Court has never applied Gibbs' rationale to permit a federal court to exercise supplemental jurisdiction over a claim that does not itself satisfy those elements of the Article III inquiry, such as constitutional standing, that "serve to identify those disputes which are appropriately resolved through the judicial process." There is no reason to read Gibbs' language as broadly as plaintiffs urge, particularly since the Court's standing cases confirm that a plaintiff must demonstrate standing for each claim he seeks to press, see, e.g., Allen. If standing were commutative, as plaintiffs claim, the Court's insistence that a plaintiff must demonstrate standing separately for each form of relief sought, see, e.g., Friends of Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., would make little sense when all claims for relief derive from a "common nucleus of operative fact," as they appear to have in cases like Laidlaw.

Such a reading of Gibbs would have remarkable implications. The doctrines of mootness, ripeness, and political question all originate in Article III's "case" or "controversy" language, no less than standing does. Yet if Gibbs'"common nucleus" formulation announced a new definition of "case" or "controversy" for all Article III purposes, a federal court would be free to entertain moot or unripe claims, or claims presenting a political question, if they "derived from" the same "operative facts" as another federal claim suffering from none of these defects. Plaintiffs' reading of Gibbs, therefore, would amount to a significant revision of the Court's precedent interpreting Article III. With federal courts thus deciding issues they would not otherwise be authorized to decide, the "'tripartite allocation of power'" that Article III is designed to maintain, Valley Forge would quickly erode, and the Court's emphasis on the standing requirement's role in maintaining this separation would be rendered hollow rhetoric.


How the Justices Voted

Majority: Roberts, joined by Stevens, Scalia, Kennedy, Souter, Thomas, Breyer, Alito

Concurrence: Ginsburg