A tax credit that Ohio granted DaimlerChrysler to build a Jeep plant is unconstitutional because it grants preferential treatment to companies to expand within the state rather than elsewhere, a federal appeals court reportedly ruled on Thursday.

A lawyer who argued against Ohio’s programme told the Associated Press (AP) the ruling by the 6th US Circuit Court of Appeals could be cited to challenge similar tax-break programmes used by other states to promote economic development.

“This particular form of corporate welfare is no longer constitutional in Ohio,” lawyer Terry Lodge of Toledo told AP. “It is a tremendous win for taxpayers, for small businesses that are just local and couldn’t qualify for something like this as an incentive.”

National Taxpayers Union spokesman Pete Sepp told the news agency some 35 of the 45 states with a corporate income tax had some type of investment tax credits, according to a 1996 report by the state of New York. He said the appellate court’s ruling could hamper many states in their competition to use tax breaks to lure corporate investment.

“The one silver lining in this ruling might be that states might be encouraged to have more broad-based, low-tax systems rather than taking piecemeal approaches to lure firms,” Sepp told the Associated Press.

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A dozen taxpayers and three small businesses in Toledo reportedly had sued over the investment tax credit that Ohio granted DaimlerChrysler to build the plant, which employs about 3,800 workers and produces the Jeep Wrangler and Liberty models. The Toledo plant opened in 2001.

Officials told AP the total value of the tax incentives for DaimlerChrysler was about $US280 million, including the investment tax credit and a 10-year local property tax exemption.

The federal appeals court reportedly reversed a lower court’s 2001 ruling and said Ohio’s investment tax credit violates the US Constitution.

“Any corporation currently doing business in Ohio, and therefore paying the state’s corporate franchise tax in Ohio, can reduce its existing tax liability by locating significant new machinery and equipment within the state, but it will receive no such reduction in tax liability if it locates a comparable plant and equipment elsewhere,” Judge Martha Craig Daughtrey wrote for the unanimous three-judge appeals panel, AP said. The Constitution authorizes Congress to regulate commerce and “implicitly limits the state’s right to tax interstate commerce,” Daughtrey wrote.

Lodge told the Associated Press the ruling could affect approximately $70 million of DaimlerChrysler’s incentive package. He also said it might also have implications for a $2 billion expansion under way of Jeep operations in Toledo.

DaimlerChrysler spokeswoman Mary Gauthier told the news agency that the company was examining the ruling to determine its impact. The automaker had not decided how it will respond.

Spokeswoman Kim Norris told the Associated Press Ohio Attorney General Jim Petro plans to challenge Thursday’s ruling. Petro reportedly could ask the full 12-judge appellate court to rehear the case or request review by the US Supreme Court.