(Editor's note: The following commentary is an edited version of remarks delivered by Michael D. LaFaive, director of the Morey Fiscal Policy, to the Midland Area Chamber of Commerce on April 23, 2010.)
Is the state in a position to competitively bring in new business while at the same time retaining the viable businesses already within our state?
The first question is whether by state you mean state government, or the geographic region itself? The people of this state were creating viable commerce before we were even a territory, let alone an official state with government programs designed to "bring new business and retain old ones." Humorously, the George Washington administration tried to create a government-run fur factory here in the 1700s and it was an unmitigated disaster.
The state is not in an ideal position to competitively bring in new business whether you consider this question from the perspective of overall tax policy or its policy of offering targeted tax credits, abatements and subsidies. We have a business tax that is too complicated and on top of it was slapped a surcharge designed to take $600 million more than was being paid by Michigan business just three years ago. We are also taxed in many ways that are not explicitly taxation, including fees and unnecessary regulation.
Tax and business incentives themselves in Michigan are greatly overdone and have expanded to such a degree that they now dominated by refundable tax credits. But exhaustive research has shown that, at best, state and local development efforts have little or no impact on real economic growth.
Consider some background:
First, and in the broadest sense, research from 2002 indicates that state and local units of government expend about $50 billion annually on business incentives with no apparent impact. In your folder is a META review of the literature titled "The Failure of Economic Development Incentives." A META review is essentially a review of reviews of scholarly literature on a particular topic. This review encompasses a "massive" amount of research and concludes that there were "theoretical, empirical and practical [reasons] to believe that economic development incentives have little or no impact on firm location and investment decisions." While the hundreds of studies that comprise this report are written by academics, the analyses are of real world historical data examined from every conceivable angle. This is not a fantasy concocted by insulated eggheads.
I bring this up because all too often the only response I get from apologists for these programs are a) well, I work in the real world and I can tell you these programs work; and b) they then go on to naively list anecdotes of specific industry leaders who assured them it was the incentive that made the difference. But I digress.
Second, it does not appear that Michigan has fared any better. Since 2005 there have been four major studies published on the state's premier development program, the Michigan Economic Development Corporation, two by the Mackinac Center, one by the Anderson Economic Group and one by the Upjohn Institute.
In 2005 our 127-page review of MEGA included a powerful time-series econometric model. We proved that MEGA had no impact on employment, the unemployment rate or per-capita personal income statewide. Last year we used a different technique called a "shift-share" analysis to analyze the program and basically came to the same conclusion. In fact, we found that every $1 million in MEGA manufacturing tax credits received in a given county, 95 manufacturing jobs were lost in that county.
Although it was not a MEGA-specific study, several years ago two scholars from Michigan State University and Wayne State University did a comprehensive study on local property tax abatements in Michigan. They concluded that data on local property tax abatements — a key component of the MEGA program issued by individual communities — from 1980 to 2001 "fail to show a clear, consistent relationship between abatement activity and change in economic health."
The third study was released this year by the Anderson Economic Group. They concluded that the opportunity cost of running the MEGA program was about 8,000 jobs. They created a model and tried to estimate what would have happened to the Michigan economy if, instead of handing out tax credits the state had just cut taxes for everyone. They found it was more effective to cut business taxes for all instead of a favored few.
The fourth study, by the Upjohn Institute, basically came to the opposite conclusion and is the most favorable study to date on the MEGA program. Remarkably, the authors' conservative conclusion is the MEGA program was decisive in bringing to or creating new jobs in the state in 8 percent of deals. Think about that. Even if you were to double that success rate to 16 percent it would represent a "win-loss" record equal to that of the Detroit Lions last year. This is nothing to be proud of, and even with the positive conclusions drawn by the study the program still has net negative fiscal effects of $3,500 per job. So you can say the record remains "mixed" but basically negative. We have written a fuller response to the Upjohn study and you will find it in your packets.
In short, these incentive games do not work. A better alternative is for government to distinguish itself with broader-based policy changes at both the state and local levels. More economic freedom, not central planning writ large, is the key to economic growth and development.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.