Elected officials today regularly try to woo large companies into locating to their state or city by offering them special tax treatment or subsidizing them in some way. States and cities compete with each other in this regard — Michigan is no exception — and this competition makes national headlines when well-known companies choose to relocate or expand. With this in mind, one might reasonably assume that publicly funded economic development is a long-standing, firmly established practice. But that’s not the case in Michigan.
This report chronicles the history of Michigan Supreme Court decisions on this issue. It is not a formal legal review of the case law, but rather a historical account of important cases, spanning from Michigan’s earliest days as a new state to the ratification of the current constitution in 1963. The narrative that unfolds will surprise those not familiar with Michigan’s experience with taxpayer-funded corporate handouts.
For almost all of its first hundred years as a state, which was a time of steady population and economic growth, corporate handouts were strictly prohibited by Michigan’s constitution. The Michigan Supreme Court repeatedly ruled that it was unconstitutional to use public resources to benefit a private interests, and voters repeatedly rejected proposals to eliminate this prohibition.
Over decades, multiple challenges were posed to this constitutional prohibition. A wide variety of private interests tested it, each arguing that its case was so unusual and special that it deserved to be exempt. But one after another, these pleas — for subsidies for railroads, streetcars, sugar manufacturers, corn farmers and private museums — were denied by the state’s highest court.
This continued until 1941 when the Michigan Supreme Court, in a surprising opinion, allowed public funds to be used to benefit a private interest. Even though previous courts had ruled against corporate handouts in nearly identical cases, this court allowed taxes to be used to subsidize the marketing of apples. The court reasoned simply that selling more apples would be good for the state’s economy and therefore permitted it.
But even after the long-standing precedent against subsidies to private companies was overturned in the courts, the people reaffirmed the constitutional prohibition against such spending. In the early 1960s, voters rejected a proposed constitutional amendment to allow the Legislature to spend money on corporate handouts. Then, while developing a new constitution, convention delegates carefully considered whether public funds should be used to subsidize private interests and preserved language they thought would continue to prohibit it. Voters ratified this new constitution in 1963 and it remains this state’s current law.
Despite Michigan currently devoting millions of dollars per year on taxpayer-funded economic development programs, the main takeaway from this historical review is that these programs may rest on a weak legal foundation. The language meant to prohibit corporate handouts remains unchanged in the state’s constitution, yet these programs proliferate. In light of the full view of Michigan’s history with corporate handouts, it may be past time for the courts to review the constitutionality of economic development programs.