For most of Michigan's history, economic development was thought of as
what happened when people pursued their own productive enterprises, free of
undue interference from government. The principles of free markets-"a fair field
and no favor"-were the main guideposts for Michiganians. As a result, many jobs
were created-more of them and at higher wages than anywhere else-when
profit-seeking entrepreneurs rushed to meet the public's demands and government
encouraged a safe and stable environment in which to do business.
Today, however, economic development often means "industrial policy," a euphemism for state government picking winners and losers; doling out subsidies; and engaging in wealth redistribution and corporate welfare. As a result, many government bureaucracies are loudly but falsely claiming credit for "creating" jobs. It is time for the Legislature to address economic development with a critical eye and the proper analytical tools.
When Gov. Engler took office in 1991, Michigan's overall tax burden was well above the national average. Total state and local tax revenues as a share of personal income were 10.9 percent. By 1995, the Senate Fiscal Agency reported that the percentage had fallen to 10.3 percent. By the end of the decade, the tax burden was back up to 10.7 percent of personal income. In Fiscal Year 2000 it was 10.8 percent. Michigan must reduce its overall tax burden, particularly in light of the need to stay competitive with other states that are also cutting taxes. According to the Tax Foundation, a Washington, D.C.-based nonprofit organization, Michigan ranks 16th in per capita state and local tax burden as a percentage of income, which means that 34 states have a lesser burden than does Michigan. The following recommendations will help ensure Michigan's economic prosperity.
48. Scale back the Michigan Economic Development Corporation.
The Michigan Economic Development Corporation (formerly the Michigan Jobs Commission) is the state's department of corporate welfare, taking in hundreds of millions in federal and state tax dollars and doling out tens of millions of dollars in subsidies and other favors to select businesses. The Legislature should examine this agency's budget and ask to what extent its programs merely redistribute jobs to the politically well connected while causing many other businesses to incur the costs of retraining and rehiring in tight labor markets.
Many of the MEDC's activities appear disturbingly similar to the failed gimmickry of previous administrations. The Legislature should recognize that corporate welfare and "industrial policy" are no less objectionable when Republicans practice them than when Democrats do. The best policy for the state to follow is to excise all those programs of the MEDC that amount to corporate welfare, leaving any necessary or mandated functions to be managed by either a streamlined MEDC or other departments of state government.
State government should pursue economic development by improving core government services such as transportation, reforming education, cutting taxes and bureaucracy, and implementing needed labor reforms. This was the broad-based approach advocated and practiced by Gov. Engler in his first term but which has since been joined by the dubious programs of the MEDC. Indeed, the MEDC has brazenly declared in its own publications that its primary activity in 2002 will be working to preserve its own continuance into the next administration.31
It also should be noted that when the MEDC subsidizes some firms, it usually hurts other firms. Consider the case of Boar's Head Provision Company-a meat products company headquartered in Brooklyn, N.Y. In exchange for the company's promise to invest $14 million and create 450 new jobs in Michigan over three years, the MEDC arranged in 1998 to give Boar's Head an "economic development package" worth up to $5.1 million in federal, state, and local resources. It included up to $3 million for equipment leasing, an abatement of the 6-mill state education tax of up to $212,590, and as much as $1,000 per worker for training. Armed with these "incentives," the company opened a processing plant near Holland, Mich., on Dec. 13, 1999. What the MEDC's press releases never revealed was the impact of the deal on other Michigan businesses, such as Koegel Meats Inc., in Flint.
Like Boar's Head, Koegel makes meat products. A Michigan-based family business for three generations, it produces an extensive line of cold cuts and the popular "Koegel's Vienna Frankfurters" that get grilled by the millions in Michigan backyards every summer. Its meat products still use recipes devised by Albert Koegel when he emigrated from Germany to Michigan and started the company in 1916. The firm sells 99 percent of its product in Michigan and employs about 100 people at its Flint facility. For all of its 86 years, Koegel Meats always has paid its taxes while never receiving government favors or taxpayer dollars in the form of abatements or subsidies. The company always has trained employees with its own funds. In fact, when the company was once offered federal money for job training, Al Koegel turned it down because he did not want the hassle of red tape and paperwork.32
It is patently unfair to extract tax dollars from Koegel and use them to benefit an out-of-state competitor such as Boar's Head. Unfortunately, this sort of situation is part and parcel of the MEDC's mission-a mission that needs to be dramatically revised or ended.
For further information, please see www.mackinac.org/2670, www.mackinac.org/4053, and www.mackinac.org/718.
49. End self-aggrandizing advertisements.
One specific area the Legislature could examine is the MEDC's advertising to celebrate its own self-importance. In late 2001, the agency released a brochure of its "2002 Corporate Objectives" in which it listed "Ensure the Continuity of the MEDC" as its No. 1 objective. In other words, the bureaucrats at Michigan's department of jobs have made protecting their own jobs their top priority in 2002.33
The MEDC also is running a series of self-aggrandizing radio advertisements through the 2001-02 fiscal year, which ends on Oct. 31, 2002, just days before the next election. The timing of this ad run may not be a coincidence, since Michigan voters will choose a new governor in the election, and that governor may not be as favorably disposed toward the MEDC as Gov. Engler has been.
The MEDC is spending $850,000 to produce and run the ads, which all underscore the importance of the MEDC in general, or what it has meant to specific entrepreneurs.34 Of the 16 ads that the Mackinac Center for Public Policy has obtained through the Freedom of Information Act, all contain the following introductory and concluding remarks:
"The Michigan Economic Update is presented by the Michigan Economic Development Corporation, the No. 1 driving force behind business growth in Michigan"35 (emphasis added).
Implicit in this astounding claim is the MEDC's apparent belief that the
thousands of Michigan entrepreneurs who risk their own money bringing products
to market, who meet payroll, navigate state-mandated regulatory mazes, and pay
taxes to support bureaucracies such as the MEDC itself are a secondary force in
Michigan business development. This is an unrealistic, if not insulting, view of
how a modern market economy works.
Each MEDC advertisement also concludes with the statement:
"The Michigan Economic Development Corporation is in the business of helping businesses grow and succeed. They can give your business an edge, provide you with expert help on workforce training, recruiting skilled workers and corporate tax strategies. The experienced staff at the Michigan Economic Development Corporation can help you cut through red tape that can save time and money. Plus, their services are free"36 (emphasis added).
The MEDC's activities are far from free. Since fiscal year 1999-2000 the MEDC
has received more than $244 million in General Fund/General Purpose dollars-tax
money extracted from Michigan citizens.37 The General Fund is the money in the
Michigan budget over which elected politicians have the most discretion. And
this figure does not include the money that is received by the MEDC from the
federal government and other sources.
It is unseemly when government agencies promote themselves with lavish media buys, but particularly so when the agency is of such dubious worth as the MEDC and at a time when an economic downturn demands that government tighten its belt.
50. End duplicative state Internet job bulletin boards.
The MEDC's counterproductive work goes beyond just handing out favors to particular businesses. Sometimes, it competes directly against private firms and, in one particularly notable case, even against another state agency.
Consider two highly similar programs-one operated by the MEDC and the other by the Michigan Department of Career Development (MDCD). The MEDC sponsors a web site called "Michigan Careersite" while the MDCD operates one known as the "Michigan Talent Bank." They each carry out the same function-bringing job seekers and job providers together-and compete not just with each other, but also with hundreds of private, Michigan-based job recruitment companies.38
Why does the state run these redundant sites? According to the MEDC, Michigan Careersite was created to help attract "skilled workers in Information Technology, Life Sciences, and Advanced Manufacturing." The MDCD says its Michigan Talent Bank is intended to "bring employers and employees together," but it does not exclude skilled workers from any field, so the two sites end up performing overlapping duties. In addition, an MEDC brochure about Michigan Careersite brags about its ability to "grab" jobs posted on Michigan's Talent Bank and move them to its own.39
Reading the brochure, one gets the sense that even MEDC officials know they should not be in the job board business. It reads, "The world does not need another job board. We know. Internet job boards are one of the great advances in modern recruitment, but their popularity and abundance have reduced human resource staff productivity nationwide. The MEDC is partnering with Michigan-based Careersite.com to fix this problem."40
Private recruitment companies have long helped employers find qualified workers
to fill jobs. During the 1990s, Michigan alone saw 348 new "human resource"
firms spring up to fill this role. Michigan also is home to many privately run
labor exchange web sites, such as Careermatrix.com. Its founder, Dennis Hoyle,
is not thrilled with the state's involvement in his business. "It really is
irksome to see the state using our tax dollars to compete against us," he said.
"Moreover, it's bizarre watching the agencies competing against each other.
There really isn't much difference between the two sites."41
Additionally, a number of general web sites in the state, such as Mlive.com, operate labor exchanges, and many newspapers post their want ads online. There are over 6,000 web sites specifically dedicated to job recruitment nationwide, and most of these private organizations do their work without costing the taxpayer a cent. Meanwhile, the MEDC is spending about $500,000 to operate Michigan Careersite for its first two years. The MDCD does not know what it costs to operate the Michigan Talent Bank.42
Another irony is the MEDC's mission to recruit workers from outside Michigan. According to the agency, it is "saturating the cities of Chicago, Indianapolis, Cincinnati and Columbus" with $5 million in advertisements to tell workers about Michigan job opportunities. At the same time, the MEDC is enriching Career Site Corp., which it hired to help run Michigan Careersite. Career Site Corp. also operates Careersite.com, a national labor exchange site that can help Michigan workers find jobs outside the state.43
51. Abolish the Michigan Economic Growth Authority (MEGA).
An important element of the MEDC's business retention and attraction efforts is MEGA, a program of selective tax abatements for firms that promise to create or retain a certain number of jobs in Michigan. It is the essence of the government strategy for "picking winners and losers" that economists regard as counterproductive to genuine, lasting, market-directed development. During the past few years, Michigan labor markets were the tightest they have been in three decades. It hardly seems necessary for the state to be playing this game even if government were capable of knowing which firms are deserving and which are not.
Yet Michigan has an entire state bureaucracy that is organized around the mistaken idea that government economic planners can figure out which endeavors in the marketplace will be winning investments and which will not. Decades ago, Austrian economist Ludwig von Mises and his Nobel Prize-winning student Friedrich Hayek argued forcefully that such predicting is fraught with complications and limitations. It simply isn't possible to predict the ever-changing preferences of consumers, or the impact of innovation, competition and technology in a vibrant, healthy economy.
Take, for example, MEGA's pick of Webvan Group Inc. of Foster City, Calif. An online grocery retailer, Webvan was offered $23.4 million in tax credits by MEGA on Dec. 21, 1999, to build one of its 26 distribution centers in Michigan. The company's stock finished that week at $18.38 per share.44
Webvan was supposed to be a big winner. Doug Rothwell, MEDC president, told Site Selection magazine in May 2000 that "Detroit was picked by one of the best-financed retailers on the market for the next wave of e-retailing." State officials heralded the Webvan-MEGA deal as wise policy and a win for Michigan. But the marketplace rendered a very different verdict.
Webvan's stock began a steady descent almost immediately following the MEGA agreement, reaching $0.47 per share on Dec. 15, 2000. The company withdrew its promise to build a distribution center in Michigan, forfeiting the MEGA tax credits. (see Chart 10). Webvan stock proceeded to lose 100 percent of its value with the company declaring bankruptcy in July 2001.45
Why did state officials fail to predict Webvan's difficulties? MEGA regularly issues reports purporting to forecast exactly how many jobs will be created by its tax credits, even 20 years into the future. The answer is simple: Hayek's knowledge problem again. Entrepreneurs putting their own money on the line have more reason to forecast correctly than anyone, yet even they fail much of the time. For government planners spending taxpayers' money, this sort of economic prediction is infeasible to say the least.46
Maintaining a government department that hands out special favors to certain
businesses and not to others is not only unfair, it may also hurt economic
growth. Harold Brumm, an economist with the General Accounting Office in
Washington, D.C., says companies devote substantial resources to securing
government favors, and that this has a "relatively large negative effect on the
rate of state economic growth." In other words, without discriminatory
favors and especially with more broad-based tax and regulatory relief,
Michigan's economy might be doing better than it is.47
MEGA also is unfair to existing businesses that must compete with the firms favored by MEGA abatements. As of Dec. 31, 2001, MEGA has awarded more than $1 billion in tax credit opportunities to 137 projects.48 The majority of MEGA recipients must show that they have created a net number of new jobs to receive these credits against their Single Business Tax liabilities. But there is no way to prove that these jobs would not have been created anyway. See Chart 9. In addition, the MEGA program makes it harder to cut taxes across the board-cuts that would encourage the creation of many thousands of jobs in their own right. Unfortunately, most MEGA recipients also receive many other government favors along with their credits: job training subsidies, property tax abatements, the elimination of fees for building permits, and on at least one occasion, free municipal recreation passes for employees of the expanding firm.
For further information, please see www.mackinac.org/718.
52. Sustain the phased-in reductions in the state's income tax and Single Business Tax.
In 1999, Gov. Engler proposed, and the Legislature subsequently enacted, a phased-in reduction of the state's flat 4.4 percent personal income tax rate to 3.9 percent over five years. The Single Business Tax (SBT) was put on a 23-year path to extinction by another law passed that same year. Broad-based reductions in personal income tax rates and Michigan's particularly onerous SBT burden on businesses will do far more for Michigan's economic development than selective abatements or subsidies.
The complicated SBT is especially harmful to businesses. It's the only
comprehensive, statewide, value-added tax imposed by any state, and businesses
pay it whether they earn a profit or not. If Michigan had a standard corporate
income tax, the rate necessary to raise the revenue brought in by the SBT would
have to be in the vicinity of 15 percent-far higher than the corporate income
tax rates of all but perhaps two states. That ought to tell us what businesses
here have been saying for years, namely, that the SBT is a job-killer.
In 1998, calculations of the Senate Fiscal Agency prompted The Detroit News to editorialize that "Michigan's state and local taxes as a share of average state personal income are moving back up to levels not seen since before John Engler took office in 1991." At that time, combined state and local taxes amounted to 10.9 percent of personal income. They fell to 10.3 percent by 1995 but had edged back up to 10.7 percent by the end of 1997. Michigan workers need and deserve a tax cut. As pointed out earlier in this document, the Tax Foundation has shown that Michigan's overall tax burden is still above the national average.
With the current recession crimping state revenues, many are calling for delaying or canceling the scheduled reductions in the personal income tax and Single Business Tax. When he unveiled his 2003 budget proposals in February 2002, Gov. Engler wisely endorsed retaining those cuts. That's the course on which Michigan must remain.
For further information, please see www.mackinac.org/3821.
53. Lower the cost of home ownership.
The state's real estate transfer tax stands at $3.75 per $500 of total home value at the time of purchase. To encourage home ownership, that rate should be cut to $2.50 or lower, as soon as possible.
54. Help businesses create jobs by lowering payroll taxes.
Michigan's unemployment insurance payroll tax base-currently at $9,500 of an employee's earnings-should be restored for at least one year to the federal level of taxable wage base, which is $7,000. This would have no direct impact on state revenues because employers pay this tax into a separate fund, which presently is in surplus. Mirroring the federal wage base for one year would help cut the overall tax burden on all Michigan businesses.
55. Eliminate the double sales taxation of automobiles.
The 1994 hike in Michigan's sales tax from 4 cents to 6 cents on the dollar exacerbated at least one inherent flaw in the way the sales tax is imposed: the double taxation on automobiles, a major Michigan product on which tens of thousands of jobs depend.
When someone in Michigan buys a car, he pays sales tax on the purchase price. When he later trades in the car, he pays sales tax not only on a new vehicle but also on the trade-in value of the old vehicle. That amounts to double taxation because the individual already paid sales tax on the full value of that vehicle at the time of its purchase. The Legislature should end this inherently unfair practice.
56. Extend personal property tax relief.
In July 1998, the Legislature passed a bill that permits a handful of distressed municipalities to offer personal property tax breaks of up to 100 percent on the installation of new equipment by companies that relocate within Michigan. While tax reduction is laudable, this extremely selective approach is unfair to existing businesses that pay full freight and must compete with newcomers that get a substantial break. The Mackinac Center agrees with the MEDC that cutting the onerous personal property tax "is necessary to reduce unemployment, promote economic growth, and increase capital investment in the state," but a broader and more comprehensive reduction of the tax would be much more fruitful.
Generating about $1.7 billion statewide, the personal property tax in Michigan is an important source of revenue for many local units of government (which retain about one-third the total, leaving two-thirds to assist public education). However, it is also a detriment to economic development. Other industrial states against which Michigan competes, such as Pennsylvania, Illinois, and New York, have eliminated their personal property taxes altogether. Michigan must move in that direction to stay competitive.
The Legislature should enact legislation that would allow all local units of government, not just the 50 or so covered in the July 1998 law, to eliminate or phase down their personal property taxes.
57. Critically review unfair state government and university competition with the private sector.
In a number of areas, Lansing is competing head-on with private enterprise and doing so unfairly. In the past, this has involved such things as sales of computers, floral supplies, and recreational time (e.g., use of tennis courts) by the universities, and in other cases it involves more direct state agency intrusions. The Legislature should direct a comprehensive review of all those state government activities that compete with the taxpaying private sector, determine which are legitimate and appropriate, and jettison the rest.
58. Critically review state-mandated health benefits.
State-mandated health benefits have exploded across America in the past 30 years. They range from government-required coverage for drug and alcohol abuse treatment in most states to coverage for hair transplants in Minnesota and pastoral counseling in Vermont. The National Center for Policy Analysis estimates that approximately one-quarter of all citizens without health insurance lack this important protection because the cost of state mandates has priced them out of the health insurance market (see Table 2).
Consumers in the medical insurance marketplace should be free to pick the benefits that best suit their particular needs and desires. The Legislature should review all state-mandated health benefits and consider abolishing at least some and lowering the required dollar amount of coverage on others. The Legislature should refrain from adding new mandates, especially those whose costs outweigh their benefits. Following this recommended course will result in more Michiganians being insured and lower costs for Michigan businesses and health plans.