The failure of K-Mart, one of Michigan’s most recognized retailers, has a policy angle few have noticed: It places in stark relief the inadvisability of allowing government bureaucrats to hand out taxpayers’ money to businesses the bureaucrats think are going to be the big "economic winners" of the future.
Since 1995, when Gov. John Engler created the Michigan Economic Growth Authority (MEGA), the Mackinac Center for Public Policy has noted the inadvisability of government "picking economic winners and losers," unfairly singling out some businesses for favors while denying them to businesses no less deserving.
K-Mart was one of the businesses MEGA singled out for precisely these kinds of special favors. Why? Because MEGA bureaucrats simply knew it would never fail.
The MEGA program gives preferential tax treatment to large businesses in exchange for their promise to "create" jobs in, or move jobs to, Michigan. The small businesses that actually create most jobs are ineligible for MEGA tax credits, which provide relief from Michigan’s single business tax and often come with a host of other economic goodies such as job-training subsidies and property tax abatements. During the Engler administration, MEGA subsidized 166 such projects; the total value of incentives offered to these projects exceeds $2 billion.
Of course, MEGA officials – always quick to claim credit for job increases that likely would have occurred anyway – are not as enthusiastic about announcing their program’s many failures. In May of 1998 and again in August of 2000, MEGA declared K-mart an economic "winner" and arranged for it to receive as much as $29 million in state and local incentives. Each MEGA incentive package was heralded publicly by Gov. Engler as an economic "win" for Michigan.
In a 1998 press release about one K-mart project Engler said, "By approving this credit, we are not only bringing hundreds of new jobs to the area, but we are keeping 300 good jobs right here in town." For both projects combined, MEGA officials promised more than 1,470 new jobs for Michigan by the year 2019, 925 of which were to be created by the company directly by the year 2002.
But a funny thing happened on the way to economic nirvana: K-mart declared bankruptcy. The government bureaucrats in Lansing who think they can pick economic winners and losers and forecast the future economy can’t see their crystal balls for all the egg on their faces.
Since May 1998, when the first K-Mart/MEGA deal was struck, the company has seen its non-retail employment in Michigan slide to about 3,500. This is enough to disqualify K-Mart from the MEGA program, since its agreement with the state mandates that to receive future MEGA tax credits, its base non-retail employment must stay above 3,637 and 4,084, for each MEGA deal, respectively.
K-mart’s employment levels aren’t expected to improve soon. But don’t expect the retailer to pay the taxpayers back for the favors it has received - and failed to capitalize upon. The state has forgone more than $6 million in single-business-tax revenue to K-mart since 1998 for jobs that no longer exist. In addition, the city of Troy provided approximately $3.2 million-worth of incentives in the form landscaping, road improvements, and waived permit fees. These are financial incentives that clearly might have been put to better use elsewhere.
The MEGA program’s K-Mart debacle is not an isolated incident. On Feb. 5, 2003 MEGA recipient Robert Bosch Corp., announced it was laying off 1,200 people, a 57 percent cut in its base state employment. This jobs cut came just 7 weeks after MEGA approved its second deal with Bosch.
Internet darling Webvan, a grocery company (remember them?), was offered $23.4 million in MEGA tax credits in late 1999. MEGA official Doug Rothwell noted that Webvan was one of Michigan’s "best financed retailers." Webvan was bankrupt 13 months later. Whoops.
Although MEGA admits that a dozen of its projects have failed, this probably is an understatement given the time it takes to tabulate and publish job claims.
As the Granholm administration works to improve the business climate in Michigan, it would be well advised to do away with MEGA and other targeted-incentive programs as "corporate welfare." The new governor and Legislature should rely on across-the-board tax relief, instead of providing discriminatory tax favors to corporations and businesses that some state bureaucrats believe are Michigan’s future "winners."
And anyone who tries to stop the state of Michigan from doing away with its corporate welfare programs should be met with a new slogan: Remember K-Mart!
Michael D. LaFaive is director of fiscal policy for the Mackinac Center for Public Policy, a Midland-based research and educational institute.