The Mackinac Center was asked to present testimony before the Michigan Legislature’s Joint Committee on Economic Growth on the state’s targeted tax incentive programs as tools for generating economic growth. Last year the Center released the results of a rigorous econometric analysis of the effect of the state’s "flagship" economic development tax break program, the Michigan Economic Growth Authority, which gives Single Business Tax credits to a handful of selected firms. The analysis found that MEGA had no impact on employment, the unemployment rate or per-capita personal income.

On Aug. 23, 2006, Mackinac Center Legislative Analyst Jack McHugh presented these findings to the committee, and also presented arguments described in Bad Food at a Good Price!, Federal Mogul: More Evidence that "Targeted Incentives" Don't Work and How to Replace the SBT With Nothing. His testimony follows.

"The idea of targeted tax incentives seems plausible. Why doesn’t it work? An important reason is called ‘the knowledge problem,’ which essentially says this: While legislators and the governor chase particular firms with targeted tax breaks, thousands of potential new business start-ups are stillborn as a result of a punishing tax, regulatory and labor climate.

"These invisible losses are the ‘unseen’ cost of government trying to pick winners and losers, rather than doing the harder but more fruitful work of making Michigan a state that is attractive to all employers — not just those with clout in Lansing. You do this by creating a tax, regulatory and labor climate that makes Michigan a rewarding place for those with capital to invest, rather than a punishing place.

"Specific figures assembled by the Census Bureau drive home the irrelevance of targeted tax breaks in the overall economy. The U.S. economy is dynamic, not static, and experiences an amazing amount of job churning each year. In 2002, Michigan created 587,361 jobs, and lost 591,696. In contrast, an honest tabulation of the jobs that the Michigan Economic Development Corporation claims are attributable to MEGA credits over the program’s first 10 years is just 13,541 jobs, or 2.3 percent of a single year’s worth of job creation in this state. MEGA gave out incentives to only 27 of 21,185 new business establishments in 2002.

"Can you see the problem? Can you see how silly and irrelevant those press releases announcing 20 jobs here and 200 jobs there really are? On the other hand, if a significant improvement in our tax, labor or regulatory climate causes just a 5 percent change in new job creation here, that's almost 30,000 jobs each year, and that number accumulates every year! Over MEGA’s first 10 years that would have meant a net gain of 300,000 jobs, rather than MEGA’s paltry 13,541.

"By the way, this also explains why accusations that the Mackinac Center’s consistent position against targeted incentives amounts to unilateral disarmament are misguided: The same dynamic economy and job churning happens in every state, and it makes changing the incentives for a few companies rather than all companies a sucker's game wherever it's played.

"Several recent reports from so-called ‘centrist’ entities have been hailed by the Granholm administration and beneficiaries of government spending because they try to make a case that ‘taxes don't matter’ as a factor in Michigan’s economic malaise. If taxes don't matter, why are the governor, many tax-friendly legislators and the Michigan Economic Development Corporation so eager to defend MEGA and related programs that hand out tax breaks? Either they do matter or they don’t — you can’t have it both ways.

"Taxes do matter, and programs like MEGA are an implicit admission that Michigan’s business taxes are too high. Given that fact, this committee should return to the House and Senate with this finding: ‘Eureka! The best replacement for the SBT is no replacement at all.’"

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Jack McHugh is a legislative analyst for 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.