Michigan taxpayers and voters were surprised earlier this year as the bill for business subsidies handed out years ago came due higher than expected.

It sent legislators scurrying to figure out what to do about the cost of a corporate welfare program begun in 1995. So far, they have come up empty. Nevertheless, there is one loophole that should be explored. It can lower the expense of these incentives while also making Michigan a more inviting place for businesses. Michigan can reduce the generosity of its existing business subsidies by lowering the state’s personal income tax rate.

Before 2012, the state’s primary business subsidy program was the Michigan Economic Growth Authority program. It offered refundable tax credits to businesses that located, expanded or retained jobs in Michigan. For many companies, the value of its credits tended to be larger than its tax liability, so the credits were a transfer from taxpayers' money.

The tax credit program was then replaced with a direct subsidy program. But each of the credit deals remains in place over the term of its agreement, and those agreements can extend up to 20 years.

Stay Engaged

Receive our weekly emails!

A company that received one of these deals earned credits for each person it employed or retained. The credit was based on a formula that multiplied what the employee was paid by the state’s personal income tax rate. A higher salary — and a higher tax rate — meant a greater tax credit.

This means that when the state raised its income tax from 3.9 percent to 4.35 percent in 2007, it also made these deals 11.5 percent more expensive. On the other hand, lowering the tax rate would make these credits less burdensome to the state budget.

There are a reported $9.4 billion in outstanding credits, though some specialty credits like those for producers of electric vehicle batteries do not involve the state’s income tax rate. These billions will be cashed in over the life of the agreements. It is expected that in the upcoming year, some $807 million in credits will be paid out.

The magnitude of these credits suggests that lowering the state income tax rate would be less costly to the state budget than it would otherwise. The Senate Fiscal Agency expects that reducing the state’s income tax from 4.25 percent to 4.15 percent would save taxpayers between $150 million and $230 million and thus cost the state budget the same amount. But lowering the income tax would also lower the impact of MEGA credits by $10 million to $15 million. This impact would not be felt until the year after the tax is lowered, as companies need to certify their activities before they claim credits that are redeemed later.

Lowering the personal income tax rate could also promote economic growth. (Many businesses report their income on personal income tax forms.) Reducing the tax rate on the next dollar of income encourages more businesses to open or expand.

Reducing tax rates is also a better approach to improving the state’s economy than handing out selective favors. Instead of paying massive sums to select beneficiaries, lowering the income tax would lighten the burdens on everyone.

Besides, select subsidies are of questionable effectiveness.

Legislators are grappling with the state’s fiscal situation, which is made worse by the extra expense of the state’s corporate subsidies. They should keep in mind that reducing the tax burden on everyone would also lower the generosity of corporate tax credits. This would mitigate the costs of legacy programs and make Michigan a more encouraging place to do business and employ residents.

~~~~~

See also:

MEDC Feeling the Heat for Corporate Welfare Deals Coming Home to Roost

State Gives Billions in Dollars to Corporations - But Keeps Secret How Much They Get


Related Articles:

Don’t Bring Back Granholm’s Tax Credit Legacy

Michigan to Write $1 Billion in Secret Corporate Welfare Checks in 2016

‘But For’ Can’t Be Proved: Corporate Welfare is a Waste

Don’t Bring Back Granholm’s Tax Credit Legacy

New Corporate Welfare Proposal is Unfair

Michigan Corporate Welfare’s Secret Giveaway: $1 Billion in 2016