(Note: A modified version of this commentary was published in the March 15 Detroit News)
The recent announcement by Dana Corp. that it will seek Chapter 11 bankruptcy protection adds to the list of financially troubled businesses that the state’s Michigan Economic Growth Authority program had previously declared to be "winners."
Empirical and anecdotal evidence both indicate that the state has picked too many real lemons to receive selective tax breaks and is prepared to search for more.
Created in 1995, the MEGA program was designed to help the state improve job growth by offering tax credits to firms chosen by a politically appointed board.
"Our philosophy is to support winners, the companies that have a good business model," former state jobs czar Doug Rothwell once said about the state’s economic development efforts. Lansing politicians would better serve their constituents by dropping selective gimmickry and focusing instead on broad-based tax, labor and regulatory reforms.
In the past 10 years, a number of corporations chosen by MEGA officials have declared bankruptcy after state executives had certified that they were "financially sound and that [the company's] plans for the expansion, retention, or location are economically sound," as required by state law. Consider just a few examples.
Webvan Group, Inc. was described by one state official as "one of the best-financed retailers on the market." The state offered the company a $23.4 million MEGA incentive package to open a warehouse in Michigan. The company filed for bankruptcy one year later and has since closed its doors, having never received its MEGA tax credits.
Kmart Corp. was offered two MEGA deals worth more than $30 million in tax credits, plus $3.7 million in other inducements before declaring bankruptcy. Officials reportedly offered Kmart a third deal worth $45 million over 10 years after it went bankrupt. The company collected more than $6 million in Single Business Tax relief for jobs that no longer exist.
Delphi, Dana, Tower Automotive, R.J. Tower (Tower's subsidiary), and Hayes Lemmerz are also companies that filed for bankruptcy protection after being declared MEGA winners. These companies were offered a total of more than $74 million in state and local incentives for as much as 20 years.
Some bankrupt firms, such as Delphi and Dana, have earned MEGA credits for creating jobs. It is possible, however, that MEGA-related jobs could be lost due to restructuring. Are these merely isolated examples or are they consistent with systematic empirical evidence?
Last April the Mackinac Center for Public Policy analyzed the MEGA program and found that it had no impact on Michigan’s per-capita personal income, employment or unemployment rate. The program did create one construction job for every $123,000 in tax incentives offered, but these jobs disappeared within two years. The study also found that overall only 38 percent of promised jobs materialized and just a fraction of those arrived on schedule.
No company should be blamed for trying to minimize its tax liability any more than individuals should be chided for taking legal deductions on their income tax returns. But there are about 100,000 Michigan businesses with Single Business Tax liability, and less than three tenths of 1 percent of them have been offered tax relief through the MEGA program.
There are better alternatives for returning economic prosperity to Michigan: Abolish the Single Business Tax and make dollar-for-dollar cuts to the state budget and pass right-to-work legislation. A review of MEGA program data from 1995 through 2005 indicates that the top two reasons business executives consider locating or expanding their companies outside Michigan is the cost of employment and the state's tax burden. Adopting these two recommendations would go a long way toward addressing these concerns for all businesses, not just the favored few.
At the least, legislators should take the Hippocratic advice, "First, do no harm." Despite their best intentions, Lansing bureaucrats simply cannot predict which enterprises will be job-creating dynamos and which will not.
The overwhelming weight of the evidence suggests that MEGA has not lived up to its promises. It is time to rethink the state strategy of making special deals with a limited number of politically influential companies.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at 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.