Michigan Should End Its Tax Favoritism

Supremes let MEGA program off hook, but lawmakers still can act

(Note: This commentary was published in the May 21 Lansing State Journal.)

The U.S. Supreme Court last week ruled, in Cuno v. DaimlerChrysler, that Ohio and Michigan taxpayers lacked legal standing to challenge the constitutionality of an Ohio program that provides tax credits to favored businesses. This narrow ruling means that the Michigan Economic Growth Authority — Michigan’s version of the Ohio program — has dodged a bullet.

But Michigan policymakers, instead of celebrating, should themselves kill MEGA.

The tax credit in the Supreme Court case offsets an Ohio "franchise tax," which is essentially a levy on doing business in the state. A company's tax credit increases if the firm expands in an Ohio county favored by state officials, and the tax calculation takes into consideration a company's business in other states. The tax burden can thus be radically lower for multistate businesses that expand in Ohio rather than, say, Michigan.

The 6th U.S. Circuit Court of Appeals initially ruled in Cuno that Ohio’s tax credit runs afoul of the U.S. Constitution, which favors an open interstate market by granting Congress, not the states, the power to regulate interstate commerce. The court of appeals was reversed last Monday by the Supreme Court's finding that the plaintiffs lacked standing in federal courts.

The constitutional "commerce clause" question was never considered.

How the Supreme Court would have ruled on the commerce clause issue is not obvious. In the past, the courts appear to have sanctioned direct state subsidies to in-state businesses, but have rejected state tariffs on out-of-state products — a dubious distinction.

But at the very least, the Ohio program violates the spirit of the Constitution. The same is true of the Michigan Economic Growth Authority, which provides Michigan Single Business Tax credits to companies that expand or maintain jobs in Michigan rather than elsewhere.

The Constitution's framers understood, as the Supreme Court put it in 1979, "In order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation." And as the Supreme Court noted in 1994, since state-imposed tariffs are clearly forbidden, "Instead, the cases are filled with state laws that aspire to reap some of the benefits of tariffs by other means."

MEGA’s in-state favoritism, like Ohio’s, might be upheld in court, but the program is clearly an attempt to subvert the Constitution. Michigan legislators, who swear an oath to uphold the federal Constitution, should presumably care about this.

If this principled view seems risky, policy-makers should consider that according to extensive research by the Mackinac Center for Public Policy, MEGA’s job production has been costly and anemic, and the program has had no significant impact on state or county income growth or employment.

Legislators’ best jobs program is lowering taxes for all taxpayers equally, rendering Michigan's state tax code simply a feature of the marketplace — not a feckless economic intervention that attempts to manipulate marketplace outcomes.

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Michael D. LaFaive and Thomas W. Washburne are, respectively, director of fiscal policy and an attorney at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.