(Author’s Note: On April 18, 2008, I was asked to provide five minutes worth of remarks on questions involving economic development in Michigan at a forum held in downtown Midland. I was happy to do so.)
Question No. 3: What is the tax and business incentives climate in Michigan? How does it affect our economic development abilities?
Tax and business incentives in Michigan are greatly overdone and have expanded to such a degree that they now include refundable tax credits. But exhaustive research has shown that, at best, state and local development efforts have no impact on real economic growth.
First, and in the broadest sense, research from 2002 indicates that state and local units of government expend about $50 billion annually on business incentives with no apparent impact. In your folder is a META review of the literature titled "The Failure of Economic Development Incentives." A META review is essentially a review of reviews of scholarly literature on a particular topic. This review encompasses a "massive" amount of research literature and concludes that there were "theoretical, empirical and practical [reasons] to believe that economic development incentives have little or no impact on firm location and investment decisions."
Second, it does not appear that Michigan has fared any better. In 2005 I published a 127-page review of Michigan’s premier economic development program, known as MEGA, the Michigan Economic Growth Authority. This study included a powerful time-series econometric model that was peer reviewed by one of the authors of this META review.
We proved that MEGA had no impact on employment, the unemployment rate or per-capita personal income statewide, or in counties where firms who got the tax breaks are located. Every $123,000 in MEGA tax credits promised resulted in a single construction job, but those jobs existed for no more than two years. Moreover, counties hosting a MEGA company did no better or worse than those without MEGA recipients. To date, neither the MEDC (Michigan Economic Development Corp.) nor the Legislature has — to my knowledge — refuted a single point of fact in this study. This should be a source of deep embarrassment to both institutions, particularly in light of MEGA’s continued state support and expansion. We do not blame companies for taking what is offered, but the incentives should not be offered in the first place.
Third, and concerning Michigan’s local development work, is the subject of property tax abatements. Last year two scholars from Michigan State University and Wayne State University (Gary Sands and Laura Reese) unveiled their comprehensive study on local property tax abatements in Michigan. They concluded that "data on the number of PA 198 certificates issued by individual communities from 1980 to 2001 fail to show a clear, consistent relationship between abatement activity and change in economic health." This was not the first study to come to that conclusion.
In short, these incentive games do not work. A better alternative is for government to distinguish itself with broader-based policy changes at both the state and local levels. Cutting taxes and spending and rolling back unnecessary regulation would do far more for incentivizing business development and expansion. That means passing right-to-work legislation, eliminating the Michigan Business Tax, cutting local taxes, reining in the Department of Environmental Quality and eliminating zoning regulations.
(Addendum: All too often, those who defend government economic development programs argue that scrapping such programs would be the equivalent of "unilateral disarmament" in the economic war between the states. Not true. If it doesn’t work it is not unilateral disarmament because it was never armament in the first place. Ultimately, those who play the incentive game are fighting over job announcements, not real jobs.)
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.