Measuring MEGA’s Efficacy

Although MEGA provides Michigan business-tax credits, the MEDC also arranges for companies receiving MEGA credits to benefit from other government incentives, such as job-training subsidies, infrastructure grants and local property tax abatements. Indeed, under its original authorizing statute, MEGA could provide Michigan business-tax credits only if the local government of the business's municipality provided a business incentive of its own.[*] This local government incentive is frequently the "plant rehabilitation and industrial development" property tax abatement permitted under Public Act 198 of 1974.[†]

Through 2008, the MEGA program agreed to provide, by its own estimates, $3.3 billion in state tax credits, all of which come with additional packages of other state and local incentives.[‡] The tax breaks are conditioned on beneficiaries creating or retaining certain numbers of jobs agreed to in advance.

Determining how many of those jobs have actually been created and the size of the credits granted is central to determining the program's success or failure. Specifically, a number of measures make sense in tracking the program's efficacy:

  • The number of jobs created or retained for a MEGA project in a particular year and over the life of the agreement. MEGA enters into contracts with various businesses to provide them with Michigan business-tax credits in return for the creation or retention of jobs over an agreed-upon number of years. To gauge the success of a particular agreement, it is necessary to know just how many jobs a business has in fact created or retained during that period, since some businesses do produce the jobs that were originally projected. It is also helpful to know how many jobs may have been created in a particular year, since this can help ascertain the local effect of the MEGA project on jobs in an area.

  • Total Michigan business-tax credits awarded by MEGA per project. Since many businesses that receive MEGA agreements do not produce all the jobs originally forecast, the businesses will receive only a portion — or none — of the business-tax credits originally envisioned during the years of the MEGA contract. The dollar value of the tax credits actually awarded to the company represents the amount of revenue forgone by the Michigan Treasury in return for the jobs allegedly created or retained. This, in turn, helps determine just how "costly" the jobs created or retained proved to the Michigan Treasury. The value of the forgone business-tax revenues is particularly important in instances when a company creates the jobs and collects the credits only to eliminate the jobs later, as happened when Kmart went bankrupt.

    Note that it is important to know the total tax credits awarded per project. A particular company, such as General Motors or Kmart, may receive a number of MEGA agreements to create or retain jobs at different facilities. To determine the efficacy of a particular agreement, it is necessary to know the jobs created and tax credits awarded for each project — not just to know the total jobs created and tax credits awarded for a given company.

  • MEGA tax credits awarded by year by project. Knowing the tax credits awarded for each project in each year allows a measurement of not only the total tax credits that MEGA awards in that year, but also how much any given project contributes to that total number of credits. In some years, for example, one project might represent much of the value of the total tax credits awarded, meaning that the efficacy of the other agreements was not as high as the total MEGA credits might otherwise suggest. In any event, these are figures that should be provided if MEGA's operations are to remain transparent to the public.

  • The value of any local property tax abatement or other incentive provided by local government. As mentioned above, the state law that created the MEGA program stipulated that MEGA agreements could not be completed unless the business's local government also provided a business incentive. One common local incentive was a property tax abatement; others include the paying of fees, work-training subsidies or road improvements. Knowing the size of any local tax abatement or other subsidy is essential to determining the cost of a MEGA project.
  • Graphic 1: Breakdown of MEGA Grant Requests
    Top Reasons Why Companies Said They
    Might Locate or Expand Elsewhere

    Graphic 1: Breakdown of MEGA Grant Requests - click to enlarge

    Source: Mackinac Cdenter calculations based on collected MEGA briefing memoranda, 1995-2004.

  • The value of any other state incentives provided to the business. MEGA deals often include other state subsidies and tax abatements for the business that is offered the MEGA business-tax credits. These state incentives may involve job training, state education-tax abatements and community development block grant infrastructure improvements. As with the other local government business incentives discussed above, these incentives add to the cost of the project.

  • The business's purported cost disadvantage in locating in Michigan rather than a competing location in the absence of MEGA tax credits. A business may conclude that it faces a higher cost — perhaps because of higher taxes or higher wages, for instance — if it locates in Michigan rather than somewhere else. State law requires that the Michigan Economic Growth Authority consider this potential cost disadvantage before reaching a MEGA agreement with the business. This process serves as a safeguard, however weak, against frivolous MEGA agreements, and the resulting information is valuable in determining what factors are making it unattractive for businesses to locate in Michigan.

    For example, a review of statements of cost disadvantages in MEGA "briefing memoranda" (see Graphic 1) permitted a Mackinac Center analyst in 2006 to determine how frequently businesses cited higher taxation, higher labor costs, higher worker compensation costs and so on in claiming the need for offsetting tax credits before locating in Michigan.[1] These are often matter-of-fact statements like, "When comparing the Michigan and Tijuana locations, the company estimates that wage rates in Tijuana are significantly lower."[2] Such information can help state lawmakers determine which tax, regulatory and policy reforms might help Michigan's business climate.

In the past, the data described in the six bullet points above has been available to anyone willing to request and sift through a stack of documents produced by the Michigan Economic Development Corp., the organization that oversees MEGA. Specifically, the documents are:

  • Briefing Memoranda. Each MEGA deal is summarized by the MEDC in a "briefing memorandum." These memoranda have typically provided for each MEGA project the purported cost to a business of locating in Michigan rather than elsewhere. The memoranda have also shown the value of any local property tax abatements, the value of any other local incentives[§] and the value of other Michigan business incentives apart from the Michigan business-tax credits provided under the MEGA deal. The latter figures are necessary to any calculation of the total value of the state and local business incentives offered in a particular MEGA project.

  • "All MEGA Projects" Spreadsheet. Since the program's launch in 1995, the MEDC has tracked MEGA data with two sets of spreadsheets. The first, labeled the "All MEGA Projects" spreadsheet (see Graphic 3), listed each MEGA project recipient and effectively summarized many of the expected benefits of the MEGA deal in direct jobs, indirect jobs and estimated personal income generated by the project. The spreadsheet also provided costs to the state in MEGA business-tax credits.[¶] Indeed, before November 2001, the spreadsheet also included the value of other MEGA-related state business incentives, such as state education-tax abatements or job-training subsidies.

  • The "MEGA Credits" Spreadsheet. MEGA has also issued this spreadsheet since the program's inception. It details "qualified new jobs" — in other words, the number of jobs that a business creates (or retains) and that fulfill the original MEGA project agreement — and the number of Michigan business-tax credits the firms actually earn as a result of that job creation (or retention). The data on this spreadsheet have typically permitted the calculation of the number of jobs created at a MEGA project, the value of the Michigan business-tax credits awarded by year by project, and the total value of Michigan business-tax credits awarded by project.

  • MEGA Annual Reports to the Legislature. Part of the law authorizing MEGA[3] mandates that MEGA provide an annual report on its activities to the state Legislature. In past years, these annual reports were rich in detail and nuance. They contained a written executive summary, tables summarizing the details of each new MEGA agreement, and a project description for each deal (see Graphic 2 for an example). Also included in the report was a set of very important data about the local incentive contributions associated with each MEGA deal. Together with the briefing memoranda (see above), this report allowed a tally of the overall state and local contributions to a MEGA deal, not just the value of state-level incentives.

  • MEGA Tax Credit Agreements. Each MEGA deal involves a binding but amendable agreement between MEGA and a representative of the business receiving the state tax credits. These documents provide important basic information about the mechanics of the agreement, such as the formula for calculating the MEGA credits to be awarded and the minimum number of jobs required to actually receive a MEGA tax credit of any size. The agreements also prove helpful in cross-checking information from other source documents.

  • Economic Effects Report. This report involves technical economic modeling output and is therefore of less immediate use to the nonprofessional in determining the efficacy of a MEGA agreement. Nevertheless, the document does help provide some sense of the expected economic impact of a particular agreement. The MEDC generates the data in the report either by using REMI economic modeling software — a well-known proprietary program — or by hiring outside economists to use the software to calculate the anticipated economic impact of the jobs that each MEGA deal is expected to create or retain.[**]

[*] This requirement was suspended for certain types of MEGA credits in 2004, and it was eliminated altogether in 2008.

[†] MCL § 207.559. In their study "Current Practices and Policy Recommendations concerning Public Act 198 Industrial Facilities Tax Abatements," Gary Sands of Wayne State University and Laura Reese of Michigan State University show that from 1980 through 2001, the popular local tax abatements so frequently used by local units — and employed for MEGA deals — "fail to show a clear, consistent relationship between abatement activity and change in economic health" [emphasis Sands and Reese]. (Gary Sands and Laura A. Reese, "Current Practices and Policy Recommendations Concerning Public Act 198 Industrial Facilities Tax Abatements," (Land Policy Institute, 2007),, (accessed July 25, 2009).)

[‡] This tally of MEGA credits may differ from the MEDC's due to differences in methodology. For instance, if MEGA determined that a company failed to meet the requirements of its MEGA agreement, the MEDC historically zeroed out the dollar figures on its "All MEGA Projects" spreadsheet. In contrast, the $3.3 billion figure includes the tax credits pledged in these cases.

[§] Currently, the value of the local property tax abatement or other local subsidy is provided only in the briefing memorandum and in many cases is absent. Previously, this information was available in the briefing memoranda and the MEGA annual report. Ideally, the data provided would explicitly state that this value is not just the number stated in the original agreement, but the amount that was actually awarded. It would also show the amount provided on an annual basis, not just a total. Nevertheless, the data that MEGA provided in the past was helpful, and it was much better than the patchy and sporadic information provided now. See "The Recent Reduction of Information" below.

[¶] Forgone state taxes are generally considered a "cost" by state officials, and to the extent that they are monies that would have otherwise been collected — i.e., in those cases when the firm would have located in Michigan anyway — there is some basis for this view. That said, we would not concede that allowing people to keep more of their own money is somehow a "cost" to the state.

[**] It is worth noting that if forecasters' assumptions about a recipient firm's performance are off, so too are claims that depend on this, particularly "spin-off" (or "indirect") jobs. In an earlier Mackinac Center Study, the authors determined that through 2004, MEGA deals should have produced 127 fully employed facilities. The authors found that only 10 deals produced the number of jobs promised; inevitably, claims of associated spin-off jobs were even more wildly overstated. (See Michael D. LaFaive and Michael Hicks, "MEGA: A Retrospective Assessment," (Mackinac Center for Public Policy, 2005), 22.) In fact, following the compilation of these figures in 2005, several of the 10 "success stories" stumbled badly — Kmart being one of them.