Exploring the Economic Findings on MEGA

The shift-share findings on MEGA's lack of positive economic impact — and its possible negative impact — reinforce the results of the earlier analysis by Hicks and LaFaive.[*] Given that MEGA credits are awarded only when a company actually provides new jobs and investment — a "pay-for-performance program"[113] — the question becomes, Why might MEGA fail to provide economic growth?

Among the most likely explanations — and the most common in academic literature — is that these "payments" simply represent regional transfers of wealth, via the tax credit, to particular counties. Thus, instead of removing obstacles to growth across the region, the MEGA program may be targeting firms already willing to locate to those areas. Hence, however good the intentions accompanying the MEGA program, the presence of MEGA credits in a county may simply be signaling that the county has unique local economic problems — problems that, unfortunately, the MEGA credits have no positive effect on, at least in terms of local employment.

In that sense, MEGA would simply be associated with manufacturing job losses. While doing nothing to stop those losses, it would be doing nothing to contribute to them, either.

Alternatively, it is also possible that the presence of MEGA credits has some negative effects on employment. It should be remembered that while a company actually receives MEGA's business tax credits only when the company's jobs or investment actually occur, the company may receive other MEGA-related state and local business incentives right away. If the company is not creating significant direct and spin-off economic benefits, however, these incentives are not economically useful. Indeed, unless state and local governments actually reduce their spending by the amount of the incentives granted, other businesses and individuals may ultimately face higher taxes in order to cover the difference, reducing the money those individuals and businesses have to create jobs and investment of their own. The resulting wealth transfer could, in fact, lead to a net decline in economic growth.

Another possible negative factor is the cost of the wealth transfer itself — in other words, the cost of the development program. Redistributing tax revenues costs money. The MEDC's personnel, advertising, outreach and other program costs could cancel many or all of the net benefits of a particularly well-targeted MEGA investment.

Moreover, doing a good job of targeting economic development investments is genuinely difficult — no doubt one reason MEGA officials have not achieved greater success in choosing recipients of their tax credit deals. Even Wall Street experts have a checkered record when it comes to outperforming market averages in choosing investments, and they have considerable financial incentives to get the answer right.

It is also possible that a large program like MEGA could encourage "rent-seeking" — i.e., using government to obtain higher-than-normal revenues or "rents" than one might otherwise obtain through open competition. Rent-seeking can take the form of protectionist tariffs, direct subsidies or tax credits targeted to just one industry (or business).

In this case, companies may be actively seeking MEGA credits, as opposed to being recruited by MEGA. Such behavior can ultimately contribute to slower economic growth, as companies focus resources on rent-seeking, rather than economic production. Harold Brumm, an economist with the U.S. Government Accountability Office, has found a negative correlation between the level of rent-seeking in a state and its economic growth.

[*] In fact, as discussed later in the study, the Hicks-LaFaive analyses are consistent with the broader academic literature on the effectiveness of government economic development programs.

[113] Bomey, "Expiring Tax Credits Threaten Ann Arbor's Economic Development Strategy, Officials Say."