IV. Spurring Economic Growth and Development

For most of Michigan's history, economic development was thought of as what happened when people were left alone to pursue their own productive enterprises, free of undue interference from government. The principles of free markets-"a fair field and no favor"-were the main guideposts for Michiganians. As a result, many jobs were created-more of them and at higher wages than anywhere else-when profit-seeking entrepreneurs rushed to meet the public's demands and government encouraged a safe environment in which to do business. Today, however, economic development often means "industrial policy," a euphemism for state government picking winners and losers, subsidies and redistribution, corporate welfare and public bureaucracies that falsely claim credit for "creating" jobs. It is time for the Legislature to address economic development with a critical eye and the proper analytical tools.

When Governor Engler took office in 1991, Michigan's overall tax burden was well above the national average. Total state and local tax revenues as a share of personal income were 10.9 percent. By 1995, the Senate Fiscal Agency reported that the percentage had fallen to 10.3 percent. Today, the tax burden is back up to 10.7 percent of personal income. The earlier reduction is the kind of progress that largely explains Michigan's robust economic growth of the past seven years. The success of that effort points the way to continued reduction of the tax burden, particularly in light of a bulging billion dollar-plus "rainy day fund" and the need for Michigan to stay competitive with other states that are also cutting taxes. According to one calculation, Michigan still ranks 20th in per capita state and local tax burden, which means that 30 states have a lesser burden than does Michigan. The following 12 recommendations will help ensure that Michigan's economic boom continues well into the next century.

26. Rein in the Michigan Jobs Commission.

The Michigan Jobs Commission (MJC) has been the fastest-growing corner of state government in recent years, with appropriations ballooning nearly 53% since 1994, well above the rate of inflation (see Chart 7). The MJC is the state's department of corporate welfare, sucking in billions in federal and state tax dollars and doling out tens of millions of dollars in subsidies to favored businesses. With Michigan enjoying record low unemployment, the Legislature should examine this agency's bloated budget and ask to what extent its programs merely redistribute jobs to the politically well-connected while causing many other businesses to incur the costs of retraining and rehiring in tight labor markets.

Many of the MJC's activities appear disturbingly similar to the failed gimmickry of previous administrations. The Legislature should recognize that corporate welfare and" industrial policy" are no less objectionable when Republicans practice them than when Democrats do. The best policy for the state to follow is to excise all those programs of the MJC that smack of corporate welfare, leaving any necessary or mandated functions to be managed by either a streamlined MJC or other departments of state government.

State government should pursue economic development by improving core government services such as transportation (see Section V on page 30), reforming education as recommended in Section III of this report, cutting taxes and bureaucracy across the board, and implementing the needed labor reforms mentioned in Section II. This was the broad-based approach advocated and practiced by Governor Engler in his first term but which has since been "supplemented" by the dubious programs of an out-of-control MJC.

At press time, it was reported that the Governor may propose splitting the MJC into two new agencies. The Mackinac Center would endorse the same careful scrutiny of those two agencies-their budgets, functions, and staffing-that is urged here for the MJC.

27. Abolish the Michigan Economic Growth Authority (MEGA).

The centerpiece of the Michigan Jobs Commission's business retention and attraction efforts is MEGA, a program of selective tax abatements for firms that promise to create a certain number of new jobs in Michigan. It is the essence of the government" picking winners and losers" strategy that experts regard as counterproductive to genuine, lasting, market-directed development. With Michigan labor markets the tightest they have been in 35 years, it hardly seems necessary for the state to be playing this game even if government were capable of knowing which firms are winners and which are not. Of the 1,285 new corporate facility locations or expansions in Michigan in 1997, only 12firms acknowledged that their decision to locate or expand in the state was related to MEGA tax abatements (see Chart 8).

MEGA is unfair to existing businesses that must compete with the firms favored by MEGA abatements. Hundreds of millions of dollars in selected abatements make it more difficult to enact broad-based, general tax relief. Many of the abatements granted under MEGA go to firms that would expand or locate in Michigan even without special privileges and favors, especially if the state more vigorously pursued general tax and regulatory relief in place of MEGA-style programs.

Many publications of the Mackinac Center for Public Policy elaborate on this theme, more fully explaining the folly of government "industrial policy" and the benefit of less politicized approaches to economic development. See, for example, the study entitled, MEGA Industrial Policy: An Analysis of the Proposed Michigan Economic Growth Authority10 and two commentaries: "End the Economic War Between the States"11 and "Wanted: A Line Between Public and Private."12

28. Enact a more rapid version of the Governor's proposed income tax rate cuts.

Governor Engler has proposed reducing the state's flat 4.4 percent personal income tax rate to 3.9 percent over five years. Enacting that reduction over a shorter period (the Mackinac Center recommends three years) is not only "affordable," but it would provide the salutary benefit of forcing spending restraint. A broad-based reduction in personal income tax rates will do far more for Michigan's economic development than selective abatements or subsidies.

Calculations of the Senate Fiscal Agency recently prompted The Detroit News to editorialize that "Michigan's state and local taxes as a share of average state personal income are moving back up to levels not seen since before John Engler took office in 1991." At that time, combined state and local taxes amounted to 10.9 percent of personal income. They fell to 10.3 percent by 1995 but had edged back up to 10.7 percent by the end of 1997. Michigan workers need and deserve a tax cut.

29. Deregulate the electricity market in a way that is fair to all parties and enhances competition.

The failure of the Legislature in the last session to approve an electricity deregulation plan was good news for Michigan consumers. The plan put forth by the administration was excessively generous to the major utilities and would have prevented the full force of market competition from lowering rates.

The Legislature must act early in 1999 on this issue for several reasons: Michigan's electric rates are higher than those in 33 other states (see Table 1), more than a dozen states have already moved ahead with deregulation plans, and lower rates here can provide a permanent boost for the state's competitiveness.

The outlines of a sensible deregulation policy are presented in the Mackinac Center for Public Policy report entitled Energizing Michigan's Electricity Market13. They include granting all consumers choice swiftly; eliminating transitional price controls on final retail prices; disallowing all stranded cost claims by the utilities except for those involving investments forced upon the utilities by mandates or regulations; and giving all customers the choice to shop for "green" (environmentally friendly)power immediately.

30. Eliminate the double sales taxation of automobiles.

The 1994 hike in Michigan's sales tax from 4 cents to 6 cents on the dollar exacerbated at least one inherent flaw in the way the sales tax is imposed: the double taxation on automobiles, a major Michigan product on which tens of thousands of jobs depend.

When someone in Michigan buys a car, he pays sales tax on the purchase price. When he later trades the car in, he pays sales tax not only on a new vehicle but also on the trade-in value of the old vehicle. That amounts to double taxation because the individual already paid sales tax on the full value of that vehicle at the time of its purchase. The Legislature should end this inherently unfair practice.

31. Extend personal property tax relief.

Last July, the Legislature passed a bill that permits a handful of distressed municipalities to offer personal property tax breaks of up to 100 percent on the installation of new equipment by companies that relocate within Michigan. While tax reduction is laudable, this extremely selective approach is unfair to existing businesses that pay full freight and must compete with newcomers that get a substantial break. We agree with the Michigan Jobs Commission that cutting the onerous personal property tax" is necessary to reduce unemployment, promote economic growth, and increase capital investment in the state," but a broader and more comprehensive reduction of the tax would be much more fruitful.

Generating about $1.7 billion statewide, the personal property tax in Michigan is an important source of revenue for many local units of government (which retain about one-third the total, leaving two-thirds to assist public education). However, it is also a detriment to economic development. Other industrial states with whom Michigan competes, such as Pennsylvania, Illinois, and New York, have eliminated their personal property taxes altogether. Michigan must move in that direction to stay competitive.

The Legislature should enact legislation that would allow all local units of government, not just the 50 or so covered in last July's law, to eliminate or phase down their personal property taxes.

32. Critically review state government and university competition with the private sector.

In a number of areas, Lansing is competing head-on with private enterprise and doing so unfairly. In the past, this has involved such things as sales of computers, floral supplies, and recreational time by the universities, and in other cases it involves more direct state agency intrusions. The Legislature should direct a comprehensive review of all those state government activities that compete with the taxpaying private sector, determine which are legitimate and appropriate, and jettison the rest.

33. Critically review state-mandated health benefits.

State-mandated health benefits have exploded across America in the past 30 years. They range from government-required coverage for drug and alcohol abuse treatment in most states to coverage for hair transplants in Minnesota and pastoral counseling in Vermont. The National Center for Policy Analysis in Dallas estimates that approximately one-quarter of all citizens without health insurance lack this important protection because the cost of state mandates has priced them out of the health insurance market (see Table 2).

Consumers in the medical insurance marketplace should be free to pick the package of benefits that best suits their particular needs and desires. The Legislature should review all state-mandated health benefits and consider abolishing some and lowering the required dollar amount of coverage on others. The Legislature should refrain from adding new mandates, especially those whose costs can be demonstrated to outweigh their benefits. Following this recommended course will result in more Michiganians being insured and lower costs for Michigan businesses and health plans.

34. Expand the scope of privatization.

Michigan has engaged in significant privatization of state and local government duties in the past decade. In many cases, the process was well thought-out and the result was better service at lower costs. In a few cases, the process was hasty or ill-conceived and the results were poor.

The promise that privatization holds when it is the product of careful consideration is as great as ever. Indeed, because of its many successes, privatization is a mega-trend across America, including at the local level of government in Michigan. The Legislature and the Governor should renew their commitment to exploring this option across a broad front of state activities.

One area that cries out for privatization is corrections-a fast-growing sector of state and local governments. Michigan lags behind more than two dozen other states whose experience with contracting for private operation and management of prisons and county jails is extensive and very largely successful. Private management of the state's new juvenile facility in west Michigan is a promising start, and the state should follow this up with a more vigorous approach to cutting its horrendous corrections costs through privatization of other, existing facilities. Moreover, the Legislature should clear the books of all impediments that now deny counties the option to privatize the management of their jails.

Another area of privatization that Michigan can take action on involves Social Security. In May 1997, the Oregon Legislature passed a resolution urging Congress to grant waivers to let states opt out of the federal Social Security system and design their own retirement plans for both private-sector and government employees. Since then, Colorado has adopted a similar resolution and at least six other states are considering them. Many economists now believe that the only way to save Social Security before it goes bankrupt early in the twenty-first century without crippling tax hikes or substantial benefit reductions is to privatize it. Nations such as Chile have already shown that allowing individuals the freedom to invest their own retirement funds is a viable alternative to our present system, and one that can provide far greater payouts to retirees (see Chart 9). Accordingly, a Mackinac Center for Public Policy report entitled Saving Retirement in Michigan14 urges the Michigan Legislature to adopt a resolution that asks Congress to either

  • Partially privatize the existing Social Security program by allowing workers to shift all or part of their current retirement payroll taxes into privately owned and managed accounts; or

  • Grant the state of Michigan a waiver to opt out of the federal Social Security system and design a sounder and more beneficial retirement plan for its citizens.

35. Pursue regulatory reform and include sunset provisions.

More than 2,000 rules and regulations within state government-rules and regulations imposed upon the private sector-have been abolished under the Engler administration. The Mackinac Center for Public Policy recommends continued progress in this direction through the careful scrutiny of all existing regulations and requiring wherever possible that all new state regulations be subject to automatic "sunset" after two years to allow for a meaningful assessment of their real-life costs and benefits.

36. Continue welfare reform with a strong emphasis on incentives for work.

In Michigan last year, welfare caseloads hit a 27-year low with the number of people on welfare falling below 100,000 (see Chart 10). While caseloads in the nation as a whole plunged 39 percent from 1993 to 1998, Michigan's plummeted 49 percent. A greater-than-ever percentage of Michigan welfare recipients is working at least part-time, though achieving that has been expensive. Midland County, for instance, received almost one half-million dollars from the state for child care and a bus system intended to increase the incentives for work. The Michigan Jobs Commission has even spent thousands of dollars to pay old traffic tickets for welfare clients.

One important lesson from the many reforms in Wisconsin, Michigan, and elsewhere is that programs that emphasize work placement over training are having better results. The problem still is that too few reform initiatives place finding a job as the highest priority, or they do not do enough to change the bad behavior and costly lifestyles that keep people in the welfare quagmire.

Michigan should continue its generally positive path to welfare reform by encouraging reforms at both state and local levels that set time limits, promote marriage and responsibility, require drug testing, impose tough work requirements, establish a "family cap" to discourage clients from having additional children while on welfare, target benefits to the most needy, and encourage efficiency and privatization.

37. Adopt and encourage "urban sprawl" strategies that respect private property rights, reform poor urban policies that induce flight, and minimize intrusive planning.

Many citizens are concerned about the rapid pace of Michigan's economic development. They worry that continued development will erode their quality of life, harm the environment, and destroy the state's natural beauty. As a result, some groups are calling for legal, political, and other barriers to prevent landowners from further developing their property. However, there is little objective evidence that Michigan is facing a land use "crisis": Less than 10 percent of the state is urbanized, and long-term trends show no dramatic changes in land use (see Chart 11 and Chart 12).

The Mackinac Center for Public Policy study, "Urban Sprawl" and the Michigan Landscape: A Market-Oriented Approach15 analyzes decades of statistics on urbanization and land use in Michigan to offer five key recommendations for the Legislature to consider for any land use policy:

  1. Tax policies should be fair and uniform across the board;

  2. Local regulations and permit issuance should be streamlined to reduce the cost of doing business in Michigan and encourage wealth creation and investment in all businesses and industries, including agriculture;

  3. Full or "marginal" cost pricing for public services, particularly infrastructure services, should be implemented to avoid subsidization of "urban sprawl";

  4. Land use programs should emphasize flexibility and voluntary participation; and

  5. Property rights, an essential ingredient in both the preservation of liberty and the rationalization of markets and planning, should be protected.