(Editor's note: Jack McHugh, senior legislative analyst, delivered this testimony to the Michigan House Committee on Tax Policy on Feb. 18, 2015.)
I’m going to touch on three issues in the next few minutes. First, some recent history on Michigan’s government economic development programs. Second, characterizing what an extensive body of scholarly research on such efforts has found. And third, offering some reform recommendations.
In the modern era Michigan first began systematically trying to influence the direction of the economy under Gov. Kim Sigler in 1947. Since then every governor has put his or her stamp on the activity, with several major expansions along the way.
Fast forward to 1995, when Gov. John Engler created the Michigan Economic Growth Authority. This granted select firms Single Business Tax credits in in return for agreements to create a specified number of jobs — initially there was a minimum of 75 or 150 jobs.
The program was used sparingly at first, with only 15 deals during its first full year. However, by mid-2009 the statute had been amended 20 times, mostly with eligibility expansions and weakening of once-tight requirements.
As rigorous performance thresholds and standards for companies were eroded, use of the program steadily grew. In 2010, 110 MEGA deals were announced.
A graphic illustrates the rise in MEGA deals overlaid with Michigan’s unemployment rate. To many observers it appeared that MEDC’s main response to plummeting state employment was ever increasing job press releases. The reality was, even with its MEGA powers, the MEDC presided over arguably the worst economic decline in Michigan’s history.
MEGA has been around long enough that several institutions have performed systematic studies. None of these gave a full-throated endorsement, though one had a more positive take.
- In 2010 the Michigan Auditor General reported that MEGA agreements “have a combined success rate (excluding retention credits) of 28 percent ...” relative to stated goals.
The figure overstated the impact because it did not control for how the firms without special favors fare. Studies published by the Mackinac Center in 2005 and 2009 did control for this, and found lower job creation impact.
- In 2010 the Anderson Economic Group found that the opportunity cost of running the program versus comparable across-the-board business tax cuts cost Michigan 8,200 jobs.
This is the only positive assessment I am aware of. Upjohn scholars argued MEGA had created 18,000 jobs over 11 years, a very modest 1,600-plus per year.
- The Mackinac Center’s 2005 MEGA study found that for every $123,000 in tax credits offered just one construction job was created, all of which disappeared within two years. The program had zero net impact on manufacturing or warehousing employment.
- In 2009 we did a second MEGA study that found a statistically significant link between MEGA and manufacturing jobs — but it was negative. For every $1 million in credits actually earned there was a loss of 95 manufacturing jobs in counties with MEGA firms.
More broadly, a great deal of academic literature exists on selective business incentive programs. Overall, the assessments are unflattering. The title of one 2004 compilation of findings tells the tale: “The Failures of Economic Development Incentives.” Here’s an excerpt:
Since these programs probably cost state and local governments about $40-$50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case. In fact, there are very good reasons … to believe that economic development incentives have little or no impact on firm location and investment decisions.
Why doesn’t it work? In a 2009 Mackinac Center Policy Brief on Michigan’s film incentive program, my colleague Mike LaFaive laid out four reasons:
- First, government has nothing to give anyone it doesn’t take from someone else. At best these programs just redistribute income.
- Second, doing that costs money. Just the MEDC staff expense amounts to tens of millions annually.
- Third, it also misallocates scarce resources. MEDC employees are not imbued with Warren Buffet-like ability to pick winners and losers in the marketplace. If they were, they would be billionaire hedge fund owners, not civil servants.
- Lastly, bureaucrats are inherently inclined to make decisions based on political rather than economic factors. That’s a recipe for bad performance in a competitive marketplace.
What’s the solution?
The truth is these are mostly political development programs, not economic development programs. They’re a perennially attractive nuisance for elected officials, but the public is catching on. The political costs of supporting these programs are starting to catch up with the perceived political benefits.
The solution is actually quite simple: Just say no, starting with the appropriations process. We estimated last year that “just say no” would save at least $300 million in the current budget. Next year it will be more. The usual counter-argument is that since other states do it this would amount to “unilateral disarmament.” My response is, let the other states keep their expensive and ineffective pop-guns — we will surpass them by offering all opportunity seekers a fair field with no favors.
In the meantime, while the agency still remains, it absolutely must be made more transparent. The MEDC is almost certainly Michigan’s least transparent government agency. A 2009 Mackinac Center Policy Brief gave startling details of this dismal record.
The current administration has tried to change this. Still, as the budget drama of the past few weeks has shown, the liabilities created by past MEGA deals are still surrounded in mystery, secrecy and uncertainty.
Actually, the MEDC wasn’t always quite so secretive. From 1995 through part of 2009, when asked it routinely provided breakdowns of the value of credits claimed and the companies claiming them up.
However, our 2009 study of MEGA could not be replicated today because since then officials have asserted “administration of a tax” confidentiality. To the extent this is anything more than a specious effort to dodge accountability, the assertion raises troubling questions:
- If the state violated the law by publishing such data in the past was anyone called to account? Did anyone lose their job?
- Who at Treasury or the MEDC decided that such data was now off limits, and why didn’t they make this determination sooner?
What we do know is that after being criticized many times with rigorous specificity for poor outcomes MEDC became aggressively less transparent. Less available data means a lower likelihood that rigorous analysis of alleged “job creation” abilities would reveal these to be lacking.
We recommend the following transparency solutions:
- Demand that the MEDC or Treasury explain why “administration of a tax” secrecy applies now but not in the past.
- Require that current claims of any past MEGA credits must be accompanied by public disclosure of their value by company, agreement, and when the credits were claimed.
- Require the MEDC identify which MEGA projects are no longer active.
- Going forward, any company that accepts tax credits, abatements or subsidies should waive any right to privacy related to its transactions with the state, including cash disbursements and taxes foregone by the state.
- For the MEDC, mandate a rigorous and independent “opportunity cost” estimate of every program, similar to the one performed by Patrick Anderson. Don’t let the MEDC choose the consultant! Maybe the Auditor General could do that.
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