Targeted Corporate Incentives Do More Harm than Good

This article first appeared in the Lansing State Journal on August 7, 2000.

The state has for five years now been aggressively picking business winners and losers in the marketplace. How? By granting a few favored corporations targeted tax cuts and other incentives under the belief that this creates economic growth and employment. They should not. Why?

A mountain of empirical and anecdotal evidence exists to show that such targeted incentive programs touted by government officials are not only unfair, but actually counter-productive.

Harold J. Brumm, an economist with the General Accounting Office in Washington, D.C., examined data from the 48 contiguous states to determine "the extent to which economic growth is effected by" favor seeking by businesses from government. These special favors help a handful of firms, often at the expense of their competitors.

Brumm's research suggests that states that encourage this favor seeking-by creating and expanding incentive programs, for instance-have a "relatively large negative effect on the rate of state economic growth."

This is exactly what is taking place in Michigan. The employment rolls of the Michigan Jobs Commission(MJC), created to oversee state incentive programs, ballooned 925 percent during its six-year life. Its total budget jumped 578 percent. In all, $2.2 billion was spent supporting a bureaucracy that is not necessary-indeed, is counterproductive-to the state's real rate of economic growth. Recently, the MJC was broken up into two successor agencies, the Michigan Economic Development Corporation (MEDC) and Michigan Department of Career Development (MDCD).

It is important for us to distinguish between direct subsidies and tax credits. A subsidy takes tax money from a set of tax payers and redistributes it to another. For example, in its 84 years, Flint-based Koegel Meats, Inc., has never taken a single government incentive. Yet, in 1998, state officials showered its competitor, New York-based Boars Head Provision Company, with as much as $450,000 in job training subsidies and $4.6 million in other incentives for its Holland factory. While this is counterproductive economically, it is also unfair.

A tax credit on the other hand eliminates a portion of tax liability that would have otherwise been owed by a firm or person. This is often seen as a superior tool than subsidies, but the idea still has problems. Since 1995, the state has issued 91 tax credits, along with other incentives worth $1.2 billion, through its Michigan Economic Growth Authority (MEGA) program.

First, today's incentive programs, either credit- or subsidy-based, are job stealers, not creators. Michigan has recently enjoyed a record low unemployment rate of 2.8%. When the state hands out favors to companies for "creating" jobs, state officials fail to mention that the new jobs are almost always filled by people gainfully employed elsewhere. Their employers must then locate, hire and train new workers at a cost to themselves-a cost that diverts time and money from more productive economic activities-which hurts people and the economy.

Second, targeted incentive programs politicize jobs and turn market entrepreneurs into political entrepreneurs by encouraging business owners to pursue state favors simply out of fear that their competitors are doing the same. The time and money entrepreneurs must spend hunting for favors is time not spent discovering and bringing new products to market.

Lastly, officials often disburse incentive packages with seemingly little rhyme or reason. The MEGA program, for instance, was allegedly created to address the cost disparity between a firm expanding or locating in Michigan or another state. One firm, Behr America, may receive incentives for as much as 152 percent more than the cost disparity between competing locations every year-for 20 years. The $10.1 million incentive works out to $81,452 per job created directly by Behr. Another firm, Alliant Food Service Incorporated, may get as little as three percent of its alleged disparity, an incentive so small one wonders if it was really necessary.

The state cannot create jobs. At best, it just shifts them around. On the other hand, markets have been creating jobs without state programs for centuries. Eliminating these counterproductive bureaucracies would facilitate economic growth while making entrepreneurial competition less dependent on politics and politicians.