The failure of K-Mart, one of Michigan’s most recognized retailers, has a
policy angle few have noticed: It places in stark relief the inadvisability of
allowing government bureaucrats to hand out taxpayers’ money to businesses the
bureaucrats think are going to be the big "economic winners" of the future.
Since 1995, when Gov. John Engler created the Michigan Economic Growth
Authority (MEGA), the Mackinac Center for Public Policy has noted the
inadvisability of government "picking economic winners and losers," unfairly
singling out some businesses for favors while denying them to businesses no less
K-Mart was one of the businesses MEGA singled out for precisely these kinds
of special favors. Why? Because MEGA bureaucrats simply knew it would
The MEGA program gives preferential tax treatment to large businesses in
exchange for their promise to "create" jobs in, or move jobs to, Michigan.
The small businesses that actually create most jobs are ineligible for MEGA tax
credits, which provide relief from Michigan’s single business tax and often
come with a host of other economic goodies such as job-training subsidies
and property tax abatements. During the Engler administration, MEGA subsidized
166 such projects; the total value of incentives offered to these projects
exceeds $2 billion.
Of course, MEGA officials – always quick to claim credit for job increases
that likely would have occurred anyway – are not as enthusiastic about
announcing their program’s many failures. In May of 1998 and again in August
of 2000, MEGA declared K-mart an economic "winner" and arranged for it to
receive as much as $29 million in state and local incentives. Each MEGA
incentive package was heralded publicly by Gov. Engler as an economic "win"
In a 1998 press release about one K-mart project Engler said, "By approving
this credit, we are not only bringing hundreds of new jobs to the area, but we
are keeping 300 good jobs right here in town." For both projects combined,
MEGA officials promised more than 1,470 new jobs for Michigan by the year 2019,
925 of which were to be created by the company directly by the year 2002.
But a funny thing happened on the way to economic nirvana: K-mart declared
bankruptcy. The government bureaucrats in Lansing who think they can pick
economic winners and losers and forecast the future economy can’t see their
crystal balls for all the egg on their faces.
Since May 1998, when the first K-Mart/MEGA deal was struck, the company has
seen its non-retail employment in Michigan slide to about 3,500. This is enough
to disqualify K-Mart from the MEGA program, since its agreement with the state
mandates that to receive future MEGA tax credits, its base non-retail employment
must stay above 3,637 and 4,084, for each MEGA deal, respectively.
K-mart’s employment levels aren’t expected to improve soon. But don’t
expect the retailer to pay the taxpayers back for the favors it has received -
and failed to capitalize upon. The state has forgone more than $6 million in
single-business-tax revenue to K-mart since 1998 for jobs that no longer exist.
In addition, the city of Troy provided approximately $3.2 million-worth of
incentives in the form landscaping, road improvements, and waived permit fees.
These are financial incentives that clearly might have been put to better use
The MEGA program’s K-Mart debacle is not an isolated incident. On Feb. 5,
2003 MEGA recipient Robert Bosch Corp., announced it was laying off 1,200
people, a 57 percent cut in its base state employment. This jobs cut came just 7
weeks after MEGA approved its second deal with Bosch.
Internet darling Webvan, a grocery company (remember them?), was offered
$23.4 million in MEGA tax credits in late 1999. MEGA official Doug Rothwell
noted that Webvan was one of Michigan’s "best financed retailers." Webvan
was bankrupt 13 months later. Whoops.
Although MEGA admits that a dozen of its projects have failed, this probably
is an understatement given the time it takes to tabulate and publish job claims.
As the Granholm administration works to improve the business climate in
Michigan, it would be well advised to do away with MEGA and other
targeted-incentive programs as "corporate welfare." The new governor and
Legislature should rely on across-the-board tax relief, instead of providing
discriminatory tax favors to corporations and businesses that some state
bureaucrats believe are Michigan’s future "winners."
And anyone who tries to stop the state of Michigan from doing away with its
corporate welfare programs should be met with a new slogan: Remember K-Mart!
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Michael D. LaFaive is director of fiscal policy for the Mackinac Center for Public Policy, a Midland-based research and educational institute.