Source: Michigan Economic Development Corporation, State of Michigan
An Overview of the Michigan Economic Growth Authority
18, 2005 marks the 10th anniversary of The Michigan Economic Growth Authority, a
program established by Michigan government with the mission of spurring in-state
job creation and business investment. The authority is the state of Michigan’s
agent for selecting firms to receive Single Business Tax credits in return for
creating new facilities and jobs in Michigan. These MEGA agreements also result
in local incentives for the recipient firms, and often in other state
incentives, as well.
was originally limited to providing packages only to firms that created new jobs
at single sites in such industries as manufacturing, office operations, or
research and development. Five substantive amendments to the program since 1995
have allowed MEGA to offer packages in return for smaller job and investment
totals, for the retention of existing jobs, and for jobs in additional
Through 2004, more than $1.8 billion in Single Business Tax relief has been
offered to more than 200 firms in 230 MEGA agreements over as much as 20 years.
The value of these MEGA agreements rises to more than $3 billion with the
inclusion of other state and local incentives, such as property tax abatements,
job training subsidies and infrastructure improvements. Nearly one-third of this
total — $987 million — has been provided by local units of government or by
local economic development agencies.
Scholarly estimates suggest that nationwide, the targeted incentives distributed
by state and local governments exceed $50 billion annually.
MEGA’s Track Record
The number of MEGA packages and the total size of the
SBT credits offered each year has generally been rising, despite dips in 1997,
2001 and 2003. In 1996, MEGA’s first full year, MEGA offered just 15 deals,
totaling $89.9 million in SBT credits. In 2004, however, MEGA produced 41
packages valued at $253.3 million (for up to 20 years) in SBT relief alone.
agreements are expected to create two types of jobs — "direct" and "indirect."
"Direct" jobs are new jobs at the specific firm sites that are the subject of
the MEGA package. "Indirect jobs" are new jobs created outside these specific
firm sites in response to MEGA-related investment and direct employment.
documents indicate that approximately 127 of MEGA’s agreements should have
produced fully employed facilities through 2004 — i.e., sites hosting all of
their projected direct jobs.
Of these 127, about 56, or
44 percent, have claimed credits under the MEGA program. A company can claim
these tax credits, however, without meeting the initial total direct job
In fact, only about 10 of these 56 cases can be shown to have
created the number of direct jobs originally projected within the expected time
MEGA originally projected that these 127 MEGA deals would generate
35,821 direct jobs by 2005. MEGA figures obtained in December 2004 shows that
these deals have actually generated about 13,541 direct jobs — roughly
38 percent of original expectations.
MEGA’s direct job total through late last year thus represents
about 0.3 percent of Michigan’s 2004 workforce.
Between 1996 and 2004, MEGA originally estimated that
more than $220 million in SBT credits would be redeemed as a result of MEGA
agreements. Lagging direct job creation, however, meant that companies claimed
just $75 million in credits, or about 34 percent of original expectations.
commentaries published in newspapers in November 2004, state officials claimed
that the MEGA program had produced 28,812 total jobs. This figure is higher than
13,541 because it includes indirect jobs purportedly created by the program.
estimate of the indirect jobs in the 28,812 job total is unreliable for at least
It employs a constant, rather than a varying, formula for MEGA’s
diverse projects, even though MEGA’s own analyses show that these projects have
different potentials for generating indirect jobs;
It implicitly employs assumptions about the economy in future
years — well past 2005 — in order to estimate indirect jobs for past years;
It implicitly counts indirect jobs that would be created only
after 2005 in its indirect job estimates for the past 10 years, thereby
overstating the numbers;
It fails to fully correct assumptions made in earlier years that
have since proved too optimistic, with the likely result of overstating the
An Econometric Evaluation of MEGA’s Economic Impact
Because MEGA could theoretically generate economic benefits despite its lagging
success rate, the authors employed a detailed econometric analysis to determine
whether MEGA credits influenced economic growth in Michigan counties during the
years 1995 to 2002 (2002 was the last year for which county-level data are
available). The authors also tested the impact of MEGA credits on the
manufacturing, warehousing and construction sectors. The authors found the
MEGA did not improve Michigan’s per-capita personal income,
employment or unemployment rate.
MEGA did not improve any Michigan county’s per-capita personal
income, employment or unemployment rate (estimates of impact ranged from zero to modestly, though not significantly, negative);
Michigan counties that did not host companies receiving MEGA deals
fared as well as counties that did host such companies;
MEGA essentially did not affect aggregate income or employment in
manufacturing and warehousing (the one statistically significant effect was
negative, but too small to be economically significant);
MEGA apparently caused a temporary shift to higher construction
employment without increasing overall employment. One temporary construction job was created for every $123,000 in MEGA credits awarded; 75 percent of these jobs disappeared after one year, and the remaining 25 percent fell away after two. There was a concurrent, statistically significant decline in construction wages as a result of MEGA credits, but it was too small to be economically meaningful.
Potential Explanations for MEGA’s Lack of Economic Impact
are potentially several reasons why MEGA’s actual economic impact has been less
than expected, as is shown by a review of specific MEGA projects, the academic
economic literature and information about MEGA’s procedures. These reasons fall
into four categories:
Political and Business Incentives Can Interfere With MEGA’s Policy Goals
Academic economic literature increasingly recognizes a "political economy" in
public policy whereby political incentives to gain public approval for a program
and its supporters can interfere with effective policy decisions. In economic
development programs, this dynamic can favor projects with a higher public
profile, such as those that benefit well-known or exciting new businesses or
industries, even if these efforts are not necessarily the wisest use of
officials’ promotion of MEGA and other state economic development programs has
in the past suggested political incentives may be playing a role in officials’
support for these policies. Legislative support for the Jobs I and Jobs II
packages in 2003 appear to be instances of this.
Concern over potential political appeal may also be evident in several apparent
overestimates of job impact by state officials in MEGA and related state
programs. In one specific MEGA agreement, a company official detailed his
disagreement with MEGA’s projections of job creation at his firm. Michigan’s
auditor general has also twice criticized (non-MEGA) Michigan development
agencies for the overstated job creation numbers the agencies had reported on
overestimates of economic impact are not particular to Michigan. A Toledo,
Ohio-area economic development agency recently reduced its own job creation
claims substantially following the departure of an agency executive. Media
scrutiny played a role in this reduction, but it came several years after the
fact, and after the responsible official had departed — a delay in
accountability that is unsurprising given the long-term nature of economic
presence of targeted economic development programs can generate
counterproductive business incentives, as well. A recent study of the state of
Ohio’s economic development incentives between 1993 and 1995 found that while
the incentives had no positive economic impact, the businesses that received
incentives were more likely to overestimate employment forecasts than businesses
that had not. Similarly, at least one major consulting firm has recently
counseled businesses on how to position themselves aggressively to receive state
economic development grants. Such tactics can lead government officials to favor
less productive deals over better ones.
MEGA program could begin to serve specific, short-term political and corporate
interests, rather than the long-term goals that inspired the program. Not only
might this combination of interests lead to a misallocation of state development
monies toward less effective projects; it might also lead to lower economic
growth, according to a 1999 study of state economic statistics in the
continental United States.
The Inherent Complexity of the Marketplace
MEGA officials are faced with the task of picking companies
that can create and sustain jobs in the Michigan marketplace. But the
marketplace decisions that lead to new employment and new business investment in
Michigan are made by millions of individuals with their own subjective
preferences and individual understanding of local market conditions. The
economic literature increasingly recognizes that the inherently dispersed nature
of their knowledge and preferences makes predictions about which companies can
successfully create and maintain new jobs exceedingly difficult for any observer
or organization to determine. One recent analysis shows that that between 1995
and 2000, only one of the 45 largest stock funds outperformed the Standard and
Poor’s 500 index, and it did so only by a small margin.
Assumptions in the "REMI" Modeling Employed by MEGA
engages economists at the University of Michigan to aid MEGA’s future employment
projections through the use of a respected computer-based economic model known
as REMI, short for Regional Economic Modeling Inc. The REMI modelers at the
university appear to use the model skillfully and responsibly.
Nevertheless, several aspects of the model and the assumptions used with it may
be leading to optimistic estimates. These issues involve the treatment of the
direct cost of state tax relief, the cost of local incentives in MEGA packages,
the differences between high- and low-unemployment areas, the failed employment
and wage assumptions apparent in past simulations, and the potentially increased
cost of new state and local government services following new business
investment and employment.
The Problem of Ensuring MEGA Credits Are Necessary
law specifically requires MEGA to determine that "the expansion or location of
the eligible business will not occur in this state without the tax credits
offered under this act." If there is an error in determining this — i.e., if a
firm would have located in Michigan without the credit — the cost of the credit
to the state and its economy rises.
practice, making such a determination will be difficult, both for MEGA officials
and for the firms concerned. Several case studies indicate how business
calculations can change, so that an unattractive location may become attractive
on further review, despite the absence of a tax credit. The potential for a
revision of opinion can be particularly high if a firm already had strong
reasons to locate in a particular location.
way to determine the rate at which businesses might not ultimately need a credit
that initially appears essential would be to study the subsequent actions of
businesses that sought MEGA credits but were denied them. Gathering a
comprehensive list of such firms has proved difficult, however.
End the MEGA Program
Given the underperformance of MEGA projects,
the program’s manifest lack of economic impact in its first seven years, and the
inherent difficulties in making such a program work, it would probably be best
to cancel the MEGA program. The state has alternative ways to improve its
business climate that are more likely to be effective.
Concerns about MEGA are only amplified by questions about the program’s fairness
to firms that do not receive tax credits. These concerns are further underscored
by a recent federal court case that suggests MEGA may be unconstitutional.
reforms of the MEGA program are unlikely to increase its economic value,
policy-makers can take several steps that might improve MEGA if they choose to
The state could consider asking the Office of the State Auditor General to
conduct regular, expanded audits of MEGA’s direct job counts. Such oversight
could help improve the authority’s accounting procedures. The auditor general’s
office could also be encouraged specifically to review applications by MEGA
candidates that were rejected. The results of such a review could help clarify
the extent to which the MEGA credits have truly been necessary.
Count Direct Jobs Only. It would probably facilitate public
review and understanding of the MEGA program if indirect job benefits were no
longer reported and cited by MEGA officials. "Spin-off" considerations could
still be part of the evaluation process for a particular project, but MEGA would
no longer make a formal or informal practice of tallying the indirect jobs its
past and future projects could claim. Removing MEGA officials’ focus on indirect
job counts might free the authority to more carefully document its direct job
Develop a Transparent Framework for Tracking Success and
Failure. The status of each MEGA project could be posted and updated live on
the Web each month to show such basic items as the following: the state and
local incentives offered in each MEGA package; the state and local incentives
claimed in each MEGA package; the cost of these incentives so far and in the
current year; the current direct job figures; what the direct job figures were
originally projected to be at present; and so on. Such reporting would
facilitate effective public oversight of the program’s effectiveness.
Commission an Independent Econometric Review. An
independent researcher could be engaged to maintain a peer-reviewed and publicly transparent econometric model that annually reassessed MEGA’s impact. The model employed in this study was crafted to detect past impact, rather than
predict future performance. Regular updates of the findings would therefore be
appropriate if the MEGA program continues.