Whenever the use of targeted tax
breaks to attract or retain businesses in Michigan is criticized, some public officials inevitably point to particular employers who supposedly would
have departed or never located here were it not for such incentives. This is
intended to demonstrate the need for selective tax preferences, but in reality
it only shows Michigan’s failure to make itself into an attractive place to do
The defenders of targeted tax
breaks should expand their vision and concentrate on making Michigan such a good
place to live and do business that companies rush to get in, without needing
special "incentives." This means low taxes, an absence of excessive regulation,
a good quality of life, good schools, and a workforce that has a solid work
ethic and no "entitlement" mentality.
If this state is lacking in
those qualities, the correct question is "Why?" and, "What can we do to fix it?" It is not, "What kind of special discount can we provide to make a particular
employer stay, even though we fall short in one or all of these factors?"
As an analogy, imagine a
restaurant with second-rate food, surly waiters, slow service and high prices.
When the manager sees a customer getting restless, he rushes over and offers a
15 percent price cut. He also stands on the sidewalk offering discounts to
potential customers who look like they might walk on by.
At the end of each day this
manager sends glowing reports to the owner describing how many sales he "saved"
by offering "incentives." He spends his free time thinking up new
incentives that might persuade underwhelmed customers to buy mediocre meals.
Isn’t it obvious that this is
not a viable business plan, and that this manager shouldn’t spend another minute
dreaming up new "incentives," but instead should focus on making the food
better, the service more pleasant, and the prices lower for everyone? The
restaurant’s owner, employees and diners would be much better off if the place
were so attractive that customers stood in line to get in, and the thought of
targeted discounts never entered any of the participants’ minds.
The same applies to Michigan’s
use of targeted tax breaks to prevent particular employers from leaving, or
entice a handful of new ones to come.
These incentives are no different than the targeted discounts our restaurant manager hands out, whether the incentives come in the form of Michigan Single Business Tax credits offered by the Michigan Economic Growth Authority, or as property tax discounts offered by local governments. Officials who
defend or brag about such incentives are just as myopic about how to fix
Michigan’s economy as that restaurant manager about his "business model."
Given this, it's not really surprising that a
comprehensive study by the Mackinac Center for Public Policy shows that
MEGA's targeted tax break program is also a failure. Using a time-series econometric model designed specifically to measure the MEGA program’s economic impact, the study clearly shows that MEGA did not improve Michigan’s per-capita personal income, employment or unemployment rate.
A restaurant manager who covers
up his failure to provide value to all customers by offering discounts to a few
of them should probably start looking for another job. At the very least, he
shouldn’t hold up his targeted incentive "victories" as indications of a
successful business model.
Similarly, the extent to which targeted business tax
credits and abatements are defended by state policy makers is a function of
their failure over the years to make Michigan an attractive place to do
business. Michigan will know its problems are over when so many employers want in that we laugh at the idea of some slick businessman seeking special treatment, in much the same way that the manager of a popular restaurant can afford to wave off a customer who seeks a discount. Unfortunately, maintaining a system of targeted tax "incentives" distracts us from the job of pursuing reforms that will bring this kind of success to Michigan.
Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy,
a research and educational institute headquartered in Midland, Mich. Permission
to reprint in whole or in part is hereby granted, provided that the author and
the Center are properly cited.