Gov. Granholm signs legislation authorizing targeted tax breaks for Federal Mogul. Her press release said the bill "Adds muscle to Michigan's economic development arsenal," and quotes the Michigan Economic Development Authority director as saying, "I fully expect that these changes will save thousands of jobs for Michigan’s families.” On April 11, 2006, the firm announced it will close its St. Johns plant, eliminating 420 jobs.
What will make legislators finally accept that the targeted
tax incentive binge they’ve been on won’t fix Michigan’s broken economy? What
will it take before they realize that only such things as broad-based tax cuts
and regulatory reform will do the job?
The announced closing of a Federal Mogul plant in St.
Johns, with a loss of 420 jobs, may be a good candidate.
The binge has been bipartisan: Gov. Jennifer Granholm
boasts that she has signed into law "53 tax cuts" passed by a Republican
legislature — but none of these are actual broad-based reductions of individual
or business tax rates. Almost all are narrow tax breaks targeted at particular
firms, industries or locations.
"The governor said 'From today onward we will better be able to address the challenges employers face in the fast-changing 21st century economy, and retain more jobs for Michigan families.'"
At least three of those 53 "tax cuts" (Public
Public Act 80 and
Public Act 81) were deliberately tailored to benefit Federal Mogul. When
Gov. Granholm signed this legislation in April 2004, she issued a press release
claiming that it "adds muscle to Michigan’s economic development arsenal." The
governor said, "From today onward we will better be able to address the
challenges employers face in the fast-changing 21st century economy, and retain
more jobs for Michigan families."
Republican legislators echoed the governor’s sentiments.
Sen. Alan Cropsey, R-DeWitt, said, "For Michigan’s economy to work, Michigan’s
people need to work. The fight for jobs at Federal Mogul is a fight we need to
win — for all of Michigan."
Rep. Bill Huizenga, R-Zeeland, said: "This new law makes it
crystal clear that we will do whatever we can to help employees and
manufacturers that have been hard hit by today’s difficult economic conditions."
Sen. Jason Allen, R-Traverse City, said, "I’m glad to see
that the governor agrees with me and my Republican colleagues."
Rep. Jerry Kooiman, R-Grand
Rapids, said: "Passage of
Senate Bill 824 sends a strong message to Federal Mogul and other companies
that the Legislature is serious about removing barriers that get in the way of
Michigan being a friendly business and manufacturing state."
Unfortunately he was wrong, as were the other 106 representatives and 38 senators who voted for the bill. This legislation, and
scores of similar bills the Legislature has and continues to churn out, sent
just the opposite message. Instead of getting "serious about removing barriers"
to all, Lansing has made it clear it’s only willing to lower them for a few.
Kooiman and his colleagues may have been well-intentioned, but the "arsenal"
they’ve created is loaded with duds.
For years, the Mackinac Center for Public Policy has
consistently presented theoretical and empirical evidence as to why this
approach will not work. April 18 marks the 11th anniversary of the MEGA program, the state’s premier targeted tax incentive tool. One year ago this week, the Mackinac Center released
the results of its rigorous econometric analysis of the MEGA
program. The study found that since MEGA’s creation, the program had no impact
on employment, the employment rate or per-capita personal income. Michigan
counties with MEGA firms fared no better than those without. For every $123,000
in MEGA tax incentives offered, only one construction job was created — and
those jobs lasted less than two years.
While legislators and the governor chase particular firms
with targeted tax breaks, thousands of potential new business start-ups are
stillborn as a result of a punishing tax, regulatory and labor climate. These
losses are the "unseen" cost of government trying to pick winners and losers,
rather than doing the harder but more fruitful work of making Michigan a state
that is attractive to all employers — not just those with clout in
Here’s the real lesson from Federal Mogul, Delphi, Tower
Automotive, Kmart, Dana Corp., Hayes Lemmerz
and all the other "winners" selected by Michigan’s economic development
apparatus: Since 2003, the U.S. economy has added more than 4.7 million non-farm
payroll jobs, mostly in small businesses providing products and services that no
government official infected by the "fatal conceit" of central planning could
possibly have predicted. These firms don’t benefit from targeted tax breaks —
they pay for them.
Imagine how different things might look today if, instead
of handing out narrow "incentives" to high-profile firms or politically "sexy"
industries, the state’s bipartisan political establishment had eliminated the
deadly tax, regulatory and labor law obstacles that inhibit job growth here,
especially in small business start-ups.
Had they done so, nothing would have prevented Michigan from netting its share of
those 4.7 million new jobs. Home prices would be rising, rather than stagnant or
falling. Young people wouldn’t have to leave the state to find jobs. Personal
income wouldn’t be falling to historic lows relative to the rest of the nation.
And the loss of 420 jobs at Federal Mogul would be an unfortunate footnote in an
otherwise booming state economy, rather than yet more evidence of a failed
Michael D. LaFaive is director of
the Morey Fiscal Policy Initiative at the Mackinac Center for Public
Policy, a research and educational institute headquartered in Midland, Mich. Jack McHugh is a legislative analyst for the Mackinac
Center. Permission to reprint in whole or in part is hereby granted, provided
that the author and the Center are properly cited.