The Mackinac Center was asked to present testimony before
the Michigan Legislature’s Joint Committee on Economic Growth on the state’s
targeted tax incentive programs as tools for generating economic growth. Last
year the Center released
the results of a
rigorous econometric analysis of the effect of the state’s "flagship"
economic development tax break program, the Michigan Economic Growth Authority,
which gives Single Business Tax credits to a handful of selected firms. The
analysis found that MEGA had no impact on employment, the unemployment rate or
per-capita personal income.
On Aug. 23, 2006, Mackinac Center Legislative Analyst Jack
McHugh presented these findings to the committee, and also presented arguments
Bad Food at a Good Price!,
Federal Mogul: More Evidence that "Targeted Incentives" Don't Work
How to Replace the SBT With Nothing. His testimony follows.
"The idea of targeted tax incentives seems plausible. Why
doesn’t it work? An important reason is called ‘the knowledge problem,’ which
essentially says this: 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 invisible 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 Lansing. You do this by
creating a tax, regulatory and labor climate that makes Michigan a
rewarding place for those with capital to invest, rather than a punishing place.
"Specific figures assembled by
the Census Bureau drive home the irrelevance of targeted tax breaks in the
overall economy. The U.S. economy is dynamic, not static, and experiences an
amazing amount of job churning each year. In 2002, Michigan created 587,361
jobs, and lost 591,696. In contrast, an
honest tabulation of the jobs that the Michigan Economic Development
Corporation claims are attributable to MEGA credits over the program’s first 10
years is just 13,541 jobs, or 2.3 percent of a single year’s worth of job
creation in this state. MEGA gave out incentives to only 27 of 21,185 new
business establishments in 2002.
"Can you see the problem? Can
you see how silly and irrelevant those press releases announcing 20 jobs here
and 200 jobs there really are? On the other hand, if a significant improvement
in our tax, labor or regulatory climate causes just a 5 percent change in new
job creation here, that's almost 30,000 jobs each year, and that number
accumulates every year! Over MEGA’s first 10 years that would have meant a net
gain of 300,000 jobs, rather than MEGA’s paltry 13,541.
"By the way, this also explains why accusations that the
Mackinac Center’s consistent position against targeted incentives amounts to unilateral
disarmament are misguided: The same dynamic economy and job churning happens
in every state, and it makes changing the incentives for a few companies rather
than all companies a sucker's game wherever it's played.
"Several recent reports from so-called ‘centrist’ entities
have been hailed by the Granholm administration and beneficiaries of government
spending because they try to make a case that ‘taxes don't matter’ as a factor
in Michigan’s economic malaise. If taxes don't matter, why are the governor,
many tax-friendly legislators and the Michigan Economic Development Corporation
so eager to defend MEGA and related programs that hand out tax breaks?
Either they do matter or they don’t — you can’t have it both ways.
"Taxes do matter, and
programs like MEGA are an implicit admission that Michigan’s business taxes are
too high. Given that fact, this committee should return to the House and Senate
with this finding: ‘Eureka! The best replacement for the SBT is no replacement
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.