This 16-page report from the Mackinac Center for Public Policy examines newly introduced legislation intended to help Michigan compete with other states for jobs.
The report explains why the Governor's proposal for the Michigan Economic Growth Authority (MEGA) is a departure from an ambitious--and effective--policy of government streamlining and downsizing aimed at lowering the overall costs of doing business in Michigan. MEGA is a move toward an industrial policy model of government economic planning, with the Engler administration choosing the winners and losers. If passed, the MEGA proposal would not only fail to achieve its primary objective, but also increase the size of state government, subject it to litigation, hinder future across the board tax reform, and set a poor precedent of state-level discretionary tax policy.
MEGA was born out of the new War Between the States--the headline-grabbing practice of states competing for private sector jobs. Nearly every state has a program of either selective subsidies or tax credits to entice firms to locate or expand within its borders, and MEGA is touted as a "state of the art" economic development weapon that Michigan needs in its arsenal.
The MEGA proposal would create a seven member board, all appointed by the Governor. The board would select certain companies to receive Single Business Tax credits for up to 20 years, the amount of the credit based on the amount of state income tax paid by the new employees. To even be considered, a Michigan company must create 75 or more new high paying jobs in the state; out of state firms must create 150 or more such jobs. After qualifying, the MEGA board chooses which firms will actually receive the credit based on additional criteria.
Will MEGA achieve its objective of job growth? The report states that the Governor would be wise to heed the findings of his own report. In 1988, then Senate Majority Leader Engler received a study he commissioned of Michigan's performance in the 1979-86 business cycle, titled Michigan in Perspective. The detailed 331-page report analyzed Michigan's use of property tax abatements and reviewed a host of other studies evaluating the effectiveness of MEGA-style incentives in other states. The report concluded:
The arguments against the conventional incentives approach to business development are overwhelming. Practically every major analysis conducted in the past decade has concluded that standard business incentives packages neither substantially encourage investment, nor boost output or create jobs ....
A 1989 review of the economic development literature by the Council of State Governments confirmed these findings. The reason, as the Engler report states, is that the value of an incentive pales when compared to such locational factors as overall tax levels, a reasonably priced skilled labor force, the relative cost of bureaucratic compliance, efficient transportation facilities, and general quality of life. If Michigan is not competitive in these areas, business will go elsewhere despite subsidies or credits.
Furthermore, economic growth within the state is very uneven: low-tax Grand Rapids is growing at a much faster rate than high-tax Detroit. A firm in a high-tax locale that threatens to move out-of-state may be responding more to that local circumstance than the statewide business climate; a MEGA tax credit would simply reward the high tax jurisdiction and thereby send the wrong signal to those areas that have kept their taxes under control.
In addition to being ineffective, MEGA would, despite the claims of its proponents, increase the size and cost of Michigan government. The proposal authorizes staffing the Michigan Jobs Commission to handle the administrative work involved in promulgating MEGA guidelines and rules, evaluating company applications, publishing an annual report, and other program oversight. In addition, the proposal would allow any company denied a tax credit to appeal the ruling, first before an administrative judge and then in circuit court. What happens when one auto manufacturer is granted a multi-million dollar credit, but its in-state competitor is not? Such a situation would be unfair--and subject to litigation.
MEGA would also hinder further tax reform. One of the current problems with the Single Business Tax is that so many employers are exempt that those who remain find it difficult to build a constituency for change. MEGA would exacerbate this situation, diminishing the incentive for those firms lucky enough to receive the credit to lobby for further reform. Those states that aggressively pursue selective tax credit schemes to lure away business are actually reducing their ability to produce an overall, competitive business climate with each arbitrary subsidy or rebate contrivance they create. Michigan can foster superior and sustainable growth, as it is already proving, if it spends less energy on a few trees and cares instead for the forest as a whole.
Perhaps most disturbing, however, is that MEGA sets an unwelcome precedent for discretionary tax policy. The MEGA proposal, while calling for cost/benefit analysis of each application for credit, still leaves a seven member board of political appointees broad discretion to determine tax policy for some of Michigan's largest corporations. Although the proposed MEGA legislation sets no limit on the amount of tax credits that may be granted, the Jobs Commission proposes about $8 million per year. However, these 20-year credits add up each year; after 10 years such a program would be foregoing SBT revenue of $80 million each year-high stakes for the subjective determination of an unelected board.
Today, with Michigan unemployment at a 25 year low of 4.1 percent and a track record of sound and courageous fiscal management, Michigan is heading in the right direction. The 1988 Engler report properly noted, "Incentives are ephemeral. Efforts to improve business climate, and tax climate in particular, on the other hand, are more intrinsic and tend to work." That's an important lesson that administration officials should learn from their own first-term track record.
MEGA is not a "state of the art" economic development strategy as its proponents claim. It is a giant step backward on Michigan's road to a world competitive free-market economy. Making Michigan more competitive by reducing the business tax burden is a laudable goal, but we don't need a new state bureaucracy to do it.