Hangar42 Deal Shows Misguided Incentive Policies

The Michigan Attorney General's Office has filed a criminal charge against Joseph Peters, the primary investor in the Hangar42 film infrastructure tax credit/subsidy deal. The Mackinac Center in May was the first to raise questions about this deal after an investigation lasting several months. In June the Center was also first to call for a formal investigation. It must be noted that the filing of a criminal charge does not imply guilt.

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According to the Attorney General, Peters applied for an "assignable" 25 percent state tax credit based on a $40 million "investment" in the form of purchasing the studio property. Apparently no property transfer ever took place. "Assignable" means that if the credit recipient has no Michigan Business Tax liability then he or she can sell the credit for cash to another entity that does owe state tax. It is in effect an indirect cash subsidy.

This episode illustrates several of the misguided or false premises inherent in the rationale and operation of government programs offering discriminatory tax breaks or subsidies to particular firms or industries. For starters, they don't really create any new jobs on a net basis. An extensive body of scholarly research empirically demonstrates this truth (including two Mackinac Center studies, in 2005 and 2009, showing that this state's main "economic development" program did not raise employment or income levels here).

In addition, discriminatory tax favors are fundamentally unfair. When the credits are "refundable" or "assignable," they become virtual cash subsidies, redistributing income from the many to a politically favored few.

Moreover, the increasing government secrecy surrounding Michigan's operation of these programs rightfully generates public distrust and suspicion. So rampant has the secrecy become that at least one Michigan official claimed that it could not even be revealed whether or not the Hangar42 project had been approved.

In recent months a new twist on the secrecy appeared when the Michigan Economic Development Corp. published a letter that essentially said, "stop picking on us." They were not the only ones to do so. At least two local-level economic developers have publicly stated that any criticism of the discriminatory tax breaks and subsidies undermines their mission and that of the MEDC. (In other words, shut up and just trust the government officials handing out the favors.)

Also, as the Hangar42 near-miss demonstrates, these programs are open to abuse. With $20 billion to $50 billion or more sloshing through state targeted incentive and related programs nationwide each year, the wonder is that we haven't seen more people charged.

Finally, given that all this activity has no net positive effect on a state's economy, clearly these are merely political development programs, not economic ones. They provide politicians with opportunities to pretend that they are "creating jobs," even while the underlying economy crumbles due to increasing tax and regulatory burdens. The Hangar 42 deal accomplished its real purpose when it provided a "success story" for Gov. Granholm to boast about in this year's State of the State address. Will she similarly admit its failure in a high-profile manner?

The only way to avoid these problems in the future is to shut down the MEDC and the programs it administers. They don't work, are unfair and open to abuse.