MEGA Stumble?

Whirlpool Corp. has announced it will cut 5,000 jobs from its 73,000 worldwide workforce. Some 300 of the jobs are expected to be lost from two of the firm's operations (Whirlpool Technologies, LLC) in the southwest Michigan towns of Benton Harbor and St. Joseph, according to a company spokeswoman.

Both of these facilities were the beneficiaries of Michigan Economic Growth Authority tax break deals in 2001, and  represent what  supporters of the Michigan Economic Development Corporation (which oversees MEGA) would call “success stories."[1] Today's news is more evidence that such claims should always be taken with a large measure of salt.

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MEGA is a state business tax credit incentive program designed to generate economic development in Michigan. Tax breaks and other targeted incentives are granted to companies in exchange for their willingness to "create" or "retain" jobs here.

In 2001 Whirlpool was offered benefits for the Benton Harbor and St. Joseph facilities worth nearly $21.8 million over 17 years. In return, the firm promised to create 385 new jobs. The nominal value of the benefits was $3,328 per job per year, but the figure is misleading because it is an average. Many of the incentives - such as $1 million for job training - were available up front, while the average measures incentives per job through 2017.

The jobs claims themselves may also be misleading. Naturally, the MEDC claims that the jobs created by the recipients of such deals would not have happened "but for" the discriminatory tax treatment. But there is no way for the government to know whether a firm didn't intend to create those jobs anyway, and businesses have become quite savvy about how to game the system to their advantage.  State officials claim to understand the nature of these incentives, but hand them out with great naiveté.

Now Whirlpool is set to eliminate 300 jobs from the facilities that benefited from the 2001 deal. The company won't say whether these lost jobs are directly related to the 385 created after entering MEGA agreements, but in net terms it hardly matters: Jobs promised earlier in return for tax breaks not available to other businesses are canceled out by jobs lost today.

Incidentally, Whirlpool can't be blamed for taking advantage of MEGA and related tax break programs offered by the state. The firm would be failing its fiduciary duty to shareholders if it did not. The culpability falls upon the politicians who created these programs in the first place, in spite of mountains of evidence that they are not effective at generating economic growth.

For example, a 2005 study of MEGA by this author and Mackinac Center adjunct scholar Michael Hicks applied a sophisticated statistical model to the full MEGA record and found that the program had no impact on Michigan employment, the unemployment rate or per-capita personal income. The consensus of economic literature supports the conclusion that such programs don't work to improve a state's economy.

They do work well for the bureaucrats who run them and the legislators who attend the ribbon cutting ceremonies when the deals are announced. The latter get to pretend to be "doing something" to improve the economy, while they avoid upsetting entrenched special interests with real improvements to the state's business climate. If they really wanted improve the economy here legislators would eliminate the uncompetitive Michigan Business Tax and replace it with spending cuts, enact a right-to-work law, and overhaul the state's oppressive regulatory climate.

[1] The corporation also won a MEGA deal in 2006 worth more than $10 million in business tax relief through 2021 in exchange for creating 550 jobs. The company is required to create 75 "Qualified New Jobs" as a result of the deal no later than May 31, 2008. Results of this deal are unknown pending Whirlpool's 2008 tax documents being filed and reported.


Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and education 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.

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