No one subsidizes business like Michigan

(This opinion piece was originally published in Bridge Michigan on Aug. 4, 2022.)

When plying for more money to hand out to a favored few businesses, supporters say that Michigan needs to catch up with the profligacy of other states.

“We know that Michigan is in competition with other states. We all know that,” Lansing Mayor Andy Schor told a committee hearing on corporate subsidies earlier this summer. “We know that there are other states out there that give direct dollars to local companies that go there. They will give out cash up front. We know that in the ideal world, we wouldn’t have to do any of this. But we are in competition and we have to win that competition for jobs and for investments.”

The mayor of the state capital was promoting bills to earmark money outside of the appropriations process for new corporate subsidies.

He made it sound like Michigan is losing the jobs competition for lack of corporate welfare. But Michigan already offers more selective subsidies than other states. Lawmakers ought to be maintaining the few existing limitations on the program, not figuring out how to give away taxpayer funds more freely.

No other state has anything quite like the new program approved of by lawmakers in December. It allows officials to give however much cash administrators want to whomever they want. The only limiting factor is how much lawmakers budget for the program, and whether administrators can get appropriations committees to approve their deal. (And the legislation in question would circumvent the budgeting process.)

Programs in other states tend to tie support to preferred activities. For instance, a business that spends money building a factory can get a nonrefundable tax credit based on how much gets spent. Other programs give companies, say, $5,000 in transferable tax credits for each new job the company adds. Those credits are not refundable, but the company can sell them to other taxpayers for cash at a discount. Some states will give a company a refundable tax credit worth a percentage of what it spends on research and development.

If there were anything typical, it’s that states offer something based on the wages paid for new jobs over some term of years. The something that is offered could be direct cash, as in North Carolina. Or it could be refundable tax credits, which also give companies cash. The least generous are the nonrefundable credits that also cannot be sold to other taxpayers. Nevada offers nonrefundable tax credits, capping them at 50 percent of the company’s business tax liability and limiting their duration to four years. Perhaps because it reduces tax liability, lawmakers there call the program an “abatement” rather than a credit, even when companies earn benefits based on wages paid for new jobs.

There are also “forgivable loans” – cash grants awarded if the company meets certain obligations – which aren’t really like loans at all. Oregon has one of those.

There are states with deal closing funds that offer cash a company can get quickly. No one offers hundreds of millions in cash like Michigan.

And some states simply do with less. Regional rival Minnesota’s largest selective subsidy only allows companies to collect a maximum $2 million from its business subsidy fund.

Comparisons become difficult when lawmakers around the country are more interested in concealing the costs to taxpayers than in justifying their expenses. The transferrable credits mentioned only exist because some lobbyists think programs are easier to get passed into law if beneficiaries don’t receive a check from the state treasury. Collecting a check from another company for selling its transferable tax credit is fine. This increases the costs to the treasury and gives the beneficiary something less valuable, but the political calculus works out better.

The generosity of favoritism is also complicated because companies are subject to state taxes. It’s better to assess low or no taxes than to offer some companies abatements from it. Offering nonrefundable credits against corporate income taxes is not as good a deal as not assessing the tax in the first place.

Even with all of the diverse ways to grant special favors to businesses, no other state gives out hundreds of millions in cash over the short term. That’s what Michigan does. And lawmakers should be suspicious about bills that would keep cash flowing to subsidy programs without even subjecting the expenditures to approval by elected legislators.