
After eliminating the funding source for the state’s largest business subsidy program, Michigan legislators have introduced a replacement, calling it the “Real Jobs for Michigan,” part of a two-bill package sponsored by Rep. Mike Hoadley, R-Au Gres and Mark Tisdel, R-Rochester Hills. The proposal has some distinct and different features from previous initiatives intended to spur job growth. But giving preferences to companies is ineffective at delivering good economic outcomes to Michigan.
The proposal would allow companies that create jobs paying well above the regional averages to receive a tax credit for the new jobs they create. Employers would have to fill out a form with the Treasury Department to claim a tax credit worth half of what new employees pay in income taxes, and keep collecting credits on those jobs for as long as they last. The tax credit is also nonrefundable, which means that companies will not receive a check paid for by other taxpayers if credits are worth more than the business owes in taxes.
That is different from the current program which elected officials to give as much cash as they like to any company they choose.
It is also a little different from previous attempts to give companies the money that their employees pay in state income taxes. Before, businesses had to have a planned expansion of their operations, apply to the state for a deal, follow through on the investment, and employ people before they would get paid.
There would be no application under the proposed program. There is also no requirement to invest in property, plant and equipment. Nor is there a requirement for lawmakers or administrators to believe — rightly or wrongly — that the company would not expand in Michigan without getting a deal. Companies would be eligible for the tax credits regardless of whether the credit entices them to employ more people.
Eligibility without the prior approval of the state means that a lot more businesses will receive credits. Private employers create and lose more than 800,000 jobs a year in Michigan. There is a lot of job creation even without encouragement from policymakers. A large number of businesses would get favorable tax treatment for things they would have done without the proposed credits.
The size of the program would be limited to $50 million per year, and that exposes the central question of whether the program would be effective. Is it economically beneficial to absolve some businesses of $50 million of their tax liabilities for activities many would have undertaken without special favors? Possibly, but $50 million in the state’s $702 billion economy is going to have minuscule effects regardless.
There would be further economic benefits to weigh against the costs. The proposal does provide some encouragement to create jobs: Essentially, employers get a credit that saves them 2.125% on new workers, provided everything works out in administration and other businesses don’t take up all the credits. Some employers might take a chance on new employees with the boost.
The program is less prescriptive than other state economic development programs, but it is still selective. Only employers expanding employment at certain wages are eligible while other employers pay their full share of taxes. Taxes are supposed to raise money for government purposes equitably, but the proposed tax credits prefer some employers over others.
Scholars have looked at job creation tax credits, and the results are not promising. Georgia, for instance, offers a similar credit for new jobs. An assessment from economists in the state finds “little to no empirical support for the hypothesis that job creation tax credits affect employment growth.”
The proposal would not expose Michigan’s taxpayers to billions of transfers from some taxpayers to others, as the state’s business subsidy programs did. But being less bad is different from being effective. The business climate fundamentals matter more than tax preferences, and improving the basics will matter more than new tax credits.
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