The Michigan Economic Development Corporation is set to expire this year. The agency administers the state’s business subsidy programs and was created in 1999 by an agreement that expires after 20 years. The new Whitmer administration gets to decide what it wants to do with the functions the MEDC provides. Most likely the duties will be transferred to another arm of state government, but the state’s business subsidy regimen deserves to go away without replacement.
Here is why.
1. Corporate handouts are expensive
The state budget for business subsidies and administration is $281 million. But that’s not all that gets spent. The state also spent $1.2 billion in subsidies approved during the last legislative session. And taxpayers are still liable for $7 billion in subsidies approved during the Engler and Granholm administrations.
That costs more than the tax cuts that lawmakers rejected in 2017, which were deemed to be too expensive for the state budget. Or this money could be used to fix the roads. It’s just a matter of priorities.
2. Business subsidies are kept secret from taxpayers
The state is bad at showing what taxpayers get for their business subsidy money. It’s not all bad — there are a lot of mandated reports and the state should get credit for posting their monthly board information packs online, which helps explain what subsidies and other assistance is provided to companies.
And while the state provides information from some programs about how much taxpayer dollars have been spent and how many jobs were created, it is absent from others. So, there’s no final accounting about what happened to taxpayers’ money. Within the MEDC annual report’s 135 pages you won’t find a simple explanation of how much was spent in one year or what taxpayers got in return.
And some basic information goes unreported. Taxpayers cannot be told how much each of the companies receiving the $7 billion in taxpayer funds from the older programs get. The state considers this confidential tax information and lawmakers should change this policy.
3. Corporate welfare doesn’t work
The people that pass these incentives often point to other states that offer similar programs. But they don’t show that the programs improve other state economies. That’s because the subsidies tend to leave states worse off, not better. There are real costs to spending money trying to woo business projects, and those costs have economic effects as well.
It’s too much to expect that the MEDC’s programs will drive the state economy. The subsidies only affect a handful of businesses every year, and that’s simply not enough to affect an economy as large and dynamic as Michigan’s. The economy changes quickly and politicians cannot keep up. In the first quarter of 2018, the state signed deals with 16 companies to provide subsidies in return for an expected 1,120 jobs. Michigan businesses added 215,000 jobs and eliminated 172,700 others in those same three months. To put it another way, state residents could rely on bureaucrats to add only 0.5 percent of all the new jobs gained in the economy. If these subsidies went away, no one would even notice except the people that wanted subsidies.
The state’s special interest groups with the most political power tend to guide the creation and direction of the programs that subsidize firms. The politicians that respond to these directions aren’t necessarily corrupt, but this is an example of how cronyism concentrates benefits to the powerful.
It’s not a short-term problem. The outrage that state subsidies are used to pad the pockets of private companies goes back all the way to the first years of the state. Which brings up the last reason:
5. Subsidies are incompatible with constitutional principles
As readers can check out in From Prohibited to Permitted: A Legal History of Corporate Handouts in Michigan, for nearly 75 years, the Michigan Supreme Court maintained that the state’s public purse can’t be spent for a private purpose. Public expenses ought to be spent for the benefit of the public, but lawmakers are prone to confuse someone’s private benefit to be something that helps the rest of the state.
The decision hasn’t been overturned so much as ignored. And there are additionalconstitutionalprovisions intended to limit the state’s ability to subsidize select businesses and industries.
Lawmakers ought to approach these programs with the same kind of skepticism that led to these legal decisions and constitutional amendments.
Given all of these reasons, a reassessment of the MEDC ought to conclude that its programs should be wound down along with the agency.
Author's Note: The MEDC passed an amendment that extended its authorizing agreement in perpetuity.
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