State Corporate Handout Program Milks Taxpayer for Cass City Operation

Subsidies continue to prove to be utterly pointless

Editor’s note: This article first appeared in the Tuscola Advertiser on June 30, 2018

The state of Michigan operates corporate handout programs that are supposed to create jobs where officials think none or fewer might otherwise be created. One of those initiatives — the Michigan Business Development Program — has given a $500,000 subsidy to Dairy Farmers of America for its Cass City location. Another state agency and programs sweetened the deal with even more handouts and financial incentives, as did the local municipal government.

While DFA may appreciate the taxpayer subsidy and other fiscal favors, the state program promotes unfair competition. It effectively imposes taxes on workers and other businesses for the benefit of a lucky few corporations. The recipients of such handouts are often billion-dollar behemoths and, not surprisingly, easily find financial favors by turning to Lansing politicians and their highly paid lieutenants. Research shows that programs such as the MBDP are typically ineffective at creating net new jobs.

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The MBDP was born in 2011 and was the brainchild of the Gov. Rick Snyder’s administration. It offers direct cash grants, loans and other incentives to corporations that Lansing politicians and other government bureaucrats deem worthy.

One of those is DFA, based in Kansas City. The state gave DFA $500,000 to create just 25 new jobs in Cass City. In addition to this grant, it was also given a $300,000 subsidy from the Michigan Economic Development Corporation’s “corporate funds.” These dollars come from gaming revenues and are not appropriated by the Legislature. The state arranged for an additional $1 million in federal dollars to flow to the project through Community Development Block Grant money.

The Michigan Department of Transportation kicked in a $439,000 grant for road work, and the site was designated an Agricultural Processing Renaissance Zone. This last favor exempts the company from the state education property tax as well as personal and real property taxes for 15 years. In addition to state favors, the village of Cass City offered a $5.7 million incentive, which the MEDC estimated is equal to 85 percent of all the infrastructure investment costs associated with the project.

All told, the value of known federal, state and local incentives exceeds $317,000 per job — and at least half the jobs associated with the MBDP deal pay an average salary of about $40,000 per year, according to state documents. If this sounds like an irrational approach to job creation there’s a good reason — it is.

Between March 2012 and through September 2016, some 33 percent of MBDP deals either had been or were in some stage of default or had been dismissed from the program. The default rate would be much higher if the state were not quick to grant amendments in its various deals that lower performance requirements. In fiscal 2016 alone, the state granted 38 amendments, 28 of which appear to lower some previous performance objective.

In addition, the Mackinac Center built a statistical model to study the impact of the program in counties that hosted these subsidized projects. We found a link between the programs and jobs, but it was negative. For every $500,000 disbursed by the state by the business partnership program, there was an associated loss of 600 jobs. In other words, the program appears to kill more jobs than it creates.

This finding is consistent with other scholarship produced by the academic community. Research from a broad array of scholars shows such programs to be largely ineffective. There are a number of likely reasons.

Politicians in Lansing and elsewhere have little to give any company that they don’t first take from someone else. Any good a subsidy program might do, then, is offset by the cost of the subsidy and the cost of bureaucratic transactions. Government employees don’t shuffle-and-stamp mountains of paperwork for free.

What if, instead of authorizing $16 billion in corporate handouts since 2001, as Lansing politicians did, they instead authorized the same amount for road infrastructure or across-the-board personal income tax cuts? Our economy and more of the state’s citizens would probably be much better off as a result.

There is another insidious cost associated with such programs: favor-seeking. States that maintain large favor-seeking apparatus, composed of hordes of lawyers, lobbyists, contractors and others, do worse economically than those with smaller ones. In other words, the very act of maintaining a fat and expensive corporate handout bureaucracy that rings a “come and get it for free” dinner bell retards economic growth. In his Cato Journal article on this subject economist Harold Brumm concluded, “An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent (favor) seeking does so at considerable expense to its economic growth.”

Big business isn’t playing by the same rules as everyone else, and Lansing politicians make it all possible. They do so by creating unfair competition that transfers taxpayer dollars from the many to the few. It is unfair, and research shows it’s ineffective.

A better approach is to stop milking taxpayers for the benefit of a favored few corporations and instead create a fair playing field for all. End corporate handout programs and the government bureaucracies that manage them. Roll back taxes for all businesses and people while protecting and improving the valuable public services people and companies both need and want, such as a solid transportation infrastructure. We will all be better off as a result.

Related Articles:

More Insights from Mackinac Center’s Corporate Welfare Scorecard

Why did the Governor Flip Flop on Corporate Welfare?

Michigan Lawmakers Consider More Handouts

Corporate Handouts Run Amok

Another MBDP Jobs Subsidy Project Doesn’t Work