Do business lures really work?

LANSING — Economic development leaders rolled out a new push for business-attraction incentives last week with the familiar refrain that Michigan needs them to compete against other states for larger projects.

But little hard data exists, at least publicly, to support that contention.

A lack of transparency about incentives, tax credits and other economic development tools has dogged efforts in Michigan to create or expand programs years after Gov. Rick Snyder eliminated many of them.

Roughly two-thirds of all economic development incentive packages offered each year by the state’s economic development agency from 2014 to 2016 were accepted, according to data released by the Michigan Economic Development Corp. at Crain’s request.

It sounds like a good showing. But there is precious little available data to compare it against, so it’s hard to tell if Michigan is doing well, poorly, or somewhere in between.

Incentives are not easily benchmarked across states and Michigan doesn’t always learn why it failed to close a particular deal. The MEDC will not release a list of projects it pitched, citing confidentiality agreements.

State officials almost never say when companies choose to locate elsewhere. Senior administrators at the MEDC say it’s rare to find out why another state was more attractive and that companies don’t generally volunteer that information.

Michigan isn’t unique when it comes to a lack of sunshine on economic development incentives. Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, this month published a report using data from 33 states that suggests incentives frequently are adopted for political reasons and the policymakers who vote for them make decisions without solid information about whether they’re effective.

“There’s always an opportunity cost to these things. Any money you devote to an incentive is money you could have devoted to something else,” said Bartik, who found that incentives are expensive in many states, including Michigan, and don’t effectively target industries that pay the highest wages or invest in research. “My view is that states should be talking about more rigorously evaluating these programs.”

Backers of increased incentives say Michigan needs them to compete with other states. That competition is real, but there is strong disagreement on how to win, and whether taxpayer-funded incentives really much matter.

Two bills that have cleared the Senate would capture some state income and sales taxes to help large real estate developments on contaminated, or “brownfield,” sites, and loosen the rules to allow companies in border counties — including Wayne County — to count workers who don’t live in Michigan as new hires to win state incentives for relocation or expansion projects.

Sen. Jim Stamas, R-Midland, last week introduced legislation that would allow some companies to be refunded a portion of state income taxes paid for new hires if they create hundreds of jobs and meet certain wage requirements.

Approval will be a battle. All three proposals died in the Legislature at the end of the last term in December. And after the Republican-led House in February voted down a plan to roll back the state’s income tax, perceptions could be a problem if lawmakers vote to give businesses a tax break instead.

Opponents of the pending legislation contend Michigan should be able to compete on its business climate without having to subsidize select industries with taxpayer dollars. Snyder in 2011 replaced the unpopular Michigan Business Tax with a flat 6 percent corporate income tax rate, ending most of the state’s tax credit programs in the process.

Critics of incentives often point to the now-defunct Michigan Economic Growth Authority program, which they contend was allowed to grow far beyond its original intent, saddled the state with $9 billion in future tax-credit obligations and caught budget administrators by surprise.

Supporters of the bills, many of whom work in economic development, don’t disagree that MEGA became unsustainable. They believe low corporate taxes and fewer regulations are a fundamental economic base that Michigan absolutely needs if it’s going to compete, and by and large has achieved.

But, they counter, Michigan will continue to lose projects, or perhaps not even be in contention, if it doesn’t have an equal shot at the table.

“Site selectors tell us they will weed out Michigan often times” if it appears Michigan does not have the same incentives as other states, said Doug Rothwell, president and CEO of Business Leaders for Michigan, the state’s business roundtable, who helped develop Stamas’ bills. “How many times has that happened? I don’t know, but if it happens even once, that’s too many.”

Separated by incentives

A one-page document created as part of lobbying efforts for Stamas’ legislation, dubbed “Good Jobs for Michigan,” shows a map of the U.S. with a number of states highlighted next to news headlines about company decisions that would bring hundreds or thousands of jobs.

For instance, in Tennessee: “VW SUPPLIER GESTAMP INVESTING $180 MILLION, ADDING 510 JOBS IN CHATTANOOGA,” reads a June 24, 2015, headline from the Chattanooga Times Free Press. Local leaders approved a property tax incentive for the supplier.

Neither document, however, says whether Michigan was in contention for the project.

Michigan has a $100 million cash pool to support all projects in the state in a single year. That works well for small to midsized projects, but a large attraction or expansion project would drain most, if not all, of the available resources, said Birgit Klohs, president and CEO of Grand Rapids-based economic development firm The Right Place Inc.

Over the past 10 years, the state of Tennessee and city and county economic development teams offered hundreds of millions of dollars in incentives to German carmaker Volkswagen AG to build and expand a plant in Chattanooga.

“We never stood a chance of getting VW, ever,” Klohs said.

In a perfect world, she said, Michigan would be able to stand on its regulatory climate, its labor force and its quality of life. But other states have paid attention to those areas, too, she said. What separates them now is incentives.

Other states don’t have the kind of regular debates that Michigan policymakers have about funding for economic development, Klohs said. Revisiting that debate creates uncertainty about Michigan, she added.

A couple of years ago, as Michigan sought to break into the recreational vehicle industry, the state’s economic development team put an offer on the table to help convince an Indiana-based company to expand in southwestern Michigan. Northern Indiana — and particularly Elkhart County, just across the border from Michigan — has deep roots in RV manufacturing.

In 2015, the state awarded Elkhart, Ind.-based Forest River Manufacturing LLC a $350,000 performance-based grant to support a $7 million project to open three facilities and add nearly 400 jobs in White Pigeon, a village in St. Joseph County. The village received another $1.6 million to pay for job training. Michigan won the project despite competition from locations in Indiana, the state said then.

By January of this year, however, the company’s planned Michigan operations had yielded just 80 jobs of a promised 400 in White Pigeon, MLive.com reported. The project didn’t materalize in part because Michigan’s rules for awarding economic development incentives require any new jobs to be held by Michigan residents — and the RV company wanted to transfer workers from Indiana to start up the new operation, Jeremy Hendges, chief deputy director of the Michigan Department of Talent and Economic Development, recently told lawmakers as they debated a bill to expand incentives in border counties.

In the end, Indiana won anyway: The Michigan incentive later was rescinded, Hendges told Crain’s, and Forest River, a subsidiary of Warren Buffett’s Berkshire Hathaway Inc., in January announced plans to invest $6.7 million in LaGrange, Ind., adding up to 425 jobs. The state of Indiana awarded the company up to $2.5 million in tax credits.

Hendges didn’t name Forest River in his testimony to the Legislature, though he later confirmed it for Crain’s. He did not disclose details about other prospective RV manufacturing deals Michigan went after.

Other states use incentives “to steal our residents,” Hendges told lawmakers. “It’s about time to fight back.”

‘Give away the store’

It’s possible that companies may already have a location in mind regardless of whether incentives are offered, but use incentives to try to get a better deal out of states, said Michael LaFaive, a fiscal policy director at the Midland-based Mackinac Center for Public Policy and who opposes incentive programs.

LaFaive said he doesn’t think incentives are effective or fair, because they redistribute money to businesses that first is collected from taxpayers. He said states like Ohio do more financial harm than good to their residents if they “give away the store” to attract a company.

“The incentives are going to run out someday, so the companies need to decide where they want to be when the incentives do end,” said LaFaive, who said states should compete solely on their business climates. Many companies, he said, “pick the location first and then go shopping for some economic icing for their location cake.”

Incentives aren’t the top reason any company chooses a site. Talent, land and facilities, infrastructure and utilities are more likely to be priorities of site selectors. But incentives can seal the deal, especially when it would be more expensive to operate in Michigan than another state, its proponents say.

“To be competitive, you have to have incentives,” said Jennifer Nelson, the MEDC’s executive vice president and chief business development officer. “Every state is looking (at) how they can be better, how they can encourage growth and attract businesses. Every state is constantly looking at how to re-evaluate their tools.”

Gov. Snyder has been reluctant to support new incentives without caps on the amount of state resources applied to them.

Michigan’s current cash incentives are performance-based and are offered as payments to companies that meet a series of benchmarks, typically in the first three years of a project. Nelson said they offer more flexibility for businesses than tax credits, which are redeemed over longer periods.

Some Republican legislators, including Stamas, say the state needed to reset its economic development playbook to avoid repeating MEGA’s financial problems.

Even so, he said, he only would support bringing back incentives if they come with limits.

“We’re trying to be very strategic and take the lessons we’ve learned from some of these other programs that we’ve ended up with so many problems ... and adjust them for accountability,” Stamas said.

States like Ohio, Indiana, Wisconsin and Texas that are among Michigan’s main competitors for jobs offer tax exemptions that Michigan does not.

The Texas Enterprise Fund is Texas’ main tool for business attraction. The cash program had an initial round of funding worth $295 million when it launched in 2003 and received another $90 million in 2015 to replenish it, according to a spokeswoman for the Texas Economic Development Corp. Gov. Greg Abbott, a Republican, asked for another $108 million for 2018-19.

The Texas Enterprise Fund has given out more than $600 million in incentives since it was founded.

In Wisconsin, the state’s economic development corporation said it awarded $197.3 million, mostly in grants and tax credits, in the 2016 fiscal year.

Ohio offers a number of grants and loans, as well as a tax credit for job creation and a sales tax exemption for buying data center equipment. Job creation tax credits in Ohio apply to businesses that create at least 10 jobs within three years, with minimum annual payroll of $660,000, according to Ohio economic development data.

Michigan tracks the outcome of every deal it offers, the MEDC said. The state offered 146 deals in 2016 and 101 were accepted, a rate of 69.2 percent, according to MEDC data. Agency spokesman Otie McKinley said the accepted deals listed in a given year could be the result of offers made a year earlier.

Efforts to gather similar tracking data from these states were unsuccessful.

PR tools?

Incentive programs, LaFaive contends, allow politicians to demonstrate that they have done something to create jobs, even if the jobs never fully materialize.

“At the end of the day, politicians are worried about bad PR,” LaFaive said. “These are PR tools, not economic development tools.”

Bartik came to a similar conclusion in his recent study for Upjohn. His three years of research yielded estimates that incentives across the country cost a total of $45 billion in 2015, roughly triple what they were in 1990. And Michigan’s incentive costs, as a percentage of the state’s economy, were higher than in Ohio, Wisconsin and Illinois.

Bartik suggested that many incentive programs originate because policymakers come into office looking for ways to improve job opportunities and wage growth in their states.

The Detroit Regional Chamber recently did a benchmarking survey of how Michigan ranked compared with close to a dozen other states on auto investment, said Justin Robinson, the chamber’s vice president of business attraction. Michigan ranked near the bottom for the amount of money it could bring to the table.

Michigan has other advantages, including a talented workforce, proximity to auto suppliers and a business-friendly climate, Robinson said.

“We don’t need to be able to write the biggest check,” he said, though he added that the state has to be “in the ballpark” of other states.