Business incentives cost Michigan millions, and it’s uncertain they work

In late 2016, billionaire Detroit businessman Dan Gilbert visited the Michigan Capitol to sell lawmakers on new tax incentives he touted as crucial to unlocking billions of dollars of real estate development in Detroit.

The resulting incentive package, valued at up to $1 billion, took effect last year. It had the backing of economic developers across the state and, eventually, Gov. Rick Snyder, who ended most incentive programs shortly after he took office in 2011.

Snyder last year also signed into law a new incentive that would allow companies to capture some or all of the income taxes for their new hires if employers create at least 250 jobs and pay average regional wages. Snyder wanted the incentive as he tried to lure Taiwanese electronics manufacturer Foxconn Technology Group and the possibility of thousands of jobs to Michigan.

Related economic coverage from our 2018 Michigan Issue Guide

• Michigan business climate improves, but educated workforce is shrinking
• Demand for Michigan workers is very high, but many have given up looking
• Michigan income growth hindered by lack of college graduates

Incentives generally are not the deciding factor for a company looking to move or expand. Location, availability of property, talent, quality of life, infrastructure and utilities all play into the decision. But incentives are at the center of an economic development arms race, one in which states that don’t play can find themselves losing out on high-profile projects.

Little data exists publicly to back up claims that Michigan can’t compete without business incentives. In some cases, that’s because the state might never know if it was eliminated, nor learn why it lost a particular project to another state.

Transparency also lacks because states often sign confidentiality agreements when pitching projects. And the types of deals vary from state to state, so Michigan can’t easily be compared across state lines.

Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, last year published data from 33 states suggesting Michigan had higher incentive costs than some neighboring states. Bartik’s research also makes the case that incentives are often politically motivated and adopted without enough information to determine whether they’ll be effective.

Some opponents of incentives in Michigan reject the idea of state government choosing to reward specific industries at the expense of others. Incentives advocates contend that if Michigan doesn’t offer robust incentives, it will not compete for major jobs-producing economic growth projects.

Michigan’s MEGA problem

Incentive history here is also controversial, after a tax credit program originally designed to create jobs morphed into a job-saving tool during the Great Recession — and left the state with a $9 billion price tag.

Known as MEGA, the tax credit program started in the 1990s to reward companies for creating jobs. But the program expanded to allow credits for companies that retained jobs. Detroit’s automakers were among the largest recipients.

Michigan’s obligation to companies under the MEGA program swelled to more than $9 billion by 2015, putting pressure on the state budget because state fiscal experts underestimated the scale of companies redeeming the credits.

Governor Snyder axed the MEGA program after taking office in 2011. But companies awarded credits can continue to claim them until they expire. It’s estimated Michigan will be liable for hundreds of millions of dollars in MEGA payouts to companies through 2032.

The arms race today

Michigan lost a major Foxconn project to Wisconsin, which offered $3 billion in incentives for a planned investment of $10 billion and up to 13,000 jobs making liquid-crystal-display screens near Racine. Wisconsin approved the Foxconn incentives despite legislative analysis suggesting it could take 25 years for Wisconsin to break even on the deal.

Michigan offered Foxconn incentives worth nearly $6.5 billion for three separate projects in Marshall, Romulus, and Detroit valued at a total of nearly $11 billion in economic development, including 14,000 jobs.

Last fall, e-commerce giant Amazon.com made international news when it announced a public search to find a host city for its second North American headquarters. The company plans to bring as many as 50,000 employees to the winning city. Detroit’s binational bid with Windsor, Ontario, promised an undisclosed amount of incentives from Detroit, Wayne County and the state, along with other investments in talent and transit.

The future of business incentives in Michigan is unpredictable and unclear. A new governor and legislature may reshape the state’s approach in 2019 and beyond – as a matter of policy and also in response to new job growth opportunities not yet foreseen.

KEEP DIGGING: MORE INFORMATION ON BUSINESS INCENTIVES

• Bridge Magazine: “Good Jobs Law May Depend on Definition of ‘Good’”
• Bridge Magazine: “Do Business Lures Really Work?”
• Bridge Magazine: “Business Chief: Five Ways to Boost Michigan’s Economic Growth”
• Bridge Magazine: “Five Questions about Foxconn”
• MEGA Tax Credit Report
• Economist Tim Bartik Business Incentives Study, 2017