Michigan municipalities learn tough lessons on tax incentives

Warren Mayor Jim Fouts says, "Frankly, if we don't give inducements, there will be another city in some other state or area that will."

 

Tax incentives are the double-edged sword of economic development.

Michigan cities have become more flexible with companies when awarding tax incentives but face greater scrutiny and accountability over these programs than ever before. Those are the big changes in the municipal tax incentive arena during the past few decades, some veteran industry professionals say.

Michigan’s reputation for being welcoming to business has changed a lot in 30 years; the state’s tax structure is now on par with competitor states. But in some communities, local officials have learned the hard way that intentions with incentives don’t always pan out.

Thirty years ago, cities in Michigan were more likely to offer business tax incentives than elsewhere in the U.S., according to a story in the Aug. 26, 1985, edition of Crain’s. That was based on a survey of more than 800 mayors in cities with at least 30,000 residents by New York-based Touche Ross & Co., an accounting and consulting firm that merged with Deloitte LLP in the late 1980s.

These days, local and state governments continue to put together incentive packages to lure jobs and investment. But state programs have received a reboot during Gov. Rick Snyder’s administration — and the state’s business tax structure was revamped in 2011. Beginning in 2014, the state also phased out the taxes corporations pay on personal property purchases such as equipment or machinery.

And while the state still issues regular state-led incentives and grants, the pot of money available each year is much smaller, and several incentive programs were eliminated, including brownfield redevelopment credits.

Snyder spokesman Dave Murray said the governor believes state policymakers should focus on talent and workforce development, rather than incentives, as a way to attract business to Michigan. Snyder has not taken a position on local incentives, Murray said, instead choosing to leave decisions to local leaders.

Reputation for breaks

Locally, some Detroit-area municipal leaders laud incentives as a way to tip the scale in their favor when companies are considering where to build facilities. They say the long-term benefit to a city’s tax rolls outweighs the immediate loss of new revenue from slashing a company’s property taxes, often in half.

“Frankly, if we don’t give inducements, there will be another city in some other state or area that will,” Warren Mayor Jim Fouts said. “We don’t give them out willy-nilly. The most important thing is a commitment to jobs.”

In 1985, nearly nine in 10 Michigan mayors who responded to the Touche Ross survey said they offered tax credits to spur small businesses in their cities. Nationally, just 43 percent of mayors did.

Seven in 10 of the state’s mayors also said they believed Michigan needed to overhaul its tax structure to help business.

A comparable survey today isn’t available. Deloitte doesn’t know when the last such poll was taken.
But anecdotally, “Michigan is still viewed as a favorable place to do business,” said Greg Ripley, a senior manager with Deloitte Tax LLP who is based in Detroit. “Most of the local communities have the ability to award some type of an incentive.”

Tax incentives last for a specified number of years — in some cases, up to 12 — and can include waiving some property taxes on new construction projects and capturing new taxes to reimburse developers for the cost of work on brownfield sites.

In exchange for an incentive, companies and developers promise to spend a certain dollar amount and create or retain a set number of jobs.

One of the most commonly used is the industrial facilities exemption, allowed through Michigan’s Public Act 198 of 1974. It can reduce property taxes on new buildings by half for up to 12 years.
These types of incentives can offset the higher cost of relocating, especially if all other factors are equal — workforce, utilities and property costs among them, said Linda Bonelli, a partner with Deloitte’s U.S. incentives practice in Chicago.

In Livonia, McLaren Performance Technologies Inc., a division of Canadian auto supplier Linamar Inc., is consolidating its Livonia engineering and Southfield sales facilities into one building on Eight Mile Road, said Mark Taormina, the city’s planning and economic development director.

McLaren, which supplies engine testing services and develops driveline systems, had considered moving to Windsor, Ontario, according to the Michigan Economic Development Corp. It will spend $22 million on the project and create at least 75 jobs, the state said.

Livonia offered McLaren an industrial facilities credit on $16 million of real property investment that will save the company about $200,000 a year in total taxes, Taormina said. The city still will take in about $56,000 a year in new tax revenue for the 12-year duration of the incentive.

The project is now under construction on Eight Mile at Hubbard Street.

Adding value

City administrators say their cities benefit financially even with smaller tax revenue because the new construction ultimately adds more value to the tax rolls during the lifetime of the incentive.

Fouts said he estimates the city of Warren will take in an estimated $3 million to $6 million per year when its largest taxpayer, General Motors Co., invests $1 billion to upgrade its Warren Technical Center with new design studios and an information-technology hub.

That would be about half of the tax revenue expected due to an incentive from the city that reduces GM’s taxes on new construction by up to 50 percent for a maximum 12 years.

Said Fouts: “We may lose revenues in the short run, but not in the long run.”

Tax credits, however, have come under increasing scrutiny in recent years.

Some of it has been a shift in policy. Some, like state incentives for brownfield or historic preservation credits, have gone away altogether. The Legislature also recently killed Michigan’s film incentives program, which offered tax breaks to production companies that worked in the state.

“Every community in Michigan is doing everything they can to bring jobs in and using whatever tools that are available,” said Chris Hackbarth, state affairs director for the Michigan Municipal League.
“Unfortunately, the tools are more limited today than they were 30 years ago, and what they’ve got to play with is more limited because their tax base and their revenue streams have shrunk.”

Ill-fated bonds

But the offering of financial incentives carries inherent risk.

Van Buren Township sued its largest corporate resident, Visteon Corp., in May after the municipality found it would fall $36.4 million short on bond payments by 2018 that were issued to build Visteon’s 263-acre campus in 2004.

In exchange for the bonds, Visteon agreed to spend $270 million toward the campus, but as property values plummeted throughout the Great Recession, Van Buren Township was left holding the bag as tax revenue dropped lower than the bond payments. On its end, Visteon says the wording of the contract allows it to pass on helping the township meet the bond payments.

The shortfall has the potential to bankrupt the community.

Allen Park also lost out in a bond incentive plan for an upstart movie studio in the city. Allen Park issued $28.3 million in limited tax bonds in November 2009 for the project and another $2.7 million of general obligation limited tax bonds in June 2010 toward the build-out of Unity Studios.

Bond payments were to be covered by rental fees for the studio, which the city owned, but the development never fully materialized and the city was stuck with $2.6 million in annual bond payments.

Case studies on incentive packages gone awry and more attention paid to ROI have pushed the pendulum toward more transparency and oversight of the way incentives are awarded. For example, cities do more follow-up checks to see if companies keep their promises on spending and jobs.

Fouts, of Warren, said his city’s assessor has rescinded incentives in the past because companies did not add the number of jobs they promised.

“We check, we follow through and, if not, they lose,” he said. “It’s not a blank check. It’s a check with strings.”