Billion-dollar bust?

(Originally published Aug. 10, 2011)

A 15-year-long effort to spur jobs and vitality in some of the state’s most economically depressed areas by turning them into virtual tax-free zones — and thereby forgoing about $1 billion in tax collections — is being curtailed by Gov. Rick Snyder.

Citing disappointing results in Renaissance Zones, the Snyder administration is ending some of the tax breaks in the zones and reining in a program that exploded far beyond its original parameters.

“The program was left largely to individual cities to market and over time the list of geographic zones grew, but the overall results weren’t overly impressive,” Snyder spokesman Ken Silfven said.

During the past 15 years, local units of government reported that 10,944 jobs, or only about 730 jobs a year, were created in the geographic Renaissance Zones. Another 2,000 jobs were credited for industry-specific zones. In the last 12 years of the program (2000-2011), the state has forgone $852 million in tax collections in pursuit of these jobs. At an annualized average rate of $70 million, the entire Renaissance Zone program would have led to “tax expenditures” nearing $1 billion.

And no one knows if the job claims are even accurate. The Renaissance Zone Act did not require the state to verify all job or investment data, and state officials have not audited the figures, which include a reported $3.1 billion in private investment.

“For us it is almost impossible to know how many jobs have been created in the geographic zones,” said Karla Campbell, manager of state tax incentives at the Michigan Economic Development Corp.

Originally, just nine cities and rural communities, including Benton Harbor, Flint and Detroit, were granted Renaissance Zone designations. That allowed those units of government to abate virtually all state and local taxes in geographic areas, or subzones, within their boundaries for as long as 15 years.

Two former military installations — Wurtsmith Air Force Base in Oscoda and the Detroit Arsenal Tank Plant in Warren — also were designated as Renaissance Zones.

“Today, Michigan begins the nation’s boldest experiment in the renewal of distressed communities,” then-Gov. John Engler said at the time.

“I believe that by eliminating the barriers of government, we can unleash the power of the private sector to bring good-paying jobs to Michigan. The nation will be watching this experiment, and it will see Michigan succeed,” he added.

But program mushroomed far beyond its original intent, with more than 150 geographic Renaissance Zones having been designated in 37 Michigan counties.

About 20,290 acres, or nearly 32 square miles of property, have taxes abated in geographic Renaissance Zones.

In addition, dozens of site- and industry-specific Renaissance Zones for tool-and-die shops, food processing operations, ethanol and battery plants and other businesses not required to locate in blighted geographic areas were created.

Companies in those zones have generated $1.87 billion in investment and added 2,002 jobs, according to a 2010 report to the Legislature by the MEDC.

Site- and industry-specific zones will continue as business investment incentive toosl, officials said.

“We draw a big difference between project-specific Renaissance Zones that are performance-based and the non-performance-based geographic Renaissance Zones,” said Mark Morante, senior vice president of policy, program administration and legislative affairs at the MEDC.

Snyder, who has been slashing tax incentives and special credits in the tax code, is quietly disassembling the geographic Renaissance Zone program.

In little-noticed changes in the new tax code, residents living in Renaissance Zones must resume paying abated personal income taxes next year. And “C” corporations located in the zones will be subject in 2012 to the new corporate income tax signed by Snyder this year.

Campbell said she does not know how many businesses and residents will be affected by the tax changes.

One developer building a residential, retail and commercial project in Traverse City said those changes renege on commitments the state has made with investors and could chill investment in the zones.

“It’s breaking a promise,” said Raymond Minervini II, whose company is redeveloping the abandoned Traverse City Regional Psychiatric Hospital.

Michigan is forgoing $103 million in tax revenue from Renaissance Zones in fiscal 2011, slightly more than the $100 million in taxes the state is giving up this year through controversial film tax credits, according to the Treasury Department.

Of that, $300,000 is in personal income tax revenue and another $21.2 million is in Michigan Business Tax revenue. The largest share of tax revenue the state is forgoing in Renaissance Zones is $81.5 million in property taxes, which will continue to be abated.

The Snyder administration has decided not to expand the geographic footprints of Renaissance Zones or extend their terms as they begin to expire this year. Such expansions and extensions were routinely approved by past administrations.

It also has frozen the Tool & Die Recovery Renaissance Zone program while it evaluates whether tooling firms in the tax-free zones performed better than those outside them.

Nearly 300 tooling companies, or roughly a third of all such firms in the state, are in Tool & Die Recovery Renaissance Zones, according to Jay Baron, president of the Center for Automotive Research in Ann Arbor.

Baron was a key player in establishing consortiums of tool-and-die companies that were later designated as Renaissance Zones.

Industry-specific zones, such as those for tooling and agricultural processing companies, helped companies survive as their industries struggled over the past decade, Campbell and others said.

Baron said most of the tooling companies in the Renaissance Zones likely would have failed had they not been granted tax-free status.

But he said the companies also benefited by collaborating with each other. He estimated about half of them will remain in zone consortiums after the tax benefits expire.

“They’ve learned a lot from each other,” Baron said. “They were surprised. They thought their companies had all the secrets.”

But a 2010 study by the Anderson Economic Group on state tax incentives found Michigan would have gained 12,806 more jobs through a statewide 2 percent, across-the-board cut in tax rates than it added through Renaissance Zones through the first three years of the program.

The study, conducted for the Michigan Education Association, concluded that Renaissance Zones were one of the three most ineffective tax incentive programs in the state. The others were the film tax incentives and the Michigan Economic Growth Authority.

Some complain that the lack of tax revenue in Renaissance Zones is squeezing the already tight budgets of school districts, community colleges and libraries.

The enabling legislation required the state to reimburse local school districts, intermediate school districts, the state school aid fund and local libraries for lost tax revenue.

But the state, faced with its own budget problems, stopped making those payments this year. Schools and libraries are losing about $26 million this year because of that action, said Gretchen Couraud, executive director of the Michigan Library Association.

“There are serious cuts to service delivery that no one is talking about,” she said.

The cuts in state reimbursement to libraries range from $1.3 million for the Detroit Public Library to $72,215 for the Hart Public Library, nearly a third of that library’s budget, Couraud said.

Economic activity hasn’t exactly flourished in many of the original Renaissance Zones. Just 1,891 jobs in Detroit, 511 jobs in Saginaw and 351 jobs in Flint have been reported by those communities in their zones since 1996.

“Just creating blanket tax-free areas, we would agree, is not an effective economic development tool,” said Olga Savic-Stella, vice president of business development at the Detroit Economic Growth Corp.

Doug Rothwell, who was president of the Michigan Jobs Commission (the forerunner of the MEDC) at the time of the Renaissance Zones’ creation, said he gives the zones a mixed review.

“I think the mistake a lot of communities made was using Renaissance Zones in their worst areas,” said Rothwell, who now is president of the advocacy group Business Leaders for Michigan. “There were too many issues involved in bringing those areas back.”

One example he cited was Saginaw’s designation of much of its central business district, including a Jacobson’s department store, as a Renaissance Zone. Eliminating taxes failed to save the store from closing, and much of the city’s downtown area remains depressed.

State officials said the 10 geographic Renaissance Zones in Grand Rapids generally have experienced greater success by strategically targeting troubled, but not completely abandoned, areas.

About $413 million in business and residential investment, and 1,630 jobs have been created in those zones since 1997, said Kara Wood, the city’s economic development director.

In addition, “hundreds” of residents are living in condominiums in downtown Renaissance Zones, she said.

The tax-free zones “attracted people to live in the center city,” Wood said. “They’ve driven redevelopment of properties that wouldn’t otherwise have been developed.”

Wood said 170 residential and business taxpayers in the Grand Rapids Renaissance Zones would be affected by the loss of tax exemptions, but she’s not sure how they will react to the re-imposition of tax payments.

Campbell of the MEDC said that, statewide, Renaissance Zones have not attracted enough investment and jobs to erase large swaths of blight in troubled cities and rural communities.

“If an area is too distressed, it can be very difficult to attract development,” she said. Renaissance Zones “might not be the right tool.”

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