Michigan municipalities learn tough lessons on tax incentives

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.”

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Mon, 08/24/2015 - 8:11am
There was a proposal for a movie studio in Lansing that the local media was giddy over with the idea of people jetting in from Hollywood to make films here, thankfully it never got beyond the proposal stage, I think it would have been a financial disaster.
Chuck Fellows
Mon, 08/24/2015 - 8:54am
Rather than bet on the business acumen of short term investors and the political aspirations of a few the public should be investing in education of a community that will provide the best and most diverse population possible, one that can serve all the needs and aspirations of the whole community, not just one segment of society. The current practices of recycling incentives as political whims only serves to disrupt revenue streams and long term growth and development of communities.
Cap't Don
Mon, 08/24/2015 - 11:20am
These incentives can work to establish new business opportunity to to retain one in growth by reducing the risk through incentives or tax abatement. But is it often stated that this is to support "jobs". However, there is no transparency at the MEDC as to how many jobs were gained on each of the incentives provided. The same is true at the local government level. I know this from personal experience having received abatements on two occasions. We certainly filed our tax returns and identified new investment that were tax abated etc. But, we never had to report on the promised jobs. Once a local offical asked me about jobs and my response was that we were behind schedule due to other elements of the business in total but the new investment had saved some jobs. There was never a follow up on actual hiring to the "plan". Where is the accountablility and transparency?!
Mon, 08/24/2015 - 11:57am
The Allen Park situation has a very bad odor to it.
John S.
Mon, 08/24/2015 - 1:20pm
Mayor Fouts argument seems to sum up the situation of municipalities. So long as the performance of local elected public officials is gauged in terms of their skill at promoting economic development (and enlarging property values and the tax base) of their communities, the competition and the tax incentive game will go on.
Jeff Salisbury
Mon, 08/24/2015 - 2:47pm
“Economic development officials value business tax incentives as tools needed to compete with other states,” a November 2013 report commissioned by New York State’s Tax Reform and Fairness Commission began, stating their presumptive selling point. “There is, however, no conclusive evidence from research studies conducted since the mid-1950s to show that business tax incentives have an impact on net economic gains to the states above and beyond the level that would have been attained absent the incentives.” The 143-page study, produced by Marilyn M. Rubin of John Jay College and Donald J. Boyd, the former director of the Rockefeller Institute of Government State and Local Government Finance research group, was not alone in this conclusion. “We estimate the impact of manufacturer business taxes on value added during the 1990s for 15 manufacturing sectors in 20 U.S. states,” began a National Science Foundation report published this past June. “When we isolate the value of industrial incentives from the basic tax system in our theoretically preferred marginal tax measure, we find… only 1.2 percent industrial growth, the latter elasticity not statistically different from zero.” http://www.alternet.org/corporate-accountability-and-workplace/corporate...
Jeff Salisbury
Mon, 08/24/2015 - 2:49pm
So... in a free-market system, what's the difference between extortion and business tax incentives? Not one damn thing.
David L Richards
Tue, 08/25/2015 - 4:21pm
A study of the effects of tax incentives is certainly in order. The studies cited compare states, but do not seem to (based only on the short bottom lines quoted) address the effect of granting incentives, such as tax abatement, by municipalities to attract business or to compete with other municipalities. It has not been unusual for large businesses to explore, either seriously or as a ploy, several locations to expand an existing facility or locate a new facility, so they can play one community off against another. When each city decides whether to grant incentives, it has to decide if half a loaf is better than none, and whether the jobs likely to be created warrant a discount in tax revenues. For tax abatement, usually taxes on a specific improvement are paid at one-half the normal rate for a specified number of years, and full taxes are paid at the end of the abatement period, so declining to play the game risks loss of revenue and jobs. Another aspect of the issue that needs to be considered is the cost of city services to the business applying for incentives. My observation is that prior to the end of the personal property tax, the cost of providing services that an industrial business does not use, such as parks, libraries and schools, meant more tax revenue than increased costs, even with tax abatement, because sophisticated and heavy machinery generated substantial taxes without significant increase in use of municipal and school services. Now that the personal property tax is ending, the trade-off between taxes and costs of services may not be a good one for the municipality in many cases.
Charles Richards
Mon, 08/24/2015 - 2:56pm
"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." This doesn't contain any significant information. How much " more value to the tax rolls during the lifetime of the incentive."? And is that increased value discounted back to present value at an appropriate interest rate?
John Q. Public
Mon, 08/24/2015 - 7:28pm
This can't be the same Jim Fouts who railed against tax incentives--calling them "corporate welfare"--for years as a Warren city councilman. Can it?
James McKimmy
Mon, 08/24/2015 - 7:30pm
How many years do the companies stay after the tax incentives are consumed? My information indicates that they frequently move on to the next community or state that will meet their requirements for more incentives. On a local, state or national basis we are engaged in a race to the bottom when corporatations use this method to avoid taxes which are needed to support the needs in our communities.
Thu, 08/27/2015 - 8:42am
How about ending corporate welfare? Many moan and groan when, gosh, we help people who have fallen on hard times. It's about time for corporations to do their patriotic duty and pay their fair share of taxes..what a novel concept:) If the situations in Belleville and Allen Park don't change our minds, not sure what will.