Is Michigan too light on tax lures?
How many economic development incentives does Michigan need to compete for jobs and business investment?
A debate is raging over that question since Gov. Rick Snyder largely shifted the state’s economic development efforts away from trying to buy jobs from other states to helping Michigan companies grow, a process he calls “economic gardening.”
Soon after taking office in 2011, Snyder replaced the state’s signature, 16-year-old Michigan Economic Growth Authority – or MEGA -- business tax credit program with a deal-closing fund that can spend as much as $100 million in the current fiscal year.
The Michigan Business Development Program gives qualifying companies upfront cash for making new investments and adding jobs in Michigan.
It spends far less than MEGA, which during Gov. Jennifer Granholm’s eight years in office approved $7.3 billion in business tax credits to 515 companies. That’s an average of more than $900 million a year.
Through Nov. 9, the Michigan Business Development Program had awarded $37.1 million in grants to 45 companies that expect to create 5,593 jobs.
Michigan spent $2.055 billion on incentives in 2009 and budgeted $122 million this year, a state-sponsored study found. That's just 5.9 percent of what the state spent in 2009.
Jeff Finkle, president of the International Economic Development Council in Washington, D.C., said it’s hard to determine the optimal number of economic development incentives.
“It’s a difficult question,” he said. “I’m not sure anybody sits out there with a (generally accepted) scorecard.”
He said it “may be too early to tell” whether Snyder’s approach of eliminating long-term tax incentives, while focusing on closing deals and help small businesses grow will pay off with more jobs and investment.
Consultant hands ‘F’ to Michigan
But Ron Pollina, a Chicago-based economic development consultant, says Michigan is falling behind in the race for business investment and jobs.
“Basically what you’ve got is what we in the industry call a slush fund,” Pollina said of Michigan Business Development Program. “Most corporations look at that and discount it severely.”
Pollina, who publishes an annual ranking of top 10 “pro-business states,” ranked Michigan 39th this year, down from 29th in 2011.
The top 10 states this year are, in order: Utah, Virginia, Wyoming, North Dakota, Indiana, Nebraska, South Dakota, Kansas, Missouri and Oklahoma.
Those states combine a favorable tax and regulatory climate with incentives that are clear, easy to apply for and are quickly acted upon, Pollina said.
All of those states have lower unemployment rates than Michigan. And Michigan lagged all but three — Utah, Indiana and Mississippi -- in per capita income in 2011.
Pollina’s report graded states in 32 different areas of business attractiveness. Pollina gave Michigan’s economic development programs an “F.”
“By the time (Gov. John) Engler left office, the MEDC developed some really great incentive programs, but they didn’t keep up with the competition,” Pollina said. “Other states improved on Michigan’s programs.”
But a recent study done for the Michigan Economic Development Corp., found that the state is having success in trying to do “more with less.”
The April study by Angelou Economics in Austin, Texas, noted that cash incentives in Michigan Business Development Program respond to the trend of companies seeking upfront cash from states instead of longer-term tax breaks.
“These incentives garner heightened interest from many corporate clients, especially in these challenging economic times, when cost containment and initial start-up costs are of primary concern,” the study said.
It also cited Michigan’s new 6 percent corporate income tax, which gave businesses a $1.7 billion tax cut, as a “broad incentive” that is likely to add jobs and business investment.
The study found the MEGA program attracted more jobs than any other incentive program in the country.
But the effectiveness of MEGA and other state incentives under Granholm was offset by the state’s higher tax rates, according to the Angelou Economics study.
“With these two forces at odds with one another, MEDC, though perhaps armed with a larger set of incentives tools, found its efforts undermined by a less competitive tax environment,” the study said.
Another study commissioned by the MEDC in 2010, near the end of Granholm’s years in office found the state’s economic competitiveness “declined significantly” since 2002, despite its aggressive use of tax incentives.
SRI International ranked states based on seven criteria: human investment, financial resources, innovation resources, infrastructure, business costs, quality of life, and globalization and vitality.
Michigan made slight improvements in business costs, university and industry research expenditures, and success in obtaining federal grants to aid small businesses. But it declined in the other competitiveness measures, according to the SRI International study.
Granholm stepped up incentives in response to a frightening, decade-long decline among Michigan’s automakers, which had been driving the state’s economy for a century.
Snyder faced a different environment upon taking office in 2011. The automakers were churning out billions of dollars in profits again and employers were beginning to hire, albeit slowly.
The new governor’s strategy was to dial down tax incentives while attacking business climate issues, including taxation and regulations -- moves that have been supported by much of the business community.
Michigan made the second-largest improvement among the states this year in the Tax Foundation’s annual business tax climate ranking, jumping from 18th to 12th place.
Replacing the complex Michigan Business Tax with a 6 percent corporate income tax pushed its corporate income tax component of the broader ranking from 49th to 7th best in the country, according to the Tax Foundation.
But since taking office, Snyder also has created about a dozen incentive programs mostly aimed at small businesses and entrepreneurs.
Those programs are authorized to spend more than $50 million to commercialize technology at universities, help companies obtain financing and provide business services. Much of the money comes from the 21st Century Jobs Fund.
And the Snyder administration hasn’t abandoned tax incentives. Last year, it created the Small Business Investment Tax Credit, which offers “angel” investors in businesses a 25 percent credit on their personal income taxes. The program is capped at $9 million.
And companies with existing MEGA credits can continue to collect them by paying the old Michigan Business Tax instead of the new corporate income tax.
General Motors Co. recently was approved for an expansion of its MEGA credits from a maximum of 30,000 retained jobs to 33,000 jobs. The automaker’s business tax credits are worth more than $1 billion.
It is unknown what impact GM’s MEGA credits have on its state business income tax liability because the information is confidential.
State gets advice on incentives
Pollina, who authored a 2010 report for the MEDC on how it could improve incentive programs, said Michigan should offer more powerful programs to compete with other states.
Among his recommendations to the MEDC were to act faster on incentive requests from businesses and promote right to work, which outlaws labor contracts that require workers to pay union dues.
Pollina said Michigan might be able to blunt some of the controversy surrounding right to work if it were to allow local communities to create right-to-work zones.
The zones would be similar to Michigan’s tax-free Renaissance Zones, a program that Snyder has downsized. Neither the Granholm nor the Snyder administrations acted on that recommendation.
There has been a long-running controversy over whether economic development incentives do much to help job growth, regardless of how well they are crafted.
But every state has some kind of an economic development program, at least to try to prevent other states from luring its jobs away.
Pollina said there’s a more important reason for a state to have a powerful arsenal of incentives: global competition.
“One of things a lot of governors don’t get about incentives is that they are there to help level the playing field between you, Mexico, China, Brazil and Vietnam,” he said. “That’s the real competition.”
Rick Haglund has had a distinguished career covering Michigan business, economics and government at newspapers throughout the state. Most recently, at Booth Newspapers he wrote a statewide business column and was one of only three such columnists in Michigan. He also covered the auto industry and Michigan’s economy extensively.
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