James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy. Gilda Z. Jacobs is the president and CEO of the Michigan League for Public Policy.
In order to save lives and flatten the curve in a worldwide pandemic, Gov. Whitmer’s emergency orders shut down portions of the state economy, and policymakers will have to deal with the effect this has on the budget. As part of that effort, the governor may want to ask Ford, General Motors and Fiat-Chrysler to reduce the money they get from the state as part of old economic development deals.
The state’s budget has already been approved, but it was based on revenue projections from before the COVID-19 pandemic. Because of the virus, there will be a difference between revenue and spending for the immediate year, and it will be up to the Legislature and the governor to work together to address the difference.
The governor has already signaled this need by making vetoes in a recently passed supplemental budget bill, ordering temporary layoffs of state workers, and announcing that she and her senior staff are going to take a pay cut. But as the state does its part, a bigger and better way to reduce government spending would be to turn to some of the private sector businesses that are large recipients of public taxpayer dollars.
Ford, GM and Fiat-Chrysler all received large deals from the state during the 2009 recession, where they would receive money from state taxpayers based on how many people they employed in Michigan. The deals were worth $6.8 billion to be paid over 20 years, provided that the companies employ the agreed-upon numbers of people.
That is only an estimate, however. How much they actually receive from the state treasury is currently considered confidential taxpayer information, though legislation has been introduced to change that. These three deals account for the bulk of payments which cost $600 million per year, according to state reports. That makes these business subsidies a larger expense than the Department of Natural Resources, which spends only $356 million in state money.
The payments to the companies may already decline without further action. The auto industry is hurting like many others right now, and the automakers have laid off employees and closed factories during the epidemic, which can lower the amounts they receive from the state. But the shutdowns are not expected to last forever, and company managers are trying to reopen plants with appropriate safety measures.
We all know that thousands of Michigan jobs depend on the auto industry, and we want to see auto manufacturers come out of this crisis successfully. But as lawmakers recognize revenue losses, this is an opportunity to reconsider their priorities. These business tax credits for the Big Three automakers have already been willingly renegotiated by the companies, and with the COVID-19 crisis and its impending fiscal impact still in effect, these state subsidies may need to be re-evaluated.
In general, taking money from residents to give to select businesses is unfair, ineffective at creating jobs and expensive to the state budget. And at the very least, the state should add more transparency and accountability to its business tax credits program, making more information available on how much money is being spent — and the impact it is or isn’t having on job creation.
At least 20 percent of Michiganders are now out of work and making household budget cuts. Government managers at the state, school and local levels have started to struggle with the fiscal effects of the pandemic and stay-at-home order. They’re considering ways to stretch dollars further, reprioritize, and they may try some more blunt ways to save money, like pay cuts, hiring freezes and layoffs.
Transferring hundreds of millions from the state treasury to business subsidy deals is something that lawmakers and the governor should revisit. There are better uses for the money.