02/09/2003
$1.4 billion business program gets minimal payback in jobs
LANSING/Detroit News -- Michigan's main job creation program is up for renewal this fall amid criticism that it has handed out lucrative tax breaks to a small group of companies for minimal overall economic benefit.
A Detroit News review of the Michigan Economic Growth Authority (MEGA) tax credits found:
Since the program was started eight years ago, 176 tax breaks have been granted to businesses -- ranging from small, fledgling high-tech firms to the auto industry giants -- in exchange for the promise of some 46,000 jobs.
Credits awarded to these companies will total $1.38 billion over their duration, which can be up to 20 years. That would be enough money to replenish the cash-starved state's depleted rainy day fund, foot most of the bill for state aid to higher education for a year, or fully fund the Medicaid health care program for the poor.
Michigan-based multinationals such as the Big Three, Dow Chemical and Delphi Automotive were among the companies that received the 15 most lucrative tax breaks, adding up to $651 million, or nearly half the total amount of abatements approved. Critics question whether these companies would have bolted to other states without the credits.
The authority's policy says companies that get credits must be financially sound, but 15 abatements were approved but never implemented mainly because the firms went out of business or couldn't produce the minimum 75 jobs. Kmart is likely to lose its credits next year because of layoffs, but already has collected more than $6 million in tax breaks it won't have to pay back.
Of the 400,000 new jobs added to company payrolls in the state between 1995 and 2000, only 10,787, or less than 3 percent, were jobs directly created by authority-aided projects.
Critics say these numbers suggest the authority is dabbling on the fringes of the state's job creation efforts. And state officials who operate the program concede that they're in the tax abatement game mainly because they're afraid to quit -- awarding tax breaks has become a high-stakes competitive game among the states.
"It's an expensive way for a state to bring about a very modest increase in job creation," said Peter Fisher, University of Iowa professor of urban and regional planning, who has written extensively on state economic development programs.
"If most of the credits go to firms that would have located there anyway, which I suspect is the case, then you've blown a lot of money for nothing."
States competitive
Gov. Jennifer Granholm and officials at the Michigan Economic Development Corp., which oversees the tax credit program, say the state needs to extend the authority.
"I'm interested in keeping MEGA or a version of it, because we have to compete with other states around us and all over the country," Granholm said. "If you're not offering any package to come here, why would companies choose to move here? Companies are very pragmatic."
James Donaldson, vice president for Michigan business development, said that in a perfect world, all states -- and foreign countries -- would eliminate their tax break programs and compete on the basis of general business climate factors. But it would be a mistake for Michigan to unilaterally disarm, he said.
"What MEGA amounts to is discounting to gain market share, or to keep customers," he said. "It's a business technique with a long history."
State-to-state number comparisons are difficult, says Miles Friedman, president of the National Association of State Development Agencies, because the nature of the state abatements and corporate tax systems is so varied.
But Michigan is seen as having a relatively strong program because it tries to ensure that companies are living up to job creation requirements.
"In most states, the tax credits are like entitlements," Fisher said. "If you locate in a qualified area, you get the credit."
Michigan also is one of only a few states that require qualifying companies to provide business cost information comparing all sites they're considering, here and in other states.
"But the corporation holds all the cards," Fisher added. "They know what their decision really hinges on. States have to guess and take what firms tell them at face value."
Rate cuts favored
Business leaders point out that the state could wipe out the single business tax or the personal property tax on equipment and capital for about the same $1.4 billion price tag on abatements. Such a general tax cut would be a better way to keep and attract businesses, they say.
"MEGA grants are provided to only a minuscule percentage of businesses," said James Barrett, president of the Michigan Chamber of Commerce. "It's logical that if the tax climate needs to be more competitive, the rates of taxation for all businesses should be reduced."
Michael LaFaive, policy analyst at the Mackinac Center for Public Policy in Midland, a free market think tank, said the actual tax cost for authority projects will be $2.5 billion when local property tax abatements, training grants and other forms of government assistance are tallied.
"The MEGA board does not have the authority to grant these extra subsidies, but it helps arrange them," LaFaive said. "This all amounts to corporate welfare."
David Hollister, director of the state Department of Consumer and Industry Services, counters that state tax abatements have "tended to be the critical link to making a deal go." He was mayor of Lansing when the credits were used to help coax General Motors to build two auto plants there.
Abatement caps
Michigan offers two kinds of business tax credits: One goes chiefly to manufacturing and research and development firms, the other to high-tech companies. The state is limited to 25 regular awards a year and 50 high-tech credits. On average, 17 to 20 applications are approved each year.
Only 57 companies are getting the authority credits. The others are somewhere in the pipeline. It usually takes at least two years to go from project approval to receiving the abatement.
State officials note that the projects are expected to have a $4.5 billion net impact on the state's economy, according to a formula used by the University of Michigan that measures direct and spin-off effects.
About 90 percent of projects approved by the authority's board are to retain businesses already operating in Michigan.
"It's mostly a business retention tool, used to help Michigan companies grow," said Mike Pohnl, managing director of development finance for the Michigan Economic Development Corp.
Firms applying for the credits must swear in writing that but for the abatement, they'd pack up and take their projects to another state. Applications include comparative information about business costs in Michigan and the other states they're considering.
"That but-for clause is very open to manipulation," contends Kenneth Thomas, political science professor at the University of Missouri and a national expert on business incentive programs. He estimates there is more than $50 billion worth of government subsidies to businesses across the country.
"Most of these kinds of programs would be better targeted to poorer areas," Thomas added. "Otherwise it becomes a direct subsidy, a giveaway to companies for something that would have happened anyway."
Authority's beginning
The Michigan Economic Growth Authority was started in 1995 after the state lost a few major projects to other states that were offering big tax breaks, including North Star Steel and Alcoa to Ohio, and Mercedes and BMW to Alabama. Some states offered free plants and job training in addition to tax credits.
Michigan officials decided it would be more efficient to provide single business tax reductions than giving away up-front cash or infrastructure improvements like some Southern competitors were doing.
Autocam Corp. won a tax credit in 1997 to build an auto parts factory in Marshall. Warren Veltman, chief financial officer for Autocam, said the tax break "was a huge factor for us" in picking Michigan over South Carolina.
But he conceded that Michigan had a built-in advantage because it's only 80 miles from the corporate headquarters in Kentwood.
"That's what put us over the edge in Michigan," Veltman said.
Fred Gassaway, who is on a South Carolina team that gets involved with all economic development projects in that state, said he doesn't recall Autocam making a bid to locate there.
"But sometimes companies we work with use code names," he said.
Autocam was supposed to employ 200 workers by now, but has only about 95 on the payroll.
LaFaive of the Mackinac Center questioned whether Four Winns Boats, which got a tax break for a boat factory in Cadillac two years ago, seriously considered building in Florida as the company claimed on its application.
"Michigan has more registered boats than any other state," LaFaive said. "They have the same incentive to operate in Michigan as do tier-two auto suppliers: to be near their customers."
Four Winns president John Anderson did not return phone calls, but a memo from the authority's staff to the board noted that five of the company's top 10 dealers are in Michigan and Wisconsin.
The boat maker promised to employ 900 by this year. There are 500 to 600 people on the job.
Lawmakers back program
Despite some concerns about the tax abatement program, lawmakers say they're likely to extend it. The winning argument, legislators say, is that Michigan can't afford to bypass a tool other states are using at a time when Mississippi, South Carolina, Alabama and Great Lakes neighbors are sending teams here to wine and dine homegrown auto suppliers.
"MEGA's not perfect, but it has added some benefit to the state," said Sen. Valde Garcia, R-Howell, chairman of the Senate Appropriations Subcommittee on Commerce-Labor and Economic Development. "The reality is we have to compete not only with other states but globally."
Fisher at the University of Iowa, sees the flip side.
"Of course you can unilaterally disarm when you're talking about an incentive -- like the MEGA tax credit -- that isn't very effective anyway," he said.
You can reach Mark Hornbeck at (517) 371-3660 or mhornbeck@detnews.com.