The Michigan Economic Development Corp., a quasi-public agency that administers state economic development programs, has been in the spotlight lately due to the state's bad economy and a number of legislative proposals under consideration.
In this report, we describe the organization of the MEDC, enumerate its many programs and review the performance of several of them — such as the Michigan film incentive, the state's now-defunct Broadband Development Authority and the Michigan Economic Growth Authority. MEGA is the MEDC's flagship tax credit vehicle for "creating" jobs. We also describe the ongoing tax money used to support the MEDC.
MEGA is a 14-year-old authority that offers state business-tax credits to select companies that plan to invest in business facilities in Michigan and create or retain jobs here. In order to claim the tax credits, companies must provide a minimum number of jobs as detailed by state law. The MEDC also frequently arranges for MEGA recipients to receive additional incentives, such as state education tax abatements, job training subsidies or local property tax abatements. Some of these incentives may be awarded immediately, regardless of whether the business has created jobs at the facility.
In this study, the authors explore MEGA data to see whether actual job creation meets the MEDC's estimates. The authors inspected credits awarded from 1995 to the end of 2004 and found that while MEGA deals were expected to produce 61,043 jobs, only 17,971 were ultimately created. Hence, the actual job count was just 29 percent of the expected total — less than one-third. In practice, an announcement that 1,000 direct jobs are expected at a MEGA facility translates into 294 actual jobs on average.
To analyze MEGA's impact in greater detail, the Mackinac Center commissioned an analysis of the program from Michael Hicks, a Ph.D. economist at Ball State University. This "shift-share" analysis was designed to evaluate the relationship between a county's manufacturing employment and the dollar value of the MEGA tax credits actually awarded to companies in that county.
Hicks calculated changes in manufacturing employment peculiar to Michigan counties from 2001 to 2007. He then performed a regression analysis of these county-specific manufacturing job changes against the dollar value of the MEGA manufacturing tax credits to businesses in each county from 1995 through 2000.
Hicks was able to find a statistical relationship between MEGA manufacturing tax credits and county manufacturing employment, but the relationship was negative. Hicks reports that from 2001 to 2007, every $1 million in MEGA manufacturing tax credits awarded in a county was associated with the loss of 95 county manufacturing jobs. While the statistical model cannot imply causation, it does strongly indicate that MEGA credits are not working to improve manufacturing employment.
MEGA invites scrutiny because of its size, influence and design. The program has offered more than $3.3 billion in Michigan business tax credits since its inception.
This study also addresses existing programs such as the Michigan film incentive, which is part of the Michigan Film Office administered by the MEDC. The Michigan Film Office was formed in 1979 to "assist and attract incoming production companies in the entertainment industry, including film, TV and music."
Claiming a need to better compete with other states and create jobs, legislators passed a package of 15 bills in 2008 to provide more generous film tax incentives. The most significant portion of the legislation amended the Michigan business tax law to allow film production companies to earn tax credits of up to 42 percent of the companies' spending in Michigan. The credits are refundable, meaning that the state issues the company a check for the difference if the company's Michigan-related spending exceeds its tax liability.
The Michigan Film Office has since stirred controversy through its lack of transparency and through its publication of a distorted impact analysis of the film incentive. While the analysis forthrightly estimated that in 2008 the film incentive created just 1,102 full-time equivalent jobs — an insignificant number in a state the size of Michigan — the report then excluded costs of up to $48 million in calculating the program's benefits. Including these costs would likely have reduced the already small number of jobs ascribed to the incentive. Indeed, it may have even led to a jobs figure that was negative. In other words, the program may actually destroy jobs.
This study also describes the Michigan Broadband Development Authority, a major MEDC economic development failure that led even the program's early supporters to express their regret. Proponents initially promised 500,000 new jobs between 1999 and 2009 if taxpayers and consumers of Internet services would permit a tax increase to help the government fund greater deployment of high-speed Internet access. In 2001, the Michigan Legislature created the authority, but ultimately rejected the Engler administration's attempt to hike telecommunications taxes, instead turning to floating bonds to pay for their vision.
The program almost immediately began losing the money it had loaned to facilitate broadband deployment. The MBDA was ultimately absorbed by the Michigan State Housing Development Authority and dissolved in July 2007. MSHDA forgave the $14.5 million in loans it made to the authority.
The failure of economic development programs are not limited to Michigan, nor are criticisms. This study provides a short literature review of vital publications on the subject, including a meta-review of economic development programs and an analysis of the politics of economic development programs by both University of Michigan and Michigan State University professors. The report from MSU professor Michael Mintrom and graduate student Lucinda Ramsey reads in part: "Are [politicians] really trying to attract new business development or are they engaging in maneuvers designed to please current state business interests and voters? The need for such questioning becomes even more acute when we find that, while these policies are often introduced to the chorus line of 'jobs, jobs, jobs,' there is little evidence to show that these direct financial incentives actually have any impact on state employment levels."
In a paper titled, "Why State and Local Economic Development Programs Cause So Little Economic Development," University of Michigan economist Margaret Dewar argues that too many analyses of government economic development programs fail to consider the programs' political nature: "Economic development programs are not designed and implemented in ways that can achieve their goals." She then goes on to discuss why this is so: "Administrators must run a program to garner support of legislators, a governor, and opinion leaders for program survival."
Ineffectiveness and the presence of politics in government economic programs may not be startling. But the likelihood that they are intrinsic to such programs is a different matter, especially given the state of Michigan's economy. Consider just how badly the state has fared during the decade in which the MEDC has existed.
Michigan was ranked 16th among the 50 states in per-capita state GDP in 1999, the year the MEDC was formed. The state has since tumbled to 41st.
From 1999 through 2008, Michigan was the only state in the union with a negative state GDP growth rate.
Michigan's per-capita personal income ranking has tumbled from 16th to 34th since 1999 and is now 11.2 percent below the national average, the lowest point it has reached since the start of the Great Depression, when such record-keeping began.
In light of all this there are still those who labor under the mistaken belief that Michigan's economy and its employment prospects might actually be worse if it were not for the work of very highly paid MEDC workers dolling out a tax incentive here and a job training subsidy there.
This study makes a number of recommendations regarding this expensive and counterproductive program. Some of them are listed below:
- Eliminate the Michigan Economic Development Corp. This department has, by all indications, failed to create new and retain existing jobs for Michigan workers. Killing it and the programs it administers outright would conceivably and directly save tens of millions of dollars that could be used to balance the budget without raising taxes.
- Short of outright elimination of the MEDC, state lawmakers should eliminate the Michigan Economic Growth Authority and Michigan film incentive programs.
- Mandate a full performance audit of each MEDC program. In addition, the Office of the Auditor General should provide a tally of "direct jobs promised" vs. "direct jobs delivered" by year, using independent sources wherever possible, for each program reviewed.
- Require that MEGA use only direct jobs "created" as a measure of a program's success or failure. The MEDC and other state agencies should be prohibited from using hypothetical assertions of spin-off jobs.
- Completely eliminate the "refundable" part of the film incentive tax credit. Tax credits against actual business tax liability are a better tack than disbursing cash from the state Treasury.
The latter, lesser reforms could conceivably shed light on the performance of some MEDC programs and stimulate helpful debate on their effectiveness. But policymakers should reflect that it is unlikely many Michigan individuals and businesses would look at the MEDC's track record and choose to finance the corporation's operations with their own money if given the choice.