MEGA Tax Credits Are Not Without Cost

Last August, the Mackinac Center released a study critical of the Michigan Economic Growth Authority. This was the second of two rigorous analyses of MEGA by the Center, and both found that — at best — the program has had no net positive job creation impact. Indeed, the latest results suggest that the program may actually destroy jobs. Not surprisingly MEGA apologists have bristled, and when compelled to respond, have done so with what could charitably be called a series of untruths about the program.

For example, in recent months several state officials, including Greg Main, head of the Michigan Economic Development Corp., and MEDC spokeswoman Bridget Beckman, have argued that MEGA is a costless "performance-based" program. They dismiss criticism on the grounds that, if the company doesn't create jobs then it doesn't collect tax credits. The cost to the state is nothing, so why worry?

The University of Michigan is under contract with the state and largely responsible for making economic forecasts associated with each MEGA deal, done primarily by economist Don Grimes and two others. In October Grimes echoed Main and Beckman, telling reportingmichigan.org the following:

"And what the Mackinac Center failed to acknowledge is that if the firms getting the incentives only create 30 percent of the jobs they planned on, then they will only get 30 percent (or less because frequently there is a trigger minimum) of the incentives they were originally offered."

Grimes is incorrect. Our 2009 study states:

"In particular, MEGA officials would note that the credits are not awarded unless the jobs or investment actually appear, reducing the possibility that any poor choice they might make in awarding tax credits will ultimately damage the economy or state tax revenues."

Grimes, Main and Beckman know, or should know, that a more nuanced treatment of MEGA is necessary to fully appreciate how misleading the "MEGA is costless" assertion really is.

First, every economist is taught early on that everything has a cost, even if it's just an opportunity cost. In the case of government programs that pick a handful of "winners" for discriminatory tax breaks, the foregone opportunity may be to provide across-the-board tax relief for more than 100,000 Michigan businesses carrying the burden of the Michigan Business Tax and its surcharge.

Second, MEGA defenders fail to acknowledge that companies have collected on tax credits earned for jobs that they later eliminate. Kmart Corp. is a prime example. This firm collected more than $6.1 million in tax breaks before trimming its payroll and leaving the state. (Note: Less than 17 months before the company declared bankruptcy, University of Michigan economists predicted that Kmart's second MEGA deal would create 753 jobs through 2013.)

Third, until a 2008 amendment repealed the provision, every MEGA deal had to include additional tax breaks or subsidies from local governments. In Kmart's case, the value of local incentives was estimated at some $3 million and reportedly included landscaping work.

Fourth, MEGA and MEDC bureaucrats and political appointees frequently arrange other state-level incentives — such as job training subsidies. These funds also risk being wasted if a company "creates" jobs only to eliminate them later, or if the other incentives are simply ineffective in their own right.

Fifth, the notion that if a company doesn't perform it doesn't earn the tax credit can be false depending on the definition of "perform." On two occasions the Mackinac Center has detailed how MEGA simply amended original deals to accommodate changes and so better ensure the "success" of tax credit recipients.

Sixth, the bureaucrats paid to staff programs like MEGA don't work for free. Money for their salaries and benefits is taken from taxpayers, and is a cost imposed on everyone regardless of whether MEGA companies "perform."

The MEDC's economic consultants, of all people, should recognize this. State records indicate that the MEDC paid the University of Michigan $744,000 to provide computer-aided impact analysis of MEGA deals between January 2001 and through September 2008 The 2007 purchase order indicates that $79,808 was budgeted for the salary and benefits of three researchers.

Lastly, research shows that states with a great deal of the "rent seeking" activities that are the lifeblood of programs like MEGA have slower economic growth than states with fewer of these. Yet all these costs are conveniently ignored by those who earn a living making excuses for failed jobs programs.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.