Alice in Subsidy Land

With Director Tim Burton's "Alice in Wonderland" set to open in movie theaters across America, it's hard not to compare the literary symbolism in Lewis Carroll's masterpiece to real world events. For example, the Michigan Senate Finance Committee met recently to discuss creating a "Michigan Promotion Fund" and allocating taxpayer dollars to it for the purpose of subsidizing Michigan's private, for-profit tourism industry.

This tumble down the proverbial rabbit hole is the umpteenth "jobs" adventure Gov. Jennifer Granholm and the Michigan Legislature have forced taxpayers to accompany them on. Not only have Lansing politicians' stories of promised job creation grown predictable and tiresome, so has the naked reality of a tourism industry trying to boost its bottom line by feeding at the public trough. The key to Michigan's economic rescue does not lie in crony capitalism — these cozy relationships between government and business — but rather in a truly free market where firms are permitted to sink or swim on their own merits, not on what they can wrest from taxpayers.

The current attempt to grab more taxpayer dollars is intended primarily to help promote Michigan as a tourism destination. The reader may be familiar with the $30 million Pure Michigan advertising campaign, which had been funded with revenues from the "securitization" of tobacco revenues (that is, by borrowing against this revenue stream). With that honey pot now depleted, Travel Michigan — the state's promotion arm — along with the state's tourism industry, are lobbying hard for a permanent source of revenue. A proposal was made to tax rental cars at airports, but last week the Senate chose instead to offer $9.5 million in General Fund monies.

There are a number of problems with this approach. First, and most offensive, is the refusal of the industry to directly fund with its own resources the advertising campaign from which it directly benefits. In the industry's own 2007-2011 strategic planning report, titled "Michigan Tourism Strategic Plan," the authors write:

There is absolutely no industry support for a broad-based industry self-assessment approach to generate sufficient monies to fund Travel Michigan. Last year, TICOM (Tourism Industry Coalition of Michigan) created a special task force to explore such an approach. Without exception, representatives from a variety of tourism industry segments indicated their members and/or Boards would strongly oppose such an approach.

In other words, tourism industry members determined that this type of promotion does not provide a worthy return on investment if they have to pay for it. They are happy, however, to fund this campaign by depriving other taxpayers of their own precious resources.

Last week in the Lansing-based Gongwer Michigan Report newsletter, Steven Yencich of the Michigan Lodging and Tourism Association claimed that the Mackinac Center took this argument out of context, saying "the key reason members objected to a mandatory instead of voluntary tax is because it would come on top of a 6 percent use tax for overnight hotel stays and a 2 percent to 5 percent 'bed tax.'"

There's nothing "out of context" in our characterization - it simply demonstrates the industry's dislike of new levies imposed on top of existing ones. Yencich also argued in Gongwer "that that level of taxation would pass uncompetitive costs onto the tourist, and likely decrease their number of visits to Michigan ..."

This is precisely the problem with letting the tourism industry impose its taxing will on other industries - these too will suffer from a "level of taxation" that makes them and their clients less likely to do business here. The problem is that the tourism industry just doesn't seem as concerned about the burdens faced by other business interests or consumers.

Second, this government program is unlikely to create net new jobs. It simply robs taxpayer Peter to pay industry Paul. The state and the tourism industry are taking money from many people and giving it to a few. This doesn't create wealth; at best it simply redistributes it.

Lastly, this program is unfair to those with no direct tie to the tourism industry. Why is it OK in the Legislature's collective eye to promote tourism, but not some other group of businesses?

To justify this latest government intrusion in the marketplace, Travel Michigan, an arm of the Michigan Economic Development Corp., has acquired and released an analysis of its tourism promotion efforts that — wait for it — shows huge returns on "investment" in state tourism promotion. The MEDC is the state's official jobs department and responsible for administering most state economic development programs.

This is standard operating procedure for government and special interest groups across the country. One might say that consultants operate cottage industries that churn out reports showing "x" government intervention produces "y" huge returns.

For example, I pointed out last year that the MEDC funded a study of the Michigan film incentive that showed the program was a "hit," but the study failed to factor in any of the program's costs. Doing so would have dramatically reduced the number of jobs allegedly created by the program. The Mackinac Center twice called on state officials to re-run the analysis with actual costs included, but their response has been silence.

Another MEDC-funded study argued that if the state were to subsidize broadband deployment it could add a whopping 500,000 new jobs to Michigan's employment rolls and $440 billion in output to Michigan's state Gross Domestic Product. Naturally, the agency used this study as an excuse to provide the subsidy. Unfortunately, the document was based on wild assumptions; something the author admitted was "unique" and "arbitrary." The broadband initiative, attempted during Gov. John Engler's administration, was terminated after losing $14.5 million.

Detroit Super Bowl organizers also hired a consultant who predicted large economic impacts but who — it was later discovered — also conveniently left some municipal costs associated with hosting the game out of his computer model. Including them would have also reduced the purported benefits of hosting the Super Bowl.

The Mackinac Center is not alone in finding inflated claims from economic development consultants. In his 2006 paper published in the Journal of Travel Research, "Economic Impact Studies: Instruments for Political Shenanigans?" scholar John L. Crompton writes that, "Most economic impact studies are commissioned to legitimize a political position rather than to search for economic truth." He added: 

Economic impact analyses have an obvious political mission. They invariably are commissioned by tourism entities and usually are driven by a desire to demonstrate their sponsors' positive contribution to the economic prosperity of the jurisdiction that subsidizes their programs or projects. The intent of a study is to position tourism in the minds of elected officials and taxpayers as being a key element in the community's economy.

Based on all of this Michigan-specific experience and history, it is perfectly reasonable to question the state's announcement that their consultant has found that the Pure Michigan campaign returns $2.23 for every $1.00 spent.

Also troubling is the fact that the MEDC has only released a two-page summary of the report, informing the press that back-up details explaining how its findings were calculated may not be available for another 60 days. Lastly, a survey of the consultant's web site found no reports for public entities that actually showed a negative return on investment. Does that not seem at least an implausible event? Has every tax dollar spent on tourism promotion produced a positive return? This is a record private ad agencies would kill for.

In a telephone call with the MEDC-paid consultant, I learned that he had indeed found a negative return on one specific occasion - and his client promptly fired his company after this result was divulged. This burnishes the consultant's salemanship credentials but once again shows that governments may not be seeking truth but only data that supports their programs.

There is nothing new under the economic development sun. Governors back to Kim Sigler in 1947 have tried to "diversify" Michigan's economy with their own programs or departments. Governors outside of Michigan have done likewise. Hundreds and hundreds of scholarly economic development studies have come to the conclusion that such programs are basically ineffective or the costs of the programs outweigh their intended benefits. Read a review of the literature here.

In all likelihood, programs like state tourism promotion have a neutral, if not negative, impact on economic development because they simply redistribute taxpayer and investor dollars from one area to another. Worse, the programs are frequently run by expensive bureaucracies that effectively take a "cut" in the form of pay and overhead.

There is an analogy from Alice in Wonderland that fits this government largesse and its good intentions rather well. The March Hare (picture government) oils his watch with butter and "gums up" the works. "It was the best butter," he laments, and the Mad Hatter remarks that "some crumbs must've gotten in."

While some economic crumbs may interfere with the efficacy of these economic development programs, it is more likely that the endeavors themselves gum up the works given the theoretical, practical and empirical reasons associated with them. Elected officials should be wary of another expensive program. Voters are restless and do not need yet another reason to shout at Lansing politicians, "Off with their heads!"

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Michael LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.