What Transparency Should Look Like at the MEDC (but Doesn't)

The award of a $9.1 million Michigan Economic Growth Authority tax credit to a convicted embezzler has raised serious concerns about the lack of transparency in MEGA and its parent agency, the Michigan Economic Development Corporation. Specifically, how many of the agency's targeted tax break and subsidy deals have been awarded on the basis of fraud?

The concerns could be alleviated by two transparency/due diligence reforms that would protect the state (and taxpayers) from fraud.

First, the MEDC already has the authority to verify whether the beneficiaries of its deals are truthful. Each particular deal involves a written agreement - essentially a contract - signed by company officials. These typically include a provision allowing the MEDC to audit the company's job claims figures, which are the basis on which most tax credits are granted.

Whether the MEDC has ever exercised this authority is unknown. The need to establish procedures for regularly checking up on its beneficiaries should be obvious. The agency often claims that its tax credits are not awarded unless jobs are actually created, but unless a company's jobs claims are investigated there is no way to know if they are true. The audits should be done by an independent auditor, or by the Legislative Auditor General.                         

Second, the state should post on the Internet a database of all its awardees, the benefits each received, and the outcome of each deal. This would allow citizens to "follow the money" of these programs, and see their actual cost in either foregone taxes or subsidies, either cash or in-kind services.

The contrast between the reform measures described above and the agency's actual current practices is stark. The announcement of the embezzler's tax break deal was typical of the fanfare with which the MEDC promotes the job promises of its awardees. In this case, the felon actually shared the dais with Gov. Jennifer Granholm, who lauded the putative benefits his "enterprise" would provide. However, the MEDC is largely mute regarding if and when its awardees eventually start hiring.

Related to all this is another important factor. Almost every MEGA deal is accompanied by a raft of other targeted tax breaks and/or subsidies provided by local governments or other state programs. However, it is very rare for the MEDC to actually publish a listing of these for any particular project. Yet without this information it is impossible to precisely assess the costs and benefits of particular deals.

The embezzler's tax break/subsidy deal has embarrassed this state's "economic development" mandarins. In response, they have promised to do more background checks. It has also generated announcements of "hearings" and "investigations" from politicians. Whether politicians' hearings and bureaucrats' promises are intended to provide a smokescreen behind which business-as-usual continues or the first step in real reform remains to be seen. The real issue is not whether the occasional criminal wins an "incentive" deal, but the lack of transparency that characterizes this entire operation.

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