Author's note: In 1999 the Mackinac Center for Public Policy published a commentary entitled, "Picking Winners and Losers with Tax Credits Is Unnecessary and Unfair," analyzing the ineffectiveness of the Michigan Economic Growth Authority (MEGA). April 18 marks the seventh anniversary of MEGA's inception. The following is an update of the author's original work.
In April 1995, the state created the Michigan Economic Growth Authority (MEGA), an agency empowered to issue tax credits to companies that promise to expand in or relocate to, Michigan. The evidence from seven years of MEGA operation suggests that Michigan has enjoyed economic development in spite of MEGA, not because of it.
No company should be blamed for accepting a tax credit when it is offered, just as no individual should be faulted for taking a credit on his personal income tax form. But what makes these selective MEGA credits problematic is that they are both unnecessary and unfair. Businesses—and the economy generally—would be better off with a fair field and no favor, a climate of lower tax burdens for all and discriminatory treatment for none.
The Engler administration states that MEGA was created to compete against other states that offer attractive tax deals in an attempt to lure away Michigan jobs. Between April 1995 and December 2001 MEGA and the Michigan Economic Development Corporation (MEDC) together have extended tax credits and other incentives, respectively, on 137 projects. The tax credits alone are worth as much as $1.1 billion. Most of the MEGA projects also come with a host of other financial goodies: $52 million in job training subsidies, $112 million in Community Development Block Grants, $105 million in state education tax relief, and more than $700 million in local incentives (property tax abatements, for instance) for these lucky firms.
Local units of government are required to make some contribution to these deals in order to prove that they are committed to such development. One unit actually contributed recreational passes—subsidized municipal golf, for instance. How this could pass for "economic development" is anyone's guess.
Site Selection magazine ranked Michigan as the number one state for new and expanded corporate facilities in 1997, 1998, 1999, and 2000, respectively. The total number of new and expanded corporate facilities, according to Site Selection, was 7,539 over these years. Only 107 projects were MEGA-related. Many MEGA firms were required by law to acknowledge MEGA's role in their decision, or they could not receive the tax credits. In addition, even without MEGA deals, Michigan would have placed first in Site Selection's annual review of new and expanded facilities during every year it received awards from the magazine.
Statewide, an estimated 547,000 new jobs were created between April 1995 and December 2000. According to documents obtained by the Mackinac Center, fewer than 7,600 can be directly attributed to MEGA. That is only 1.4 percent of the total jobs created since 1995. Even those job claims may be inflated. How?
First, MEGA officials cannot prove that the companies involved would not have expanded or moved to Michigan without MEGA assistance. Nor can they prove that companies would not have "retained" their jobs in Michigan without special tax favors and other incentives. Second, they cannot prove that these new jobs were not filled with people who were already gainfully employed elsewhere in Michigan and just shifted to firms receiving MEGA favors. It should be incumbent upon the state to prove that these new jobs are being filled by the previously unemployed. Lastly, job forecasts may be overstated.
The economic analyses of MEGA's impact on the Michigan economy is performed by University of Michigan economists under contract with the state. It appears as though these economists do not include important data (the costs and benefits of local property tax abatements, for instance) in their computer-generated that would probably lower their estimate of real job creation in Michigan. Unfortunately, it is impossible to determine the degree to which such job creation claims are overstated because both the MEDC and the University of Michigan have refused to allow critical review of the forecasts.
The fact is that Michigan's job-creation environment has improved even if MEGA's claimed benefits are not considered—largely due to 11-plus years of the Engler administration's across-the-board reductions in taxes and regulatory burdens. The governor's commendable plan to phase out the Single Business Tax will enhance job creation even more.
MEGA is also unfair. Most of the firms chosen by the politically appointed MEGA board to receive tax credits have in-state competitors that do not receive tax credits or other special treatment. Lacks Industries Inc. of Grand Rapids is one example. Lacks produces automotive plastic molding and plating. In 1996, the company was awarded $8,625,000 in MEGA tax credits, abatements, and "workforce development" money. That translates to $43,125 per job the firm is supposed to directly create. As part of its application, Lacks submitted to MEGA a "Confidentiality Form" listing five reasons to keep certain data secret from the public. Three reasons noted that making public certain data would give an "unfair advantage to our competitors."
But MEGA credits themselves give unfair advantages to the firms chosen to get them. There are currently 1,365 companies in the state with whom Lacks shares Standard Industrial Classification (SIC) codes. SIC codes, vital to MEGA's computer-driven job forecasts, classify businesses by industry and economic activity. Businesses within the same SIC code produce similar if not identical products and also compete with one another to attract workers.
This means that 1,359 Michigan businesses in the plastic products industry are forced to compete against Lacks and five other firms that have received special government favors. Also, since Lacks received its MEGA credits, approximately 159 businesses in the same SIC code have either started up or moved to Michigan, all without help from MEGA. So, while state government is busy picking winners and losers, the vast majority of firms are working to win on their own.
Michigan has created jobs and attracted firms at record levels in the past seven years, but MEGA is not the reason why. A better explanation is the state's 30-plus tax cuts totaling more than $25 billion over the past 11 years, combined with regulatory relief and a healthy national economy during much of that period.
The MEGA program is unnecessary and unfair. It is time to make it part of Michigan's history, not its future.
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