(A version of the following Op-Ed was published in the March 15, 2005 Detroit Free Press. Beneath the Op-Ed is a discussion of the methodology employed to generate the figures upon which the Op-Ed was based.)
* * *
Tower Automotive declared bankruptcy recently, while the beleaguered Kmart Corp. appears ready to move all or part of its headquarters from Troy to Chicago. The trials of both businesses underscore the failure of state government’s Michigan Economic Growth Authority to successfully pick winners in the marketplace. As it nears its 10th birthday in April, MEGA’s track record isn’t something to celebrate.
MEGA was created in 1995 by former Gov. John Engler and the state Legislature to stimulate job growth through offers of special tax treatment to promising businesses that affirm in a contract that these tax breaks are necessary to their creating jobs in Michigan. The firms are chosen by MEGA’s staff and politically appointed board, and MEGA’s agreements with the firms include other incentives, such as property tax abatements from local governments. Through December 2004, more than $3 billion in potential state and local incentives had been offered to companies selected by MEGA — "potential," because firms can’t collect state tax credits until they provide the jobs.
Enter one of the recipients, Kmart Corp. Kmart received MEGA deals in 1998 and 2000, the second occurring less than 17 months before the firm declared bankruptcy. In exchange for sizable state and local tax incentives in the two MEGA packages, Kmart promised to keep its base employment in Troy at a minimum of 3,637 (the 1998 deal) and 4,084 (the 2000 deal).
By February 2003, Kmart’s employment levels had dropped to about 3,500, and a recent newspaper report suggests the job count might now be as low as 2,000. Nonetheless, by 2002, Kmart had already been granted more than $6 million in state tax relief for jobs that no longer exist.
In fairness, Kmart is an unusual case, since the company was actually able to claim the state tax credit before killing the jobs for which they had received the credit. But consider Tower Automotive, a builder of automobile components and suspension products.
Tower grew dramatically during the 1990s, often by acquiring other firms, such as Plymouth-based A.O. Smith Company in 1997. Smith Company was a recipient of a MEGA agreement, and its tax credit was transferred to Tower. MEGA afterwards offered Tower financial incentives to expand its operations in October and December of 2000.
In the first deal, MEGA offered R.J. Tower, a Tower subsidiary, an estimated $6.1 million in Single Business Tax relief and arranged for another $3 million in state and local incentives. This was supposed to result in 404 new jobs in Delta Township by 2003. Unfortunately, in February 2005, the firm employed a total of just over 200 at the Delta plant.
As intended, R.J. Tower has not received any SBT relief, because the company was not allowed under its MEGA agreement to let its base employment level in the state drop below 4,168, and it now stands at about 2,800. Nevertheless, Tower has collected local property tax relief from Delta Township as part of the overall MEGA intercession.
Tower and Kmart may, of course, come roaring back from their bankruptcy proceedings. And MEGA, like private-sector investors, can be expected to pick some losers as well as winners.
But MEGA’s success rate is pretty low. Based on state documents compiled since 1995, the Mackinac Center for Public Policy estimates that there are 127 MEGA deals that should have had fully employed facilities through 2004.
Of those, about 56 have managed to claim credits under the program, and only 10 can be shown to have directly created the number of jobs promised within the expected timeframe. Three of these ten, including Kmart, have since performed poorly.
The jobs count isn’t encouraging, either. The 127 MEGA deals were supposed to have created more than 35,000 jobs at MEGA companies by 2005. Based on a December 2004 MEGA document, however, only about 13,500 jobs exist at those companies — about 38 percent of what has been advertised to state taxpayers.
If Tower and Kmart don’t beat the odds in the coming months, these two firms will have needlessly received tax breaks for their "job-creating" ability. In the meantime, their competitors — with their own middle managers and minimum-wage employees to pay —will continue paying taxes while competing with Tower and Kmart.
Given this tilted playing field, and given MEGA’s track record these past 10 years, it may be time to reassess the value of this program.
(End of Op-Ed text)
* * *
Comments on Methodology
In attempting to estimate the number of MEGA jobs that would be directly created by companies chosen to receive MEGA incentives a number of assumptions had to be made that affected the totals. Tallying the MEGA program’s corporate successes and failures is in an inexact science. The following is an explanation of how we determined the numbers used in this document and why we chose to exclude a number of firms from our analysis.
Background
With each MEGA deal, the state produces documents that contain key data on each MEGA corporation and the impact its move or expansion may have in terms of expected employment The Mackinac Center collects these documents for each MEGA deal. The documents include what are known as "Briefing Memos" and "Economic Effects" documents. We also employ summary sheets produced by the state known as "All MEGA Projects" and a spreadsheet simply known as "MEGA Credits." An example of each can be viewed by clicking the appropriate hyperlink in this memorandum.
In each of the Economic Effects memos and All MEGA Projects spreadsheet there is a number listed for the "direct jobs" that a firm is supposed to create. In the Economic Effects memos the number usually comes with a description of the year by which the company is expected to create these jobs at the facility for which the credit was granted. These are the figures most often used by the state — and specifically by the governor’s office — when it publishes press releases publicizing how many jobs will be coming to a particular area of the state as a result of MEGA.
The Mackinac Center compared the total of these MEGA job forecasts through 2004 with the actual number of jobs that companies with MEGA contracts have submitted to the state when claiming MEGA tax credits.
We estimate that through 2004, 127 MEGA deals should have resulted in the direct creation of 35,821 jobs. This count excludes seven companies that were not expected to create all of their direct jobs until after 2004, yet already appear on the "MEGA Credits" spreadsheet — proof that they have at least created some of the jobs expected of them as part of the program. The companies are excluded in the interests of maintaining a consistent timeframe in the analysis, as well as recognizing the possibility that the firms may not retain these jobs long enough to meet the projected employment number for that facility on the original date projected. (Kmart is a case where job decline followed an initial creation of new jobs.)
From the "MEGA Credits" spreadsheet we compared the jobs shown in the "Average QNJ" column for the "Tax Year" with the year the MEGA companies were supposed to have created jobs directly by a certain year.
The MEGA Credits spreadsheet lists 69 MEGA corporations. Of these 69, only 10 can be shown to have created the number of jobs directly and in the timeframe that was expected. Three of those have subsequently performed poorly: Kmart Corp, Howmet Corp.[1] and Robert Bosch Corp.
Kmart Corp. declared bankruptcy and appears to be moving most of its headquarters operations to Chicago. Howmet won its MEGA deals in 1997 and 1998. Howmet went on to create and claim MEGA relief for 201 jobs in tax year 2001. Its project was then cancelled, placing it with Kmart and National Tech Teams as MEGA deals that resulted in tax relief granted to companies for jobs that no longer exist.
One could argue that the Robert Bosch Corp. does not deserve to be counted among underperforming MEGA recipients. According to the most recent version of the state’s "MEGA Credit" spreadsheet, Robert Bosch Corp was credited with 475 Average Qualified New Jobs by the state for tax year 2003. But since 2003, the company has laid off about 1,200 people at its Kentwood facility. According to a Robert Bosch Corporation spokesman, the current base employment (through February) in Michigan is 2,511.
This would appear to fall below the "minimum base employment level" of 2,655 jobs that the company must maintain in order to continue receiving MEGA credits. However, other Bosch-related facilities in Michigan may be included in the MEGA deal, in which case Bosch’s total employment figure for MEGA purposes may climb to 3,096. (Because of our difficulties in obtaining information from MEGA on a variety of basic definitional issues, we remain uncertain as to which count is appropriate for MEGA purposes.)[2]
Regardless, The Detroit News reported in August 2004 that 500 additional layoffs would occur at Bosch’s St. Joseph plant. When the St. Joseph layoffs are complete, the company may well fall below the "minimum base employment level" it needs to maintain by either one of the job counts (2,511 or 3,096). Even if does not, the fact remains that the company has not performed well in recent years.
We also felt compelled to exclude a number of companies among the 69 on this sheet when comparing the forecasted job totals to the actual job totals. These firms are listed below along with an explanation of the reason they were omitted.
Four of the corporations appear to have never received credits. They are CMI International; Dow Chemical Co.; Hess Industries; and National Tech Team (second MEGA award). Each of these entries is denoted with a remark like "don’t expect to qualify."
General Motors was excluded from the final "MEGA Credits" count because it was simply a "retention" credit. A retention package, as opposed to a "creation" package, offers MEGA credits if a company simply promises both to retain jobs that already exist and to make other qualified investments.
One Kmart Corp. deal is excluded despite the firm’s earning MEGA credits, because no record on the central "MEGA Credits" spreadsheet exists for 2002, the year by which this particular deal was supposed to have resulted in all of the projected new jobs created.
Subtracting the six deals above and the seven deals mentioned earlier, we are left with 56 MEGA corporations that have earned credit for jobs allegedly created as a result of their MEGA deals. Thus, of the 127 deals, only 56 — just 44 percent — have actually earned any credits so far. [3]
It should be noted that this figure may be understated due to the fact that some companies will work to delay making their Single Business Tax payments and thereby delay any relief they will get through MEGA once they claim credit. On the other hand, there is an important sense in which the figures are arguably overstated, since some companies that appear on the spreadsheet haven’t earned credits in years and may never do so again. Counting them as "successes" is, perhaps, generous, given that MEGA’s purpose is to generate meaningful job growth.
#####
Michael D. LaFaive is director of fiscal policy for 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.
[1] Howmet is sometimes identified as Sprayform Technologies, International in state documents.
[2] The MEDC has failed to answer a number of questions the Mackinac Center has posed in recent months.
[3] Even if the seven firms excluded earlier were factored into the count — an inconsistency, but one that would recognize a set of cases that are arguably "successes" — the tax credit claims rate would rise to just 47 percent.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
Please consider contributing to our work to advance a freer and more prosperous state.
