Courts Limit Selective “Economic Development”

(The following article first appeared in the Fall 2004 edition of Impact.)

For years Mackinac Center economists have identified politicized economic development schemes as one of the reasons jobs flee the state. Two recent, wide-reaching court decisions suggest new legal boundaries for government industrial policy — good news for the people of Michigan.

The first decision, by a unanimous Michigan Supreme Court in July, was an unqualified victory for property rights and a renunciation of more than two decades of government takings of private land for “economic development.” The court had ruled in 1981 that it was a permissible “public use” for government to exercise its powers of eminent domain to condemn private homes, businesses and churches in Detroit’s “Poletown” neighborhood for the benefit of General Motors.

Officials in other states began citing the Poletown precedent, taking property from their citizens to give it to more powerful ones. But the economic results were usually poor. The Poletown plant never lived up to its promises of eco¬nomic growth, and the former residents remained permanently dispossessed.

The most obvious problem with Poletown was that it invited abuses, justifying practically any taking of private property if government could posit some economic benefit. Supreme Court Justice Robert P. Young Jr. wrote, refreshingly, “We must overrule ‘Poletown’ in order to vindicate our constitution, protect the people’s property rights and preserve the legitimacy of the judicial branch. ...”

The Mackinac Center, in a brief submitted to the court with the Washington, D.C.-based Institute for Justice, argued for precisely this outcome.

In the second decision, the U.S. 6th Circuit Court of Appeals in September ruled that Ohio’s targeted business tax credit program violates the “commerce clause” of the U.S. Constitution, a point of view elaborated earlier on the Center’s Web site (see “Are Targeted Tax Incen¬tives Constitutional?”). The decision opens similar programs in Michigan and other states to legal challenge.

The Michigan Economic Growth Authority is our state’s version of the imperiled Ohio program. Set up in 1995, MEGA has granted more than $1.7 billion in Single Business Tax credits for over 200 select firms that promised to create jobs.

As Mackinac Center Fiscal Policy Director Michael LaFaive has carefully documented, MEGA has not made Michigan a jobs magnet. MEGA’s cost has made broad-based tax cuts more difficult to enact, and MEGA is unfair to the thousands of businesses that do not receive tax breaks, but must compete with companies that do.

When our friends ask why a Mackinac Center economist would oppose MEGA tax breaks, we explain we’re for tax breaks for everyone, not just the few firms chosen by bureaucrats. No company can be blamed for pursuing every legal tax advantage, but we have yet to talk to a CEO who would not prefer predictable, lower taxes across-the-board, with no special favors for anyone.

It’s a shame that it took court action, rather than legislative review, to rein in clearly flawed economic development schemes. But these decisions give Mackinac Center scholars new opportunities to remind lawmakers that economic growth is a result of government performing limited functions well — and not the product of evermore ambitious government economic development schemes.