Federal-Mogul Lesson: Get Rid of the SBT and Fix the Fundamentals

When will legislators finally realize that the selective tax cut binge they’ve been on for years has not and will not fix Michigan’s broken economy? What will it take before they understand that gimmicks don’t work, and that only fixing the fundamentals of our business climate through broad-based reforms will?

Perhaps the message is getting through. Eliminating Michigan’s insidious Single Business Tax is considered a widely-held "moderate" position and is a real possibility in 2006. Attention is now turning to what will come after.

The Mackinac Center for Public Policy, which advocated abolition of the SBT for years when the very notion was generally regarded as "radical," has offered plausible suggestions for more than enough savings in government expenditures to replace the SBT with nothing at all.

Old myths die hard, however. Many supporters of the MEDC’s selective tax breaks also say that Michigan isn’t overtaxed and suggest that elimination of the Single Business Tax should be offset by tax increases. In other words, tax cuts do work but only if government in its wisdom gives them to a few politically well-connected firms and not to everybody. The primary job creators — small businesses — are just out of luck.

Gov. Jennifer Granholm boasts that she has signed into law "53 tax cuts" passed by a Republican legislature — but none of these are broad-based reductions of individual or business taxes. Almost all are targeted at particular firms, industries or locations.

At least three of those 53 "cuts" were deliberately tailored to benefit Federal-Mogul and its plant in St. Johns, north of Lansing. When Gov. Granholm signed this legislation in April 2004, her press release claimed that it added "muscle to Michigan’s economic development arsenal." The governor said, "From today onward we will better be able to address the challenges employers face in the fast-changing 21st century economy, and retain more jobs for Michigan families."

Republican legislators echoed the governor’s sentiments. Rep. Jerry Kooiman, R-Grand Rapids, said, "Passage of (this bill) sends a strong message to Federal Mogul and other companies that the legislature is serious about removing barriers that get in the way of Michigan being a friendly business and manufacturing state."

Unfortunately, he and the other 106 representatives and 38 senators who voted for the bill were dead wrong. This legislation sent just the opposite message, that instead of getting "serious about removing barriers" to all, Lansing was only willing to lower them for a few. And despite the special treatment, Federal Mogul announced in April of this year that it was closing the St. Johns plant, resulting in a loss of 420 jobs.

If Michigan’s struggling business climate were a giant restaurant, the food being served would be rated poor. But instead of improving the menu, suppose the state offered bad food at a discounted price for a handful of patrons. Wouldn’t that be silly? Clearly, Lansing needs to get serious about fixing the fundamentals of our state’s business climate for everyone instead of offering goodies for a few.

Untold numbers of potential new business start-ups are stillborn as a result of the state’s punishing tax, regulatory and labor climate. These losses are the "unseen" cost of government picking winners and losers rather than doing the harder but more fruitful work of making Michigan a state that is attractive to all employers. The Governor’s 21st Century Jobs Fund is more of the same, throwing a billion dollars at particular firms and industries at showy photo ops and ribbon-cutting ceremonies.

Here’s the real lesson from Federal Mogul, Delphi, Tower Automotive, Kmart, Dana Corp., Hayes Lemmerz and all the other "winners" selected by Michigan’s economic development wizards: Since 2003, the U.S. economy has added more than 4.7 million non-farm payroll jobs, mostly in small businesses providing products and services that no government official could have predicted. These firms don’t benefit from targeted breaks or subsidies — they pay for them.

Imagine how different things might look today if the state had eliminated the deadly tax, regulatory and labor law obstacles that inhibit job growth here, especially in small business start-ups. Michigan could have grabbed its share of those 4.7 million new jobs. The loss of 420 jobs at Federal Mogul would be a minor, unfortunate footnote in an otherwise booming state economy, rather than yet more evidence of a failed policy.

Michael D. 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. Jack McHugh is a legislative analyst for the Mackinac Center. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.