April 18, 2005 marked the 10th anniversary of the Michigan Economic Growth Authority, a program established by state government with the stated mission of spurring in-state job creation and business investment. The authority selects firms to receive Single Business Tax credits in return for creating new or expanded facilities and jobs in Michigan. MEGA deals also result in local incentives for the recipient firms and often other state incentives as well.
After 10 years of MEGA, Michigan’s economic performance among the 50 states ranks dead last. A new study from the Mackinac Center for Public Policy explains why the state attempting to pick winners and losers is a poor substitute for improving the fundamentals of our business climate.
First, it’s important to note that no company should be faulted for accepting a tax credit when it is offered, for the same reason that no individual should be faulted for taking a credit on his personal income tax form. What makes these selective MEGA credits problematic is that they are ineffective. Moreover, they are unfair to competing businesses that don’t get the same breaks. 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.
Through 2004, more than $1.8 billion in Single Business Tax relief has been offered to more than 200 firms in 230 MEGA agreements. The value of these MEGA agreements rises to more than $3 billion with the inclusion of other state and local incentives, such as property tax abatements, job training subsidies and infrastructure improvements. Nearly one-third of this total — $987 million — has been provided by local units of government or by local economic development agencies.
To measure the impact of MEGA on Michigan’s economy, the Mackinac Center created an econometric model that would measure MEGA’s influence on per-capita income, employment growth, and the unemployment rate in Michigan’s counties from 1995 through 2002. The findings:
MEGA did not improve Michigan’s per-capita personal income, employment or unemployment rate overall;
MEGA did not improve any Michigan county’s per-capita personal income, employment or unemployment rate (estimates of impact ranged from zero to modestly, though not significantly, negative);
Michigan counties that did not host companies receiving MEGA deals fared as well as counties that did host such companies;
MEGA essentially did not affect aggregate income or employment in manufacturing and warehousing (the one statistically significant effect was negative, but too small to be economically significant);
MEGA apparently caused a temporary shift to higher construction employment without increasing overall employment. One temporary construction job was created for every $123,000 in MEGA credits awarded but 75 percent of those jobs disappeared after one year, and the remaining 25 percent fell away after two.
State documents indicate that approximately 127 of MEGA’s agreements should have produced fully employed facilities through 2004 — i.e., sites hosting all of their projected direct jobs. These 127 deals were supposed to generate 35,821 direct jobs by 2005, but figures obtained in December 2004 show that these deals have actually generated about 13,541 direct jobs — roughly 38 percent of original expectations.
Such inflated promises of economic impact are not peculiar to Michigan. A Toledo, Ohio-area economic development agency last year felt compelled to dramatically reduce its own job creation claims following the departure of an agency executive. Media scrutiny played a role in this reduction, but it came several years after the fact, and after the responsible official had departed.
Given the underperformance of MEGA projects and the program’s manifest lack of economic impact in its first 10 years, it is past time to scrap the program. It is a distraction from the tough decisions that need to be made about Michigan’s overall business climate, such as cutting state taxes and spending, and improving poor schools. At a bare minimum, the legislature should require regular and independent audits of MEGA by respected tax economists who will perform rigorous analysis.
While clinging to the false notion that MEGA armed us to do battle with other states in keeping and attracting jobs, Michigan allowed itself to unilaterally disarm in other ways. It’s time to arm ourselves by fixing the fundamentals, and that begins by ridding ourselves of weapons that don’t work.
Michael D. LaFaive is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Michael J. Hicks, Ph.D., is a research professor at the Center for Business and Economic Research at Marshall University in Huntington, W. Va. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.