Auto tax breaks create budget fear
Michigan faces years of budget uncertainty because state leaders awarded billions of dollars in tax credits mostly to Detroit's three automakers to save tens of thousands of manufacturing jobs during the Great Recession.
A Detroit News analysis of state records found General Motors Co., Ford Motor Co. and the former Chrysler Group LLC are entitled to refundable tax credits worth nearly $4.5 billion if they retain more than 86,000 jobs in Michigan through 2032 — or nearly 70 percent of their current, combined in-state workforce. The subsidies require the three automakers to spend a combined $5.5 billion in upgrading assembly plants and other facilities in Michigan.
Former Gov. Jennifer Granholm's administration awarded the three automakers the massive tax credit packages as the companies fought for survival in 2009 and 2010, trying to ensure the domestic auto industry stayed anchored in Michigan. The plan worked, but the bills are coming due.
The costs promise to escalate because the Michigan Economic Growth Authority tax credits are tied to the wages, overtime, lump-sum payments and profit-sharing checks of the covered workers. Analysts and company insiders expect wages at the resurgent automakers to grow further after national contract bargaining with the United Auto Workers this year.
"We need to deal with the consequences of the past," Gov. Rick Snyder told The Detroit News in an interview. "We have a stronger economy and it's come back stronger and faster than people expected, so we're seeing potentially an acceleration of how credits are being used compared to what people might have predicted, which is a good problem to have.
"I'm not sure they were done in the most economically sound cases in the past."
The governor is preparing to make $325 million in mid-year spending cuts to close a budget hole largely attributed to thriving companies like the Detroit Three cashing in hundreds of millions in tax credits, which can be used to reduce their tax bills. When one unnamed company in December cashed in two credits worth $224 million, it helped push Michigan's government into an unanticipated deficit.
The UAW contract talks are expected to result in increased wages for more senior hourly workers covered by the credits or higher pay for lower-paid, more recently hired employees in the auto industry's two-tier wage system. Profit-sharing payouts for last year, ranging from $2,750 at FCA US LLC (formerly Chrysler) to $9,000 at GM, boost the payrolls further.
"I don't think they can get a contract ratified without a pay increase for the first tier," said Art Schwartz, a former GM labor relations executive who now heads Ann Arbor-based Labor and Economics Associates. "The second tier will get a pay increase. However you look at it, labor costs are going to go up. It's just a question of how much."
GM, Chrysler and Ford's remaining tax credits, the exact value of which is shrouded in state tax law secrecy, are part of an overall $6.5 billion estimated liability that threatens to consume at least 7.5 percent of the state's roughly $10 billion general budget annually for the next few fiscal years. The automakers declined comment.
The $807 million that state economists officials say is needed to pay for business tax credits in next fiscal year is more than what Michigan is spending this year on community colleges, local health agencies and the Department of Natural Resources combined. Snyder said he has been personally studying the far-reaching impact of the remaining tax credits and plans to address the issue in his annual budget presentation Wednesday to lawmakers.
Snyder continues program
Although Granholm's Democratic administration approved a great majority of the tax credits to automakers, the Snyder administration also handed them out. Records show the Republican administration has tacked on $266 million in additional credits for GM and Ford, despite the governor's insistence this week that "we ratcheted them down."
Started in 1995 by then-Gov. John Engler, state officials have given businesses more than $12 billion in Michigan Economic Growth Authority tax credits to lower corporate tax bills and spur economic development, records show.
The program was designed to act as a financial incentive to lure companies to Michigan or to persuade existing businesses to expand in the state and add jobs. But in the final years of the Engler administration, the Michigan Economic Development Corp. began giving companies MEGA tax credits for retaining jobs in Michigan instead of moving workers to another state — or a foreign country.
As the economy worsened in the middle years of the last decade, the Granholm administration stepped up its use of retention credits to stem job losses, particularly in the auto industry. The packages proved too attractive to ignore, ranking auto executives said at the time, spurring billions of dollars in post-recession investment by the automakers.
"The rationale when it was done at the time was they were trying to make Michigan retain every single manufacturing job that they could during an unprecedented economic meltdown," said Doug Rothwell, CEO of Business Leaders for Michigan and a former head of the MEDC under Engler.
State records obtained by The News show General Motors has been awarded more than $2.1 billion in refundable tax credits by the Granholm and Snyder administrations — the most of any automaker.
GM can apply those credits against its Michigan tax liability for at least the next 14 years if it keeps 34,750 jobs and invests $3.7 billion in manufacturing and product development facilities across the state. The tax credit covers 77 percent of GM's workforce of 45,500 in Michigan.
In June 2009, the Granholm administration struck a deal with GM to roll the company's existing tax credits into a new "global retention" credit worth $1.07 billion; it was tied to keeping 20,000 jobs in Michigan and making $2.5 billion in capital investments. Granholm's MEDC added another $733 million and 10,000 jobs to GM's retention credit before she left office at the end of 2010.
Strategy to end competition
Greg Main, CEO of the MEDC at the time, said the large-scale retention credits were designed to end a "nightmare" of patchwork tax credits awarded to GM and the other automakers to get them to refurbish individual plants in Michigan.
"We wanted to get out of the business of competing with every plant with everyone else," Main said in an interview. "We did it for the exact reason that has come to play: GM has made much bigger investments in Michigan than it has in the past, and we got away from all of the interstate competition. The strategy worked exactly like we wanted it to work, absent the additional amendments that were made."
After GM secured its global retention credits, Ford and Chrysler followed suit, creating long-term certainty for the state's tax base and chain of auto parts suppliers. "We wanted to retain as much GM, and as much Ford and Chrysler jobs as we could," Main said.
On Oct. 26, 2010, one week before Snyder was elected governor, the Granholm administration announced tax credit commitments for Ford valued at $909 million and $1.3 billion for Chrysler.
Ford's credits since have been amended to be worth more than $1 billion and tied to keeping 31,600 jobs — 72 percent of its Michigan workforce — and investing $850,000,000 into its facilities, according to MEDC records. FCA, the former Chrysler Group, has tax credits tied to $1 billion in facility upgrades and 20,000 jobs retained, or 57 percent of its 35,000-employee workforce in the state.
The bulk of GM's tax credits came as the automaker was bailed out by the federal government and emerged from bankruptcy. But the company has convinced the Snyder administration to amend the deals struck with Granholm's administration.
More than $266 million of GM's tax credits have been awarded since Snyder became governor in 2011 and vowed to end the tax credit program and move the state to a flat 6 percent corporate income tax without carve-outs and credits. The Snyder administration's latest amendment to GM's tax credits came in July, when the automaker was awarded an extra $96.3 million to keep another 1,750 jobs in Michigan, records show.
Since Snyder took office, the MEDC has added a total of $391 million in tax credits to the nearly $9.5 billion in credits the Granholm administration handed out, records show.
Amendments may be over
Snyder suggested this week that he wants to end further amendments to the MEGA credits for companies still using the Michigan Business Tax system he repealed in 2011 in favor a grant-based economic incentive program for companies that create new jobs or relocate to Michigan.
"Any further amendments to MEGAs will probably not be allowed," said Steve Arwood, president and CEO of the MEDC, which administers the tax incentives program.
Officials have attempted to get businesses to trade their tax credits for direct incentives administered by the Michigan Strategic Fund, though some prefer to work within the MEGA structure, said Mark Morante, a senior vice president at the MEDC.
"We're doing everything we can to mitigate the long-term impact of MEGA credits," Morante said. But barring action by the Legislature, the value of MEGA credits will continue to grow with wages, he said..
The lack of any cap on the escalating value of MEGA tax credits for job retention is a "flaw" that may have not been considered by the Granholm administration, said Rothwell, the former MEDC head during the Engler administration.
"We don't know what any of us would have done in a similar situation because that was a time when the entire auto industry … was being threatened in a way we had never seen," he said. "None of us knows what we would done to protect those jobs."
The Snyder administration has not ruled out asking the Legislature to cap wages that can be applied toward the tax credits. But some lawmakers are targeting the MEDC for spending cuts in retaliation for the credits eating away at the state budget.
"The most important thing right now — before there is a reaction — is to get the liability known, understand what is driving the liability so an informed policy decision can be made," Arwood said.
Detroit News business columnist Daniel Howes contributed.
How tax credits work
Businesses that have been awarded Michigan Economic Growth Authority tax credits for creating or retaining jobs in the state can use them to lower their tax bills.
In some cases, the tax credit may exceed what the business owes the state in taxes in any given year, so it gets a refund from the state Treasury Department for the difference.
A refundable MEGA tax credit is calculated by applying the state's 4.25 percent income tax rate against an employer's payroll for jobs covered by the credit, said Mark Morante, a senior vice president at the Michigan Economic Development Corp., a state agency that administers the tax incentives program.
For example, if a company had $1 million in payroll for jobs tied to a MEGA tax credit, it would receive a $42,500 credit against its tax bill. Payroll calculations include base wages, bonuses and profit-sharing checks.
In 2011, Gov. Rick Snyder signed a law eliminating the Michigan Business Tax and the associated MEGA tax credits and shifting corporations to a flat 6 percent income tax.
But the law allowed about 220 large corporations to continue using the MBT so they could cash in their previously awarded MEGA tax credits.
— Chad Livengood