Michigan lawmakers spar over whether to trim $9.4B tax liability or negotiate with firms
Lansing — Debate in the Legislature is heating up over whether the state should try to renege on its commitment to a portion of the $9.38 billion in tax credits owed to some of Michigan’s biggest employers during the next 16 years.
The looming cost of tax credits mostly used to keep jobs in Michigan during the height of the state’s economic recession in the last decade has become a central issue in the Legislature’s state budget-writing process. For the 2016 fiscal year, business tax credits are expected to cost more than $800 million, taking a big bite out of the state’s $9.6 billion general fund budget.
Lawmakers on both sides of the aisle have suggested the companies should be willing to forgo owed tax credits, agree to new caps on the rising value of credits and seek refunds only in the years when they were earned.
“Everybody who has an interest in the state’s fiscal health should be willing to make some concessions just like state employees have done, firefighters, school teachers, private employees in the last decade,” said state Rep. Brandon Dillon, D-Grand Rapids.
Invoking pension cuts that retired Detroit workers are starting to endure this month, Dillon said the tax credit program can remain in place with “modest” reductions without “jeopardizing” the bottom line of Michigan’s largest companies.
“There’s almost $10 billion in credits out there,” Dillon said. “To suggest that ... the value can’t somehow be reduced in a very, very modest way to help ease the pressure on the budget, I think is ridiculous.”
Democrats such as Dillon are calling for a paring back of Michigan Economic Growth Authority tax credits that were largely handed out to businesses in the final years of Democratic Gov. Jennifer Granholm’s administration.
The most expensive tax credits were awarded in 2009 and 2010 to General Motors Co., Ford Motor Co. and the former Chrysler Group LLC, initially topping $4 billion in value for all three automakers combined.
State officials have acknowledged those credits have grown in value in recent years because of a profit-driven rise in payrolls at the Big Three automakers. The formula used to calculate the tax credit value is the total payroll of jobs covered by the credit multiplied by the state’s 4.25 percent income tax rate.
“We don’t even know how big this could get because there are factors the government can’t predict,” said Rep. Cindy Gamrat, R-Plainwell, who wants to change the formula to lower the payouts to companies. “I think it’s the responsible thing to do.”
Snyder seeks changes
Gov. Rick Snyder’s administration is asking companies to voluntarily inform state agencies when they intend to cash in tax credits, which can be used up to four years after they are certified.
Snyder told The Detroit News last month he wants “mutually agreed upon” changes to the MEGA tax credits with the nearly 280 companies in the program, but has emphasized that “the goal should be to honor these agreements.”
The Michigan Economic Development Corp. also has said it wants companies to voluntarily start cashing them in during the year when they’re issued.
In December, the Snyder administration got a surprise when one unidentified company redeemed $224 million in tax credits — a major contributor to a $325 million midyear budget deficit. The firm, which state officials can’t identify because of tax privacy laws, sought its tax credits for 2011, 2012 and 2013.
The Michigan Manufacturing Association, a trade association representing the Big Three and other tax break recipients, has said the companies are willing to talk with state officials about being more transparent when they seek refunds against their tax bills.
But the group has resisted talk of amending the deals, some of which extend out 20 years and are tied to the business plans of individual companies.
“If the state goes to the companies and tries to leverage them in some way and say let’s amend these contracts … the next time an auto investment comes up … would you ever really trust the state to deliver on its agreement when we deliver on our agreement?” Mike Johnston, vice president of government affairs of MMA, said at a House committee hearing last week.
Rep. Earl Poleski, R-Jackson, is concerned about how Michigan’s business climate would be perceived if the state took away tax credits promised to companies that hired or retained workers and expanded factories and office parks.
“It’s inconvenient now that the credits are being submitted,” said Poleski, a member of the appropriations committee. “(But) they are contractual in nature. And to renege on a contract would be to call our integrity into question. I’d prefer not to see that happen.”
Divisions over what to do about the tax credits are mixed among the two political parties. The MEDC projects the state will owe business tax credits exceeding $500 million annually through 2029.
Rep. Sam Singh, D-East Lansing, has proposed companies agree to smaller annual payouts, but stretch out the redemption time period beyond 2031 so the companies still receive the amount owed and the state’s annual cost is lowered.
“I do believe we have a contract in front of us that we have to live up to,” Singh said. “But the question is because of all the generous benefits that we’ve given to the business community over the last four years, are there things that we can do to lessen that burden on an annual basis?”
Rep. Al Pscholka, chairman of the House Appropriations Committee, did not rule out seeking concessions. “We’ve got to give the administration enough room to see if that’s even possible,” said Pscholka, R-Stevensville.
Pscholka, who is in his final term in the House, wants certainty in the annual cost of the tax credits so future lawmakers aren’t forced to trim spending in the middle of a fiscal year because of an unexpected influx of businesses redeeming tax credits.
Snyder and lawmakers recently made $207 million in spending reductions to make up for the $325 million budget shortfall.