New Mich. biz incentive plan stirs old fears

Michael Gerstein, and Jonathan Oosting

Lansing — Six years after Michigan legislators voted to scrap a controversial business incentive program that still strains state budgets, Republicans and Democrats alike are considering a smaller-scale tax incentive plan to encourage big companies to relocate or grow here.

But as the new “good jobs” legislation gains momentum after sailing through the Senate in March, critics warn it could take the state down the same path as the Michigan Economic Growth Authority program that ended in 2012, opening the door to future expansion should the economy decline again.

Gov. Rick Snyder and lawmakers were forced in early 2015 to make more than $400 million in midyear budget cuts to fill a shortfall caused by an unexpected surge of companies cashing in tax credits, which the state no longer offers but businesses can redeem through 2032.

A bipartisan coalition of legislators including House Speaker Tom Leonard, R-Dewitt, protested when the semi-private Michigan Strategic Fund last month allowed a large steel company to inherit an old $60 million MEGA credit but reduce it to $20.4 million.

On Friday, two House Democrats and two House Republicans asked Attorney General Bill Schuette for an opinion on the legality of AK Steel’s tax credit transfer for a Dearborn steel factory, noting the Legislature last session failed to approve two bills that would have let the company claim the tax credits from former owner Severstal North America.

Rep. Martin Howrylak, R-Troy, rapped the Strategic Fund board for a lack of transparency and setting “a dangerous precedent by allowing a specific company to acquire a tax loophole” without legislative approval, while Rep. Abdullah Hammound, D-Dearborn, said concerns from legislators and Dearborn residents about the plant’s pollution have been disregarded.

By contrast, the new tax credit legislation, which has a $250 million liability cap, enjoyed bipartisan support in the Senate, where backers said it is different from the MEGA program and argued it would help Michigan compete with other states for businesses and workers.

“I think the ‘good jobs’ package actually only puts us in position to have the tools to compete with other (states) that have similar tools,” said state Sen. Arlan Meekhof, R-West Olive, who supports the measure. “We believe, because we passed it, that it does give a net plus to the state if we’re able to use these tools.”

Critics such as Michael LaFaive, fiscal policy director for the Mackinac Center for Public Policy, said it’s essentially a “cut and paste job” that revives the dead MEGA program in another form. Last year, Michigan barely broke even on principal business taxes, netting $40 million after paying $880 million in credit refunds under the old Michigan Business Tax.

“This is the old MEGA idea being reborn with a new name and a different mechanism for handing out favors,” LaFaive said. “At the end of the day, they’re just picking winners and losers with other people’s money.”

Michigan owes an estimated $9.38 billion from MEGA credits, according to a 2015 state analysis. Michigan Economic Development Corp. spokesman Otie McKinley said the next official report will be released this fall.

How plans compare

The so-called “good jobs” Senate plan faces an uncertain fate in the House. But supporters say the revised legislation would spur new economic growth and create “good-paying jobs.”

Senior-ranking GOP senators said they cut too deep six years ago when they slashed business incentives. Now, Michigan is losing a high-stakes war for jobs with other states and even countries where it might be cheaper for companies to operate, they said.

The legislation would allow up to 15 businesses to capture annually a portion of income taxes paid by new hires if they successfully create hundreds of jobs that pay at least the national average regional wage, which is between $18.57 and $27.77 per hour in parts of the state.

Companies could keep up to half of the personal income tax withheld from new employees for five years if they create at least 500 jobs paying at least the average regional wage. Companies would keep all new employee income taxes for 10 years if they created at least 250 jobs paying at least 25 percent more than the average regional wage.

LaFaive pointed to several places in the “good jobs” legislation where the language mimics the old MEGA law. The 1996 program required that “plans for the expansion, retention or location are economically sound.” The new bills include nearly identical language, minus the reference to retention.

The new proposal, like MEGA, also requires a cost-benefit analysis for each project to show it would have “an overall positive impact to the state.”

But the new legislation differs significantly, supporters say, by capping the state’s total liability at $250 million, calling for shorter agreements with qualifying companies — five or 10 years, rather than 20, as under the MEGA program. And the intent is different, they argue: It’s supposed to entice companies and jobs to Michigan, while the former program was regularly used to keep businesses from fleeing during the recession.

“The whole point of (the new plan) is attracting new jobs, not keeping the jobs we already have,” said Kelly Chesney of Business Leaders for Michigan, one of nearly 60 business and local government groups backing the legislation.

The plan also does not use refundable tax credits, like MEGA, MEDC spokesman McKinley said. Instead, the “good jobs” proposal would allow companies to capture a portion of employee taxes that supporters say would not exist but for the jobs the companies create, while MEGA didn’t require new jobs for credits to be awarded.

MEGA was envisioned as a limited-scale program when it was originally adopted, LaFaive said.

“The worse the economy got, they more they turned to the MEGA program to generate public relations events and ribbon-cutting ceremonies, and the same could happen here,” he said.

Tax collection

The old MEGA tax credit program continues to cost the state. Through March, Michigan had lost $230 million on its principal business taxes this year as MEGA refunds outpaced sluggish collections from the new Corporate Income Tax, according to the non-partisan House Fiscal Agency.

In 2011, Michigan ditched the Michigan business tax in favor of a flat 6 percent Corporate Income Tax that dramatically cut taxes for corporations and other businesses.

Officials project the state will make $268.7 million on primary business taxes this year — down from more than $2 billion in 2011. Companies cashing in credits are expected to eat up between 3 and 5 percent of all general fund revenue through 2032.

Financial analysts will revisit the estimates later this month at a consensus revenue conference, where lawmakers will learn how much money they’ll have to work with when crafting a final budget for 2018.

Critics have noted the lack of transparency in handling tax incentives. It is not only an issue with the AK Steel credit transfer, but was noted when General Motors Co., with the MEDC’s approval, refused in 2015 to reveal the new value of its renegotiated tax credits even though Ford Motor Co. and Fiat Chrysler did.

In a report released last Wednesday, the Pew Charitable Trusts said Michigan is trailing other states when it comes to improving tax incentives for jobs and growth. States such as Oklahoma have developed robust plans to regularly evaluate incentive programs and measure their impact.

“Michigan has shifted its economic development strategy in recent years, investing heavily in tax incentives at some points and scaling back at others,” the report said. “Because the state lacks an ongoing process for evaluating incentives, however, it made these shifts without adequate information about whether these programs were working or how they might be improved.”

Some Republicans said businesses in Michigan don’t need more incentives.

“There’s no lack of incentives and grants and other corporate handouts that are available there,” Howrylak said.