Audit: Should state shroud public tax deals in secrecy?

Michael Gerstein
The Detroit News

Lansing — The semi-public state entity that doles out business tax credits failed to report the cumulative value of all tax credits in 2015, according to a new state audit, an oversight that may have compounded a budget crisis that same year.

The office of Auditor General Doug Ringler also raised questions about a confidentiality agreement that the Michigan Strategic Fund signed with General Motors Co. about its renegotiated tax credits in 2015 and how it affects “transparency and consistency among program participants and other taxpayers.” The audit raises questions first posed in an April 2015 Detroit News story about the state’s secretive tax break program.

In 2015, an arm of the Michigan Economic Development Corporation did not report the cumulative value from all previous years of the now defunct Michigan Economic Growth Authority tax credits, according to the audit, an amount that turned out to be $9.4 billion. When companies started cashing in hundreds of millions of dollars on tax credits, it caused an unanticipated $325 million budget shortfall that resulted in mid-year spending cuts.

The Strategic Fund has since taken steps to correct the problem, spokesman Otie McKinley said Wednesday.

As a result, the administration of Gov. Rick Snyder renegotiated tax deals with the three Detroit automakers, which agreed to retain or add 86,000 jobs in Michigan before and during the Great Recession for a total of $4.5 billion in tax incentives. Later in 2015, Fiat Chrysler and Ford redid and disclosed their deals with the MEDC, but GM negotiated its secret deal so it did not have to divulge any credit information.

The audit said the state’s current MEGA liability totals $7.3 billion and continues to be a drain on state coffers.

Michigan Strategic Fund officials told state auditors that “its omission was an oversight” when it was crafting 2014 and 2015 fiscal reports and that it included that information in 2010 through 2013 annual reports, the audit said.

“Inclusion of the yearly detail and total cumulative value of MEGA tax credits provides designated recipients with useful information to help evaluate the total historic value of the MEGA tax credits and the amount of tax credits that have been granted to each business each year,” the audit said.

In addition, Ringler’s office suggested the GM secret tax deal is causing problems for state auditors and requested that the Legislature clarify the impact of such tax confidentiality agreements in future legislation.

GM’s confidentiality deal “limited our ability to fully report information about MEGA tax credits for all participants because the reporting of estimated credits for the remaining participants would allow the readers of this report to determine the agreed-upon confidential amount,” according to the audit.

It continued: “Should such preclusion (from public disclosure) exist for only the amount of taxes paid and/or taxable income, and not preclude estimated tax credits negotiated with public funds?

“When do State officials have the discretion to negotiate confidentiality provisions into individual agreements involving public funds? Do such agreements limit transparency and consistency among program participants or other taxpayers?”

The April 2015 News story noted that other states have dropped such secrecy provisions in tax deals.

“Michigan is swimming against the tide of history here and claiming a tax secrecy rule that many, if not most, states have long since abandoned,” Greg LeRoy, executive director of Good Jobs First, a Washington, D.C.-based government subsidy watchdog group, told The News at the time.

The free-market-oriented Mackinac Center for Public Policy and other open government groups have questioned how such a large portion of state spending is shielded from disclosure to the taxpayers.

“It’s a travesty of transparency that residents cannot be told the recipients of billions of dollars in public spending,” said James Hohman, the director of fiscal policy Mackinac Center in Midland.

The audit said tax break administrators were complying with almost all mandatory disclosures of tax break information, but Hohman said his review of the audit found the quasi-state agency frequently doesn’t disclose required data.

Among the items the state doesn’t reveal as required by state law are company payments to the MEDC, updated information on the duration and amount of amended tax credits, and how much the state paid the businesses in return for the exact number of jobs, Hohman said.

But the Strategic Fund is complying with state law, McKinley said.

The Strategic Fund “has processes and procedures in place to ensure compliance in the reporting of timely, relevant and required information to legislators and directors, and has taken all necessary measures to guarantee full compliance of all obligations,” he said.

Companies sometimes don’t create as many jobs as originally promised and, by state law, are only paid a tax break for the actual number of employees hired.

Based on original agreements, the state approved $14.2 billion in tax credits for $39.6 billion is promised private investments from 1995 to 2012, according to the audit.

Metro Detroit was by far the biggest beneficiary of tax credits from 1995 to 2016, according to the audit.

Wayne County has received the most promised jobs with 144 agreements that created or maintained 138,642 jobs. Oakland County landed the most agreements with 186, resulting in promises of more than 56,700 created or saved jobs. Macomb County landed more than an estimated 53,400 positions followed by Washtenaw County at over 17,000 jobs.