Michigan business tax credit liability to soar to $9.4B
Lansing — The cost of Michigan's business tax credit liability is expected to balloon to $9.38 billion during the next two decades, a nearly $3 billion or 44 percent increase from a prior estimate, the Michigan Economic Development Corp. said Wednesday.
MEDC officials submitted to lawmakers a revised estimate of the liability of tax credits awarded to about 240 businesses in the past decade as part of a strategy to stem job losses during the Great Recession and keep the domestic auto industry anchored in Michigan.
The state agency previously estimated the liability at $6.5 billion, but the value of the Michigan Economic Growth Authority tax credits has increased with the rising payrolls of jobs tied to the subsidies, said Steve Arwood, president and CEO of the MEDC.
"In my opinion we have not done the job we should have done in estimation because we did not apply the kind of growth factors" that have occurred in payrolls, Arwood told members of the House Tax Policy Committee on Wednesday.
The cost of the tax credits are facing increased scrutiny in the Legislature because the escalating cost is wreaking havoc on the state's budget.
Some Republican lawmakers expressed outrage Wednesday that Gov. Rick Snyder's administration awarded $391 million in additional tax credits after he got the Legislature to adopt a flat 6 percent corporate income tax that doesn't have loopholes.
"What I don't understand is when we have a governor who said 'no new tax credits' and yet we've have 45 non-technical amendments that are basically new certified tax credits," said Rep. Jeff Farrington, R-Utica, chairman of the tax policy committee. "That is what gives me the pit in my stomach."
Starting under the administration of Republican Gov. John Engler, the state has awarded MEGA tax credits to businesses to spur job creation. But under former Democratic Gov. Jennifer Granholm, the state changed the focus to giving companies tax breaks for retaining existing jobs and the incentives were sweetened.
According to MEDC data, job creation tax credits cost an average of $14,310 per job. Retention tax credits cost more than five times that amount — $74,661 per job over the life the credit.
Arwood said 95 percent of the outstanding tax credits are for economic development incentives awarded to companies to retain jobs. He said the revised liability estimate represents $111 million more in annual refunds and credits against the tax bills of corporations — a direct hit to the state's roughly $10 billion general fund.
"Why do we keep subsidizing this?" asked Rep. Ken Yonker, a Kent County Republican.
Businesses, including Detroit's three automakers, can use the tax credits to lower their tax bills.
The MEDC estimates payouts to businesses will exceed $500 million annually through 2028 and jump to $607 million in 2029, before tapering down to $129 million and $133 million in 2030 and 2031, respectively, when the last tax credits expire.
"Instead of tailing off, it actually tails up," Arwood told lawmakers.
To better account for when the tax credits will be cashed in, the MEDC is asking businesses to voluntarily project three future years of redemptions and only cash credits during the year in which they were certified, Arwood said.
Mike Johnston, a lobbyist for the Michigan Manufacturing Association, said billions of dollars in plant investments by General Motors Co., Ford Motor Co. and the former Chrysler Group LLC would not have been possible without the tax credits.
"If Michigan hadn't been aggressive with a MEGA-style program, we would have not beaten the other states," Johnston said.
The Detroit News reported Feb. 5 that Ford, GM and FCA US had tax credits last valued at nearly $4.5 billion that are linked to the retention of about 86,000 in-state jobs and a combined $5.5 billion in upgrading assembly plants and other facilities in Michigan.
MEDC officials have not disclosed the new value of Detroit Big Three's tax credits. Some lawmakers want more transparency in knowing future tax credits.
"The scary part is we aren't entirely sure of the liability going forward," said Rep. Jim Townsend, D-Royal Oak. "To the extent that we have to pierce the veil of privacy around tax credits, we have to do it."
Jack McHugh, a senior legislative analyst at the Mackinac Center for Public Policy, testified in opposition to the tax credits.
The conservative Mackinac Center think tank has long contended the MEGA tax credits are a form of corporate welfare with mixed results for creating jobs.
"The truth is, these are mostly political development programs, not economic development programs," McHugh said.