Mackinac Center: Forget industry incentives, lowering all taxes promotes business
There is a rush on by lawmakers to push through special legislation that would grant tax (or perhaps other) advantages to Switch, a data storage company, for a project in west Michigan. If the incentive bill is passed, it could see the company moving into the old Steelcase Pyramid Building. As I write, lawmakers are squabbling about the size of the fiscal Christmas gift they intend to present and whether it should be extended to other companies in the same industry.
This legislation should not be passed into law, and if it is, it should not be signed by the governor. The targeted incentives are, on balance, a proven failure. Rather than have Lansing politicians play Santa Claus for one company or industry at a time, lawmakers should roll back tax burdens for all businesses and/or people.
Corporate welfare and discriminatory tax policies have been studied ad nauseam and the balance of academic, peer-reviewed technical research concludes that they are ineffective. Consider the 2004 writing of two economists who conducted a “meta-review” of economic development studies. Their article is appropriately titled, “The Failure of Economic Development Programs,” and in part concludes:
“Since these programs probably cost state and local governments about $40-$50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case. In fact, there are very good reasons — theoretical, empirical, and practical — to believe that economic development incentives have little or no impact on firm location and decision.”
In Michigan, the Mackinac Center has done two statistical studies on the impact of the Michigan Economic Growth Authority program and we concluded that it had zero or even a negative impact on job creation.
The failure of past MEGA deals should leap out at today’s lawmakers as a warning not to be enamored by big jobs promises of tech companies.
Covisint Inc. was supposed to become the next Internet darling. Some projections said Covisint would handle some $300 billion in sales per year while generating $5 billion in revenue. Motivated by the prospect of 1,000 direct jobs, Michigan fought hard to ensure the company would expand here. But within two years the company was not doing well, and by fall of 2004, it was sold off, with some parts going to an auction company and others to Compuware. Compuware paid just $7 million for its share. It never claimed a single MEGA credit for creating a single new job.
Webvan.com was once described by (then) MEDC CEO Doug Rothwell as “one of the best-financed retailers on the market for the next wave of e-retailing.” The market had other ideas. Around the time MEGA approved Webvan’s incentive package, the price of its stock peaked — forever. One year later, it was bankrupt.
Other Michigan examples of failed incentive programs abound: film production subsidies, state broadband deployment and the Cool Cities initiative come to mind.
So what is a superior alternative?
First, foremost and last it is to cut taxes across the board. Every time lawmakers rush out to develop a new incentive package for a particular business or industry they are effectively admitting that it costs too much to do business in Michigan. If that is true, however, it is true for all businesses and industries, not just the political and economic flavor of the month.
Any jobs or revenue predictions made by the state about Switch’s incentive package should be examined skeptically. The state — specifically the Michigan Economic Development Corp. — has a reputation for producing or buying analyses that comport with its worldview and not necessarily reality.
If the state of Michigan attempts to estimate the jobs and revenue impact that their incentive offerings for Switch will have on the state, they should also estimate the alternative scenario. Doing so would likely demonstrate that broad-based tax cuts are superior to targeted ones.
Lawmakers in Lansing have been down this incentive road before and their actions have been a costly exercise in job-creation futility. Incentive deals don’t work, are unfair and a public confession that our tax system still — to paraphrase one observer — takes too much from us to do too much to us.
By Michael D. LaFaive is director, Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy.