Bring order to tax credit redemptions
The bills for Michigan’s corporate welfare splurge are coming due. Twenty years of buying jobs and development with tax credits means the state will have less money to spend this year than it had expected, so services will be cut and some state workers may be laid off.
Get used to it. Though Gov. Rick Snyder killed the tax credit program shortly after taking office in 2010, the obligation will linger until 2032, and is estimated to be roughly $4.9 billion.
The challenge is that Michigan can never be sure when the credits will be redeemed, so budgeting for them is nearly impossible.
Snyder recently announced that the 2015 budget will have to be trimmed by $325 million midway through the fiscal year because a company unexpectedly claimed $224 million in tax credits. The governor has hinted at staff cutbacks, and may shift some community college expenses to the education budget from the general fund budget.
Such uncertainty in budgeting can’t become standard fare over the next 18 years. The state must take steps to prepare for spikes in tax credit claims and to mitigate the overall obligation.
One thing it should do right away is build a buffer into the budget to cover spikes in tax credit redemptions. This year, the state is spending nearly every dollar available of the $9.5 billion general fund.
It was an election year budget, aimed at pleasing constituencies, with no wiggle room to cover the unexpected.
Setting aside 3 to 5 percent of general fund revenues would better protect the state from mid-year hits to revenue. That money should be placed in a separate savings account and used expressly to pay tax credit claims.
The Michigan Economic Development Corp., which manages the tax credits, should be negotiating with the holders of the credit to either reduce the obligation or set an orderly schedule for redemptions.
And it should stop amending credits for companies that haven’t met their promised investments or job targets. If a corporation doesn’t hit its goals, the credits should go away. Likewise, the strategic fund should end the practice of rewarding bonus credits to companies that exceed their targets or hit them early.
The state can’t afford the credits that were already promised, let alone those that weren’t pledged or haven’t been fully earned.
There is a lesson here, too, for future policymakers. The tax credits began under former Gov. John Engler and remained fairly modest for most of his tenure. They exploded during the administration of Gov. Jennifer Granholm, reaching $1.2 billion in 2009.
The strategy of buying jobs with tax credits has always been questionable, and the effectiveness of doing so never convincingly quantified.
Snyder recognized the better approach is to create a fair and favorable tax climate for all business, and get out of the tax credit game.
That will pay off in the long run. But bills for the sins of the past will keep coming for many more years, and the state should do everything possible to mitigate the damage.