Editorial: Don’t renege on state tax credits
State lawmakers on both sides of the aisle want to alter tax credits promised to businesses that stayed in Michigan and created jobs during its economically challenging past decade. Although the state has a larger financial liability than it originally thought — $9.38 billion in tax credits over the next 16 years — that’s no reason for the Legislature to go back on the promises it made during darker times.
The state has to honor the commitments. The credits will consume more than $500 million a year in general fund tax revenue until 2029 — certainly not small change. And the effects of these credits being cashed in with little warning was made obvious last year, when roughly $200 million was claimed at the last minute, creating a deficit.
Some concessions on the part of companies, including limiting the amount of credits that can be claimed in one year, may be appropriate if mutual agreements can be reached.
It’s fair to ask companies to notify the state when they’ll be redeeming their credits, as Gov. Rick Snyder has suggested. The Michigan Economic Growth Corporation, the business development arm of the state, also wants companies to voluntarily start cashing in credits during the year they’re issued.
Those are reasonable requests.
But Snyder, who led the MEDC under former Gov. John Engler, has rightly resisted pressure from lawmakers who want to cancel the agreements entirely.
“The goal should be to try to honor these agreements or, in the context that if there are changes, they’re mutually agreed to,” the governor told The Detroit News editorial board last month. “These are major job creators. They’ve helped bring us back economically in the state and we shouldn’t overlook that fact.”
When businesses and residents were leaving Michigan in droves, the state incentivized companies to stay based on a tax credit formula that equals the total payroll, including benefits, of jobs covered by the credit multiplied by the state’s 4.25 percent income tax rate.
So as the value of those jobs has increased, specifically since the Great Recession, so has the value of the tax credits.
The real problem is that the state incorrectly calculated the long-term liabilities for these credits, perhaps underestimating their effectiveness, and left them to be redeemed at will.
Some compare asking companies to cut back credits to the concessions wrested from debtors in Detroit’s bankruptcy. But those givebacks averted the possibility of even bigger losses that might have been forced by the court.
Michigan lacks the leverage of a bankrutpcy filing. It must pay what it owes.
The state should honor its deals with thesejob-creating companies, while searching for ways to soften the blow of these credits. And it should avoid making such expensive promises in the future.