Just how outrageous has the tax incentives game become? Consider:
Amazon chief Jeff Bezos reportedly was so jealous of the $2.4 billion in incentives that Tesla chief Elon Musk had extracted from state and local governments that he pushed his team to top that number for the company’s planned second headquarters.
State and local governments spend $50 billion a year on business attraction incentives, triple the amount they spent in 1990, and $2 billion more than the states collect annually in corporate income taxes.
And much of the money is being wasted, said Upjohn Institute for Employment Research senior economist Tim Bartik, who has literally written the book on the effectiveness of these incentives.
“At least 75% of the time, incentives are all costs with no job creation benefits,” he said.
In other words, 75% of all incented jobs would have occurred without the incentives. No wonder that some states, including Michigan, are rethinking the value of taxpayer-financed incentives to attract jobs.
(Bartik says incentives need to be “tamed,” not killed. More on that in a bit.)
Michigan began throttling back on costly, long-term tax incentives nearly a decade ago. Then-Gov. Rick Snyder eliminated most of them in favor of less expensive up-front cash and loans to businesses that invest and add jobs in the state.
The state handed out $180 million in grants for 239 projects between 2012 and 2018 in its Michigan Business Development Program, which replaced the hugely generous Michigan Economic Growth Authority (MEGA) tax incentive program.
MEGA, which was created with strong bipartisan support during Gov. John Engler’s administration and greatly expanded by Gov. Jennifer Granholm during the state’s economic meltdown in the 2000s, awarded more than $10 billion in tax credits for new business investment.
But near the end of his administration, Snyder succumbed to the demand by businesses and local economic developers to reinstate tax incentives.
In 2017, he enacted the $200 million “Good Jobs for Michigan” program for big, “transformational” economic development projects that allows qualified companies to keep up to 100 percent of their employees’ state income tax withholding for up to 10 years.
Fiat Chrysler was awarded a $105 million “Good Jobs” incentive in May for a variety of investments, including a new assembly plant in Detroit, that are expected to create 6,400 new jobs.
But Michigan lawmakers, in a recent budget battle with Gov. Gretchen Whitmer, allowed the program to expire at the end of 2019. And they and Whitmer have slashed other business subsidy programs, as well.
The current fiscal year budget trimmed $26 million from the Michigan Economic Development Corp.’s business attraction and community revitalization programs, or 25% of total funding.
In internal documents obtained by the Detroit News, MEDC President Jeff Mason called the cuts “a historic low for investment in critical economic development activities.”
A bipartisan bill pending in the state House would mostly erase the more than $7 billion in unused MEGA credits already awarded to businesses.
And a new free-market Mackinac Center for Public Policy report found lawmakers approved just $71 million in additional business subsidies last year, the least amount authorized since the free market think tank started tracking subsidies in 2001.
Lawmakers and the governor could be feeling less need to use subsidies to attract jobs in a strong economy. And the current crop of lawmakers appears be more concerned about the fiscal impact of development incentives than their predecessors.
Critics say business attraction incentives unfairly pick winners and losers in the economy. But that’s not always a bad thing, Bartik said.
Most businesses, particularly small, family-owned enterprises, don’t want to grow, he said. So cutting business taxes across the board, which conservatives favor, may not result in much job growth.
Giving incentives to businesses that want to expand and add lots of good paying jobs to a state economy can be an appropriate strategy, Bartik said.
But state and local business attraction incentives need a major overhaul. Incentives need to be targeted more to economically distressed areas and concentrated more on businesses that sell goods and services outside their local communities.
Providing incentives to businesses that sell only locally, including restaurants or retail stores, will just take jobs from other competitors, Bartik said.
Here are some other suggestions from his book:
- Target incentives to companies, such as manufacturers, that have large job multiplier effects.
- Shift incentives from primarily offering cash and tax breaks, to job training and customized business services, including advice to small businesses. Bartik said research shows customized business services can result in much higher job creation than cash incentives.
- Provide enticements or requirements that companies receiving incentives hire local people who are unemployed.
Among the costs of financial incentives is one that is often overlooked — the huge amount of time state and local governments spend on developing incentive offers to companies that will likely turn them down.
Witness Amazon’s nervy bake-off competition for a second headquarters that Detroit and Grand Rapids failed to win. Or manufacturing giant Foxconn’s unfulfilled promise to create 13,000 jobs in Wisconsin in exchange for $4 billion in tax breaks.
“Get rid of these ridiculous incentives for these large companies,” Bartik said.