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4 years later: Spending less, getting more? A look at new business incentives

Dec 29, 2014

Credit taxcredits.net

Four years ago, Michigan changed the way it competes with other states in order to capture new business investment and jobs.

State officials say the changes appear to be working. 

Cash is King

On average, Michigan spent $500 million a year in multi-year tax breaks to convince companies to relocate here or expand, says Michigan Economic Development Corporation CEO Mike Finney.

Today, it's cash on the table only.

"We started out at $100 million," says Finney.  "We're now at about $130 million, where historically it would have been $500 million of tax credits, so it's a dramatic difference."

Finney says the incentive is one of the tools Michigan uses to level the playing field with other states and countries. States have lured companies with these incentives for at least 40 years, he says, so it's unlikely the practice will go away. 

But Michigan is trying to be more focused in the way it uses incentives.

Going for the better jobs

"We do a very thorough job of assessing the costs a company would have here versus another location, before we commit to an incentive," says Finney.  And the aim is "not just getting more, but more and better jobs."

The MEDC divided the state into 10 so-called "prosperity regions" and calculated the average wage for each.

"We try to ensure the average wages are increasing, whether it's automotive or agricultural, and we're focused on the better side of that wage equation," he says.  "So last year, for example, in all the projects that we incentivized, the average wages actually increased by a little over $1.50 per hour."

Finney says the state performs audits of each project, and the negotiated cash is paid out as the jobs are created, not before.

That's a lot simpler than the old system, where the state would have to "claw back" tax incentives when the promised jobs didn't materialize.

Companies are getting other incentives - in the form of lower taxes

The state replaced the Michigan Business Tax with a simplified corporate tax, giving companies a $1.7 billion tax cut in the process.

So it's hard to tease out the effect of the new incentives from that tax cut - although a recent survey of Southeast Michigan business owners suggests it's had little impact on job creation and wages.

73% of 300 employers questioned in an EPIC-MRA poll said the new business tax has had little to no influence on their decisions to hire more workers or increase wages.

The poll was commissioned by Crain's Detroit Business and the Detroit law firm Honigman Miller Schwartz and Cohn.

Is it working?  A hard question for economists

Economists say it's difficult to determine if the cash incentives are more effective than the old tax break system, because of other variables.

"Michigan has been growing faster than the nation the past four years, but there are several policy and non-policy factors (including the recovery in the auto industry) that could explain this big improvement," says University of Michigan economist Don Grimes.

Sean McAlinden, an economist with the Center for Automotive Research, takes a generally positive view of the changes.

"We have spoken to automotive firms for many years about this issue, including the Detroit Three," says McAlinden, "and cash in the present is always more highly valued than future tax break deals that contain 'clawbacks,' which depend on new hiring activity -- which may or may not happen because of market conditions."

Other states, he says, lure automotive investment differently.

"In the South, they frequently provide most of their incentives in terms of new infrastructure connected to the plant and up-front training money for new and old employees. In Canada and Mexico,  they actually pay for new buildings and equipment."

Meanwhile, back at the (Texas) ranch

Finney says while Michigan has reformed its incentive system, some states are upping the ante.

"One of the more high-performing states being Texas. They're putting more money out there (in tax breaks) than the other fifty states combined," says Finney.  "Louisiana's another state that's being very aggressive.  There are many states that are being more aggressive with incentives.  But we think we ought to be fixing broken tax rules, and our state has done a lot of that.  And it's allowing us to compete even in the face of larger tax credits that may be offered in other places."