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Lawmakers want to expand tax break before it's created any jobs

Bridge Magazine

 

Debate is intensifying over plans to expand a $200 million tax incentive program for big businesses that proponents say has helped Michigan land planned investments, but not yet created a single job.

The state has so far committed $168.3 million in future tax captures to five firms under the “Good Jobs For Michigan” program, which launched in 2017 but is set to expire at the end of the year. Qualifying companies have promised to create a combined 8,104 jobs in exchange for an income tax payback that would amount to more than $20,500 per new employee.

Fiat Chrysler Automotive North America, which plans to build Detroit’s first auto assembly plant in nearly three decades and expand its Warren Truck Assembly Plant, could earn up to a $105 million incentive. And economic development leaders say other planned projects could depend on legislation that would lift the program cap to $500 million through 2024.

“There are currently six other projects in our pipeline that would create an estimated 6,830 new jobs and lead to an additional $3.4 billion in private investment,” Jeff Mason, president and CEO of the Michigan Economic Development Corporation, told lawmakers in committee.

The push for a Good Jobs extension comes at the same time as out-of-state lobbyists are urging Michigan lawmakers to go what they call “big game” hunting, by passing a sales tax exemption to lure the kind of stand-alone cloud storage data centers used by tech giants like Facebook and Google.

Switch data center, meanwhile, is asking the state for additional tax breaks four years after lawmakers adopted a $20 million sales tax exemption to help the Nevada-based tech firm turn a pyramid-shaped building into a server farm in suburban Grand Rapids.

Bipartisan bill sponsors contend their new or expanded incentive proposals would help drive continued economic growth in Michigan and position the state to compete against neighbors.

But policymakers lack objective data to gauge the effectiveness of existing programs. Legislators last year created a law requiring external evaluations of at least 16 tax state incentives, but they did not provide any funding to pay for the reviews.

"There are significant costs associated with this, and without the funding, this is stuck in neutral for now," budget department spokesman Kurt Weiss told Bridge Magazine.

The Whitmer administration is preparing to ask the Legislature for $2 million to begin implementing the incentive evaluation law, but that "would not be nearly enough funding for the long term," Weiss said.

Many researchers are skeptical about the impact of business incentives, which siphon tax revenue from the government that could be used to fix roads and schools – amenities that themselves lure businesses to the state.

“Schools in particular can really suffer,” said Nathan Jensen, a University of Texas-Austin professor and co-author of "Incentives to Pander," a book that describes incentives as an economically inefficient way for politicians to claim victories.

"If Amazon moves 20,000 workers into a city, it's not all benefits. There's costs associated with it, and the most obvious one is schools. You're adding more students and you have less revenues in the system." 

A bipartisan proposal sponsored by Republican Sen. Ken Horn, R-Frankenmuth, and approved last week by his Economic and Small Business Committee would extend and expand the Good Jobs program, which allows big job creators to keep income tax revenue generated by their new employees for up to a decade.

Income taxes are used to support an array of state services. Nearly 25 percent of all collections go to the School Aid Fund ($2.8 billion last fiscal year). Most of the rest goes into a discretionary general fund, but a 2015 road funding law requires an annual diversion that will climb to $600 million by 2021.

Any tax revenue given back to firms would not exist without the Good Jobs program, Horn argued in committee, echoing a common “but for” argument often used by business incentive proponents.

“They wouldn’t be here but for some of the incentives,” Horn said of qualifying companies, which have announced plans for private investments totalling more than $5 billion.

“Good Jobs has never been a silver bullet. It’s just one more puzzle piece in this big jigsaw puzzle we have as an economy in Michigan,” he said.

Text Box: Bridge Magazine

Debate is intensifying over plans to expand a $200 million tax incentive program for big businesses that proponents say has helped Michigan land planned investments, but not yet created a single job.
The state has so far committed $168.3 million in future tax captures to five firms under the “Good Jobs For Michigan” program, which launched in 2017 but is set to expire at the end of the year. Qualifying companies have promised to create a combined 8,104 jobs in exchange for an income tax payback that would amount to more than $20,500 per new employee.
Fiat Chrysler Automotive North America, which plans to build Detroit’s first auto assembly plant in nearly three decades and expand its Warren Truck Assembly Plant, could earn up to a $105 million incentive. And economic development leaders say other planned projects could depend on legislation that would lift the program cap to $500 million through 2024. 
“There are currently six other projects in our pipeline that would create an estimated 6,830 new jobs and lead to an additional $3.4 billion in private investment,” Jeff Mason, president and CEO of the Michigan Economic Development Corporation, told lawmakers in committee. 
The push for a Good Jobs extension comes at the same time as out-of-state lobbyists are urging Michigan lawmakers to go what they call “big game” hunting, by passing a sales tax exemption to lure the kind of stand-alone cloud storage data centers used by tech giants like Facebook and Google.
Switch data center, meanwhile, is asking the state for additional tax breaks four years after lawmakers adopted a $20 million sales tax exemption to help the Nevada-based tech firm turn a pyramid-shaped building into a server farm in suburban Grand Rapids. 
Bipartisan bill sponsors contend their new or expanded incentive proposals would help drive continued economic growth in Michigan and position the state to compete against neighbors.
But policymakers lack objective data to gauge the effectiveness of existing programs. Legislators last year created a law requiring external evaluations of at least 16 tax state incentives, but they did not provide any funding to pay for the reviews. 
The expansion push comes as the state tries to land another big project: Mahindra North America, the Metro Detroit arm of an Indian firm, recently announced plans to build an automotive assembly plant in Flint that could create up to 2,000 jobs – but may depend on state tax incentives.

A small but growing body of research has challenged arguments by proponents who say tax incentives drive investment that wouldn’t have occurred “but for” government assistance.

In a 2018 working paper, Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, compiled data from 34 economic development incentives nationwide and determined they were a deciding factor for 2 to 25 percent of firms that receive them.

“In other words, without the incentive, at least 75 percent of the jobs would have occurred in the state anyway,” Bartik said. “That could have occurred because the company … would have made the same decision, or if that company would not have chosen the site, some other company would have."

In a program similar to Good Jobs for Michigan, Kansas in 2009 adopted an incentive that encourages companies to relocate, expand or stay in the state by allowing them to retain up to 95 percent of the payroll withholding taxes of their employees.

But firms that received the incentives were statistically no more likely to generate jobs than similar companies that did not receive the tax breaks, according to 2014 research Jensen conducted for the Kauffman Foundation, an entrepreneurial nonprofit.

"Most of these jobs were coming anyway," said Jensen, the UT-Austin professor.

“There are individual projects that you could say ‘but for,’ but in terms of a program, there's no way you could ever assume every company is coming is common because of the program."

Bartik has not studied Michigan's Good Jobs incentive, but he has researched the Michigan Business Development Program, a separate incentive that provides grants and loans to targeted firms. He found it has a relatively high benefit-to-cost ratio.

Upfront cash incentives like that program tend to be more effective at tipping location decisions than long-term programs like Good Jobs, he said. They have the largest impact when used to spur development in distressed areas and include mechanisms to encourage local hiring, he added.

"Job creation is valuable," Bartik said. "It's worthwhile having the government do something to encourage it. But we need to try to adopt policies that will maximize benefits versus costs."

Is Good Jobs a good deal?

Under the Good Jobs program, the state captures income taxes from employees at a qualified company and returns the money to the firm when it creates promised jobs that pay above the regional average wage.

The 1,400 jobs FCA plans to create in Warren, for instance, are expected to pay $60,701, just north of the $59,846 average for the region.

Of the five Good Jobs awards handed out so far, only one of the firms had no prior presence in Michigan.

KLA-Tencor, a Silicon Valley-based technology equipment company that works with the semiconductor and nanoelectronics industries, plans to build a research-and-development site in Ann Arbor. The company will qualify for a $16.2 million tax capture if it creates 500 jobs over eight years.

The firm is talking to workers in Northern California, which has a higher cost of living, about transferring to the Ann Arbor area, said Mason, president and CEO of the quasi-governmental MEDC.

“It’s clearly a balance of filling out and rounding out those jobs,” Mason said, offering support for the incentive expansion legislation. “If we’re going to grow our economy, we need to grow the number of companies and the number of workers that are here.”

But critics note the some of the companies that have qualified for the tax breaks to create Michigan jobs have cut them in the past.

This spring, the state promised pharmaceutical giant Pfizer up to $10.5 million in tax capture reimbursement if it follows through on plans to bring 354 jobs to a new sterile drug manufacturing facility in Portage.

The award came 12 years after the New York-based conglomerate cut more than 2,400 Michigan jobs when it shuttered research and development facilities in Ann Arbor and Kalamazoo.

“Some of my very good friends lost their jobs as a result of that move, and now we’re paying them to provide jobs someplace else,” said Sen. Lana Theis, R-Brighton, who voted against the expansion legislation in committee.

“I have concerns about what we’re calling new jobs.”

Acrisure, a national insurance broker headquartered in Caledonia, won a $6 million incentive to move roughly 20 miles to downtown Grand Rapids, where it plans to create 400 jobs paying an average of $74,464.

The firm had “outgrown” its old headquarters and was considering a move to other states like Illinois, New York and Indiana, said Brad Comment, vice president of investor relationships for The Right Place, a West Michigan economic development organization.

If Acrisure had left, Michigan “could have lost the opportunity for 400 new jobs” in addition to the 300 existing workers the company also plans to move from Caledonia, Comet said.

Those sorts or promises are hard to verify, however, and have come under scrutiny following explosive testimony in New Jersey, where a gubernatorial task force is examining the state's tax incentive programs following a critical audit.

Testifying under oath, a former executive at Jackson Hewitt said the company was already planning to stay in New Jersey but falsely told state officials it was contemplating a move to New York or Florida in order to secure a $2.7 million incentive.

A more holistic approach?

Former Gov. Rick Snyder, a Republican, scrapped most of Michigan’s business tax incentives when he took office in 2011 and instead lowered business taxes across the board. But Snyder turned back to incentives in 2015, when he signed a law giving sales and use tax breaks to Switch and other "colocation” data centers that offer server rental space to other firms.

Two years later, Snyder signed the Good Jobs incentive law. He also signed a “transformational brownfield” incentive heavily pushed by Detroit billionaire businessman Dan Gilbert, whose redevelopment projects have since qualified for $300 million in incentives under the program.

Officials say the Good Jobs for Michigan program has helped facilitate major investments, but the income tax capture plan was part of larger incentive packages that failed to attract some of the biggest potential deals the state had sought in recent years.

The MEDC in 2017 offered Foxconn Technology Group of Taiwan a total of $7.3 billion in tax breaks for two potential developments in Marshall and Romulus, including $578 million in tax captures through the Good Jobs program lawmakers had not yet approved with a $200 million cap.

The MEDC also offered $200 million in Good Jobs tax captures as part of a $4 billion incentive offer for Amazon to build its second world headquarters in Detroit. The tech giant is instead pursuing two new campuses in New York and Virginia.

Tax incentives are popular with politicians because they help them credit for creating jobs and frame photo ops, but also be used to deflect blame, said Jensen, who explored the political dynamics of the incentive programs in his 2018 book.

“If you didn't offer incentives to Amazon HQ2, Foxconn or auto companies you’re open to criticism that you didn't try,” Jensen said. “And in our research, we found it’s a great way to minimize blame. 'Hey, I put everything in. It's not my fault. It's some other fault.’”

In the case of Foxconn, President Donald Trump joined state and company officials in Wisconsin to announce a major investment there, using golden shovels to break ground on a project that has so far failed to live up to lofty promises.

In Michigan, Democratic Gov. Gretchen Whitmer this year called the combination of $319 million in state and local tax incentives for FCA a “conservative” award given the automakers planned investment of $3.5 billion in Metro Detroit.

“We secured the largest automotive assembly plant deal in the country in the last decade,” Whitmer said shortly after the Michigan Strategic Fund approved state incentives, calling it a “historic day.”

When Detroit lost out in the bidding war for Amazon's second world headquarters, regional leaders said the company had criticized the city's lack of mass transit and questioned its ability to attract talented workers.

Crystal City in Northern Virginia, where Amazon decided to invest $2.5 billion in a new facility, offered the company a $1.85 billion package, but only $550 million of that was a direct incentive for creating jobs, according to reporting by the Richmond Times Dispatch. Most of the package represented long-term state investments in higher education and regional transportation.

Michigan Sen. Mallory McMorrow, D-Royal Oak, cited Virginia’s Amazon HQ2 offer as she sat out the committee vote on the Good Jobs extension, instead choosing to “pass” on the bill.

“We hear refrains all the time that this is a tool in the tool box, but you look historically, Michigan is still dead last in the country for increases to education funding,” she said. Revenue sharing to local governments “is down, and we don't have the infrastructure."

McMorrow said she wants the state to consider other “tools” and is preparing to introduce tuition reimbursement legislation to help encourage a more educated workforce.

"My hope is that we take a look at what states like Virginia have done, which is not intentionally anti-incentive, but building it into infrastructure and increasing our talent program so that it can be a more holistic solution,” she said.

Michael LaFaive, senior director of the Morey Fiscal Policy Initiative at the free-market Mackinac Center for Public Policy, was less polite in a plea for lawmakers to reject the proposal.

"There's no reason millions of Michigan taxpayers should pay full freight while some corporations, multinationals and others enjoy fiscal windfalls,” he said.

 

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