Dillon, Bernero largely agree on business tax incentives

Lansing Mayor Virgil Bernero (Photo by Todd A. Heywood/Michigan Messenger)

The two Democratic candidates for governor, Lansing Mayor Virg Bernero and House Speaker Andy Dillon, both recognize that tax breaks can be an effective way to attract businesses to invest in Michigan. But both also say that the state needs to do a better job of evaluating which tax incentives are working to create new jobs and which ones are not.

The use of tax credits to attract business has become perhaps the primary tool for state officials to attempt to create jobs. But recent studies have shown that many of those credits fail to create the number of jobs promised — even while the company that gets them continues to benefit from the lowered taxes.

A slow of recent scandals has also helped focus attention on those tax breaks. In March Gov. Jennifer Granholm appeared on stage with a Flint man whose company was being given a $9.1 million tax credit; the man turned out to be a convicted embezzler and scam artist. More recently, controversy has erupted in Grand Rapids over tax incentives given to build a new film studio where one of the principals involved, an aide to a Michigan state legislator, was heard on tape discussing how he and his cohorts had “made a profit” on the state through those tax incentives.

Ostensibly, the incentives lure businesses to Michigan, bringing jobs. But studies by both conservative and liberal groups have repeatedly found that they often fail to do so. A study by the right-leaning Mackinac Center found that such credits rarely created the number of jobs estimated in advance:

“In this study, the authors explore MEGA data to see whether actual job creation meets the MEDC’s estimates. The authors inspected credits awarded from 1995 to the end of 2004 and found that while MEGA deals were expected to produce 61,043 jobs, only 17,971 were ultimately created. Hence, the actual job count was just 29 percent of the expected total — less than one-third. In practice, an announcement that 1,000 direct jobs are expected at a MEGA facility translates into 294 actual jobs on average.”

A similar study by the Michigan Education Association earlier this year of the eight most commonly used tax incentive programs was even more damning, concluding that the use of those credits “cost the state almost 25,000 jobs and $85 million in tax revenue per year when compared with an alternative policy of a small change in tax rates.”

The auditor general of the Michigan Economic Development Corporation, which oversees most of those tax incentive programs, concurs with much of that criticism. An AG’s report from April concluded that many of the tax incentives given fail to live up to the promised job creation and that the agency lacks the ability to measure the effectiveness of each credit given.

Bernero and Dillon want to continue to use tax incentives to attract investment but say they will bring more transparency and accountability to their use.

As Bernero traverses the state he touts figures of bringing $600 million and 6,000 jobs into Lansing’s economy. Figures from the Lansing Economic Development Corporation show that the city has leveraged just over $577 million in investment with over $177 million in incentives over the last few years. And Lansing does appear to be in relatively better shape than much of the state.

According to simplyhired.com, the area has seen a 22 percent decrease in jobs since November of 2008. But the Federal Bureau of Labor Statistics unemployment numbers show that in May of 2010 the city had a jobless rate of 10.2 percent, considerably better than the state average of 13.7 percent.

But do they also lower tax revenues at time when state and local governments are starved for money to fund crucial government services? Bernero spokesman Jamaine Dickens says no.

“The City of Lansing has gained tax revenues from nearly all of these projects. It has lost no taxes, because the projects themselves would not even exist to pay those taxes,” Dickens said. “The principal reforms that need to be made to state tax incentives relate to transparency and accountability.”

And reforming the incentives programs with transparency and accountability is also what House Speaker Andy Dillon says he will do, if elected governor.

T.J. Bucholz, communications director for Dillon’s campaign, says that if elected the first thing Dillon will do is a systematic check of all incentives, verifying which ones are working to provide the number of jobs promised, and which ones are falling short.

“Obviously we agree on transparency and accountability,” Bucholz said. “You have to make sure they are working. You can’t just keep them in place and say they are there because they have always been there.”

Neither Bucholz nor Dickens specified exactly how they would go about monitoring the effectiveness of the various tax incentives or what they would do to fix the system.

State Sen. Nancy Cassis (R-Novi) serves as chair of the Senate Finance Committee and has been a staunch critic of such tax incentives. She echoes the Mackinac Center study which found the Michigan Economic Growth Authority job creation numbers were wrong, saying the state has lost one million jobs, but only created through the tax incentives program 18,000 new ones.

“That’s a drop in the bucket,” she says.

“It seems ironic to me you have to increase taxes on all the taxpayers to provide credits to the few, rather than lowering all taxes, making your state more competitive,” she said.

Former State Treasurer Doug Roberts, now an MSU professor, says Cassis’ argument of “picking winners and losers” is a strong argument against incentives, but says they are sometimes necessary for the state to compete with neighbors.

Former Lansing Mayor Tony Benevides, who was defeated in 2005 by Virg Bernero, similarly used state tax incentives to lure businesses to the city. He said that monitoring the number of jobs actually created has long been a problem.

“We gave a lot of tax abatements to different companies and it was very evident that we would send out Human Relations Department to check on those companies. Half the time they did not bring in the number of people they said they would,” Benevides said.

Benevides said that had to be addressed. He also said that many of the businesses are being approved for 10 or 12 year tax incentive programs, but really only need six or eight years.

“Give them just enough for them to come out of whatever they are doing. We have to put the brakes on and take a look at what exactly is it we are doing,” he said. “I think they do work. But I think there is a limit as to how much we can do.”

The key question, critics say, is whether the relatively meager number of jobs created is worth the loss of revenue from the tax credits themselves. The state of Michigan has faced budget deficits of a billion dollars or more routinely over the last few years, necessitating steep cuts in crucial programs.

The criticisms are partially because Michigan gives away $6.3 billion more a year in credits, deductions and incentives than it takes in in tax revenue. The Michigan League for Human Services noted in an April 2010 report that the state in 2009 took in a total of $22.7 billion in tax revenue, while giving out $35.4 billion in tax incentives.

Some of those tax breaks, like the Earned Income Tax Credit, help the state’s poorest residents by providing additional money for necessary expenses, the MLHS says. But others, they argue, are simply giveaways to companies that contribute to political campaigns that do little to create jobs while they “quietly drain the state of billions of dollars in revenue every year.”

The MLHS recommends the creation of a joint committee in the state legislature to develop a formal process for reviewing the effectiveness of every tax credit given by the state and says that all credits should have a sunset provision so that they must be renewed by the legislature following a thorough review of the effectiveness of each particular tax break.

“With declining state revenues, another budget gap looming, and more painful cuts on the horizon,” the MLHS says, “the state cannot continue to give away revenues.”