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  • State Budget

    The Legislature’s ongoing budget discussions have dramatically shifted in tone since economic forecasters revealed that businesses with tax agreements under the Michigan Economic Growth Authority (MEGA) are submitting much higher claims than originally anticipated. The shortfall affects both the current 2014-15 budget and future budgets until 2032, and will be a thorn in lawmaker’s sides as they try to plan around the MEGA program’s unpredictability. The revelation of the impending shortfall due to MEGA claims presents Michigan news watchers a glimpse of the methods that governments use to attract and retain companies, promote job creation, and power the economy. While most government operations - federal, state, county, and municipal - have long utilized their resources to attract business growth, state policy in Michigan shifted substantially after Governor Rick Snyder came into office in 2011. The Snyder Administration has pursued ending tax credit incentive programs that they believe leave the state with complex and fluctuating liability, and the Administration instead has implemented programs aimed at attracting business growth with upfront cost to the State’s General Fund. Growth initiatives such as the Michigan Business Development Program (MBDP) exemplify this policy shift in action, and it is just one example of the Administration’s broad overhaul of economic development policy.

    . MEGA Background

    The MEGA program, established under PA 24 of 1995, offered incentives in the form of tax credits to businesses that created a required number of jobs in the state. The program, administered by the Michigan Economic Development Corporation and authorized by the Michigan Strategic Fund (MSF), used more than ten specialized formulas that determined the amount of the credit. The formulas were generally based on a variation of the number of jobs created, wages/benefits, and personal income tax. As Michigan’s economy slowed in the mid-2000s and struggling Michigan companies threatened to leave the state or downsize their operations, Michigan policymakers reacted by decreasing the requirements that allowed them to cash in under their MEGA tax credit agreements. The scope of the MEGA program increased dramatically during the 2008 financial crisis when the legislature authorized the MSF to offer MEGA Global Retention Credits. The Global Retention Credits offered larger incentives, in some cases doubling the incentive to continue operations in the state. The increased incentives have widely been credited with slowing the bleeding in the wake of the recession as they prevented thousands of potential layoffs and factory closings.

    MEGA vs. MBDP

    Tax reform was at the top of Governor Snyder’s agenda when he came into office, and his Administration aimed to simplify the tax code with the elimination of the Michigan Business Tax (MBT) and adoption of the 6% Corporate Income Tax in 2011. The elimination of the MBT brought an end to a number of tax credit programs, including the MEGA, and replaced them with grant and loan programs such as the Michigan Business Development Program. The idea going forward, according to Governor Snyder, is to simplify the state’s business tax structure. While MEGA and the MBDP are housed under the MSF and administered by the MEDC, they are vastly different in function and practice. Steve Arwood, President and CEO of the MEDC, compared the two programs in a testimony to the Michigan House of Representatives Tax Policy Committee in late February. The following chart combines Mr. Arwood’s comparison with general facts describing how the programs operate. It further illustrates the contrasting approach between pre- and post-MBT economic development strategies:

    MEGA
    · Tax credit to be claimed at completion of agreement requirement

    · Funded via “credit card” to be paid in future years

    · Difficult to forecast impact on General Fund

    · No legal requirement for companies to submit tax credit in the year it is certificated

    · Variable effectiveness – varies with year and economic climate

    · MSF support variable based on number of jobs realized

     

    MBDP
    · Loan, grant, or other economic incentives

    · Funded via “checkbook”; appropriated and paid for up front

    · Impact on General Fund known with certainty

    · Strong effectiveness – ~100% of jobs forecasted are realized

    · MSF support for any one program shall not exceed $10,000,000


    Why It Matters

    While new MEGA tax credits were not offered after 2011, the agreements made prior to 2011 must be honored by the state as long as the companies that hold them remain under the now-defunct MBT code until the completion of their original agreement. These agreements are long-term, meaning the state has to account for MEGA liabilities until the last of the agreements expire in 2032. In their revised forecast, the MEDC estimates that the total remaining liability amounts to $9.3 billion, up from its previous estimate of $6.5 billion. The dramatic increase in their estimate is due to the variable nature of the agreements, which reward companies for increased capital investment and job growth. Recently, companies have been investing in the state and are thus eligible to claim a larger amount. The MEDC’s original assumption was that only 35-50% of the credits will be claimed, but they have upped this number to 80-100%. The increased claims have created a $325 million budget hole in the current fiscal year, and lawmakers are responsible for covering the shortfall in both the current budget and going forward.

    Conclusion

    Mr. Arwood will continue to be responsible for explaining the nature of MEGA vs. MBDP strategies to both lawmakers and the public. As Michigan continues to recover from the financial crisis and competes nationally for business attraction, lawmakers will have to consider the long-term effects of various approaches to economic development. The shift from tax credits to grants and loans is one strategy that Governor Snyder argues makes Michigan more competitive, while inflicting minimal damage to the state budget. While Snyder is committed to this economic development approach, it remains to be seen whether the shift in strategy will be continued or disbanded in future administrations and economic cycles.


    Sources

    Arwood, Steve. "History and Impact of the MEGA Program." House Tax Policy Committee. House Office Building, Lansing. 18 Feb. 2015.house.mi.gov. Web. 7 Mar. 2015.


    Bomey, Nathan. "Michigan's Economic Recovery Hinges on Turnaround Strategies Debated by Rick Snyder, Virg Bernero." The Ann Arbor News. MLive Media Group, 12 Sept. 2010. Web. 8 Mar. 2015.

    Lawler, Emily. "Michigan on the Hook for $9.38B in Budget-busting MEGA Tax Credits, According to Revised Estimates." MLive.com. MLive Media Group, 18 Feb. 2015. Web. 07 Mar. 2015.

    "MEGA Credit Unpredictability Difficult to Fix - MEDC Says." Gongwer.com. Gongwer News Service, 16 Jan. 2015. Web. 07 Mar. 2015.


    "Michigan Business Development Program Projects (MBDPP)."Michiganbusiness.org. Michigan Economic Development Corporation, n.d. Web. 07 Mar. 2015.

    "Michigan Strategic Fund Overview." Senate.michigan.gov. N.p., 5 Sept. 2013. Web. 8 Mar. 2015.

    Wiegand, John, and Joe Boomgaard. "As Policies Shift, State Incentives Continue to Favor Manufacturers." Mibiz.com. Revue Holding Company, 1 Mar. 2015. Web. 7 Mar. 2015.

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    Meet your Policy Fellow: Evan Martinak

    Evan Martinak is state budget policy fellow for the Michigan Policy Network. Evan is from Walled Lake, Michigan on the east side. He is a student in James Madison College, pursuing a major in international relations and also doubling it with an economics major. He intends to pursue a minor in Philosophy of Law. He is highly involved in student government at MSU. He is a member of ASMSU (The Associated Student of Michigan State University) as well as James Madison College Student Senate. He is also an avid Manchester United fan.