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    In his first budget, Governor Snyder made significant changes to the tax structure in Michigan. One the major changes were a reduction in many tax incentives and the elimination of many more. The most controversial reduction was capping the Michigan Film Tax Credit at 25 million dollars. Snyder contended that Michigan needs to get out of the business of picking winners and losers.   Generally, tax credits are viewed as good for business; good for states and a good tool for attract and grow industry within a state. Historically, policy makers and politicians are the most vocal supporters of tax incentives and credits. However, a recent trend amongst local officials and public and private interest groups has been to limit tax incentives due to the fact that they are "corporate welfare" (Buss 2).  One of the largest problems with tax incentives is that many states offer them out of self defense and not out of economic viability (Buss2). Public officials have the most to gain from tax incentives. Tax Incentives can protect jobs from leaving one state to go to another, rescue failing firms and industries and attract new businesses. Tax Incentives are a win-win for public officials. If the incentive succeeds, they can tout their record of economic success. If the incentive fails, they can blame a poor economy or other market factors. . However, the real beauty is few people are paying attention to the success of tax incentives in their state.
    If few people pay attention to tax incentives that are being bank rolled partially by their tax dollars it is even more important to understand if tax incentives are sound economic policy. Economists have devised several situations where tax incentives can be economical justified.
    1. A society may have unemployed resources that could be used more productively through incentives (Buss 4).
    2. If society is fully employed, it may be spending too little on investment in relation to current. Underinvestment is likely only if an investment produces significant externalities or if capital markets do poorly when financing viable private investment (Buss 4).
    3. Productivity based on tax incentives, as measured by the value of the consumption it creates, exceeds the productivity of all other feasible investments.

    In all three cases, for tax incentives to contribute to economic welfare, they must increase future consumption. And, in the first two cases, this objective is accomplished because the tax incentive causes a net increase in total investment (Buss 4).

    Serious studies of business tax credits began in the 1950s. At this point, tax credits were evaluated based upon economic growth on a comparative level instead of one based on econometric approach. Empirical research failed to establish a strong relationship, as predicted in economic theory. As late as the mid-1980s, economists continued to report no association between taxes and economic growth or in business location decisions. The economic upheaval during the 1970s and 1980s produced many new state and federal development programs. Tax research began to separate taxes from expenditures and to single out different taxes and incentives. New models began to find a negative relationship between taxes and economic growth (Buss 6). Also during this period, analysts began to look at nontax factors (public services, infrastructures, and amenities) and economic growth, finding that they matter perhaps as much as or more than taxes.

    The elimination and reductions to tax incentives made by Governor Snyder were met with opinion and emotion. Advocacy groups produced literature which cited that tax incentives such as the film tax credit added million of dollars to Michigan's economy. There were other advocacy groups who cited that tax incentives cost the state millions and Michigan could not longer afford to pick winners and losers. This should not be surprising. The economic literature on state taxes on the whole offers very little information on how effective tax credits are. Policy makers are quick to promote and create tax incentives due to the political millage they create. Economists caution that tax incentives should only be used in very specific circumstances. A state will most likely continue to offer tax incentives despite what research finds because they have a good political image. Researchers (Buss) offered a protocol list that every tax incentive should meet:
    1. Require a cost benefit analysis prior to large investments in specific firms
    2. Require periodic audits and evaluation of all programs
    3. Require sunset provisions for all economic development legislation terminating programs unless reauthorized by the Legislature. Failing programs should be terminated.
    4. Require transparency of financial documents
    5. Require legally binding performance contracts panelizing those firms who do not meet goals.


    Sources
    Buss, Terry M. "The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature." Economic Development Quarterly: 1-17. Print.

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    The Michigan Policy Network is a student-led public education and research program to report and organize news and information about the political process surrounding Michigan state policy issues. It is run out of the Department of Political Science at Michigan State University, with participation by students from the College of Social Science, the College of Communication, and James Madison College. 

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    Meet your Policy Fellow: Nicholas Biondolillo

    Nicholas Biondolillo is tax policy correspondent for the Michigan Policy Network. Nicholas is a first-year student in Engineering at Michigan State University.