Tax incentives have been a huge help to businesses in Michigan and across the nation. By offering money to firms that are ready and willing to expand, their availability has spurred so many investments.
Michigan's former governor, Jennifer Granholm, supported the offering of tax incentives to businesses. Under her watch, the Michigan Economic Development Corporation, or MEDC, specialized in targeting specific industries for development in state.
The MEDC is an agency that encourages cooperation between state and local governments and, as its website states, has "the ability, authority and reach to serve as a one-stop resource for business retention, expansion and relocation projects."
"We are the agency of state government that is directed with marketing the state both for travel and tourism, but also marketing the state in the sense of helping businesses locate here and (helping) businesses (that are) already here expand," said Michael Shore, the MEDC's director of corporate communications.
This agency was created in 1999 by former governor John Engler's administration because Engler was interested in competing with other states for business, said George Erickcek, senior regional analyst at the W.E. Upjohn Institute for Employment Research.
Before creating the MEDC, Engler had determined the state should change its overall economic development policy and lower taxes, Erickcek said. He thought having a low-cost business environment would prove more successful than having the government try to pick winners by offering tax incentives to certain industries.
But Engler's opinion on economic development policy was soon changed. When, twenty years ago, General Motors was considering closing either its Willow Run assembly plant, located near Yipsilanti, Mich., or a plant in Arlington, Texas, it was the Yipsilaniti plant that eventually was chosen to close its doors. This decision likely was due to the fact that Michigan had no tax incentives to offer the company. Texas's governor, on the other hand, offered GM $30 million in incentives. And so, it was decided that Willow Run would be eliminated.
After this incident, Engler realized tax incentives were necessary for Michigan to be a national competitor.
This is something most governors eventually come to realize, Erickcek said.
"It's a necessary evil," he said. "(Governors) wish they wouldn't have to (offer incentives), but as long as other states are doing it, they feel they cannot walk away from the table."
Engler established the MEDC and instituted several incentive programs including the Michigan Economic Growth Authority, or MEGA, and alternative energy and brownfield tax credits.
Granholm followed suite, creating credits for film production and advanced battery production.
But unlike his predecessors, Governor Rick Snyder is not interested in incentive programs, Shore said.
"The Governor has offered some significant proposals that will be going into effect in the next month or so, so our roles (at the MEDC) are changing," he said.
Snyder has been planning a reform of the MEDC that includes eliminating many tax credits and incentives offered by the state.
Tax credits currently are available to businesses for their efforts at job creation and business expansion. Businesses who decide to expand in Michigan and make an investment of millions of dollars are eligible for such credits.
"Assuming (your business) hit targets and mileposts, you can collect a rebate on your state tax liability over the course of (some) years," Shore said.
Incentives programs specifically designed to grow the state's presence in certain industries also are in place, Shore said. These incentivized industries include alternative energy, advanced manufacturing, film, life sciences and homeland security.
But Snyder believes in a lower overall business tax, not incentives. With plans to set a 6 percent corporate income tax, Snyder hopes to incite economic development by leaving businesses with more money with which to invest and expand.
Michigan's business tax currently is neither very high nor very low compared to those of other states, but Snyder's change would make the state's tax on businesses one of the lowest in the nation, Shore said.
"That in and of itself becomes an incentive," he said. "The basic premise is if you lower cost for businesses they'll be able to expand and create new jobs."
But Erickcek said that lowering an average tax in this manner will not necessarily incite economic development as Snyder hopes.
"(Snyder's reform) could have a more powerful effect if it focused more on marginal taxes than the average tax," he said.
A marginal tax, Erickcek said, is the rate at which the state taxes a business's new investment. If the marginal tax was at zero, for example, new investment in the state would not be taxed at all.
Incentives lower the marginal tax because they lessen the amount businesses must pay to expand - businesses receive money to make new investments or receive money in return for making new investments.
Incentives are used to push businesses interested in investing in state to actually invest. The government should strive to help such firms - firms that are poised for growth, Erickcek said.
"You want to cut marginal taxes," he said. "The tax on business ready to expand."
Erickcek said most businesses in state do not grow; they stay fairly stable. So when you lower the tax rate overall, as Snyder plans to do, it's wasteful.
"Many firms will not expand," he said. "They will only increase their profits."
Man with a Plan
Despite Snyder's interest in moving away from incentivizing industries, Shore said it's important to note the budget still includes $50 million for incentive programs like MEGA and the brownfield tax credits.
"There's still a pool of money for the continuation of programs similar to what we've done in the past," he said.
But Shore said these programs would be different from those currently offered by Michigan. Specific industries will no longer be targeted, removing barriers so that industries like agriculture too can benefit from incentives.
And because, as many critics of incentives argue, governments are not good at identifying which industries will excel and expand - at picking winners - this widening of eligibility will only benefit the state. So many industries will have a better opportunity to grow and so too will the state's economy.
Shore also reminded that the MEDC and its reform is being led by someone who has had years of experience as a successful economic developer, CEO Mike Finney.
"It's a plan that has been developed and vetted by someone who's been in the business for a long time," he said.
Despite concerns of critics, Shore said the MEDC is confident a lower overall business tax climate will make the state attractive to investors.
One industry that Granholm worked during her time in office to expand with incentives was that of alternative energy. She worked to encourage firms to invest in bioenergy, wind energy, advanced energy storage, advanced batteries, solar energy and hydroelectricity.
And MSU professor of political economy Bryan Ritchie said this encouragement was good.
"They made the sweet spot for us," he said. "(In Michigan), you've got all the resources - you've got the expertise; you've got the labor.
"(Alternative energy) really could be our next industry."
But some worry that without industry incentives, Michigan will lose it's competitive edge in the alternative energy industry. Businesses will instead invest in states like Iowa, Missouri, Arizona and California.
Ritchie said to encourage growth of this industry the government should focus not on the business but on the market. There needs to be a market for the products these businesses create.
"You need to think about a market for these things, or you're not going to be successful," he said.
Rather than lower taxes on businesses or offer incentives to industries, Ritchie said officials should provide the consumers with tax incentives and credits. This would encourage the purchase of the fruits of businesses' labor. If consumers were encouraged to buy, businesses would increase their profits. And with this increased revenue, they would in turn be encouraged to expand and invest.