Michigan

Tax incentive evaluation ratings

Tax Incentive Evaluation Ratings: Michigan

Rating: Trailing

Key points:

  • Michigan is trailing other states because it has not adopted a plan for regular evaluation of tax incentives.
  • The state has shifted its economic development strategy in recent years, but these decisions have not been adequately informed by analysis of the results of incentives.
  • The Michigan Economic Growth Authority (MEGA) tax credit has caused budget challenges, highlighting the need for better information.

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Michigan has shifted its economic development strategy in recent years, investing heavily in tax incentives at some points and scaling back at others. Because the state lacks an ongoing process for evaluating incentives, however, it made these shifts without adequate information about whether these programs were working or how they might be improved.

Michigan scaled up its suite of economic development tax incentive programs during its long, severe economic downturn, placing big bets on such industries as advanced battery manufacturing. Then in 2011, the state significantly scaled back its tax incentives, preferring to cut business taxes broadly and deploy grant-based programs.a In late 2015, though, the state reversed course, creating a new sales and use tax exemption for data centers designed to lure a Nevada-based company to make a potential $5 billion investment in the state.b

As lawmakers have considered these changes, they have debated both the cost and effectiveness of the state’s incentives. Budget challenges have been a particular area of concern. Even though the state’s flagship MEGA tax credit program was closed to new participants in 2011 (along with many other tax incentives), the costs of the program are expected to continue until at least 2032 as a result of the state’s pre-existing commitments.c In 2015, lawmakers had to close a midyear budget gap with spending cuts after it became clear that the incentives were going to be far more expensive than projected, throwing the budget out of balance by hundreds of millions of dollars.d

As the state continues to weigh its approach to economic development, lawmakers should consider building a stronger foundation for future decision-making by establishing a regular cycle for review. Evaluating cash and tax incentive programs together, as states such as Oklahoma are doing, would allow policymakers to compare the results of programs with similar goals across the state’s economic development portfolio.e Without an ongoing process for evaluation, lawmakers will not have the information they need to understand whether incentives are successful and to identify opportunities for improvement.

Endnotes

  1. Beata Mostafavi, “Flint and Other Municipalities Prepare for Massive Tax Overhaul and Reduced Tax Incentives Under Gov. Rick Snyder Legislation,” Flint Journal, Dec. 18, 2011, http://www.mlive.com/business/mid-michigan/index.ssf/2011/12/flint_and_other_municipalities.html.
  2. Matt Vande Bunte, “Gov. Snyder Signs Tax Breaks for $5B Switch Data Center,” MLive, Dec. 23, 2015, http://www.mlive.com/business/west-michigan/index.ssf/2015/12/switch_snyder_michigan_data_ce.html.
  3. Elizabeth Pratt, Cory Savino, and David Zin, “A Primer on Certificated Credits Under the Michigan Business Tax,” Michigan Senate Fiscal Agency (2015), 2, http://www.senate.michigan.gov/sfa/Publications/Notes/2015Notes/ NotesWin15lpcsdz.pdf.
  4. David Eggert, “How Snyder, Lawmakers Are Filling $412 Million Budget Hole,” South Bend Tribune, March 10, 2015, http://www.southbendtribune.com/news/politics/how-snyder-lawmakers-are-filling-million-budget-hole/article_64ce3198-7a14-501a-b3ea-f09e42ea3b39.html; Paul Egan, “Michigan Budget Picture Worsens,” Detroit Free Press, Jan. 14, 2015, http://www.freep.com/story/news/ politics/2015/01/14/michigan-budget-picture-worsens-corporate-tax-credits/21756881.
  5. Oklahoma Stat. § 62-7001 to 7005, http://webserver1.lsb.state.ok.us/OK_Statutes/CompleteTitles/os62.rtf.
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Improving Tax Incentives for Jobs and Growth

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Tax incentives—including credits, exemptions, and deductions—are one of the primary tools that states use to try to create jobs, attract new businesses, and strengthen their economies. Incentives are also major budget commitments, collectively costing states billions of dollars a year. Given this importance, policymakers across the country increasingly are demanding high-quality information on the results of tax incentives.