MEGA 101 –
Do Incentives Work?

August 21, 2006 

Last week, Novi City Council was presented with an opportunity to attract a significant new business to the area.  That business, Ryder System, Inc., is a company that uses leading-edge enterprise transportation management technologies, distribution management solutions, JIT processes, sound business processes, world-class logistics personnel and a rapidly growing market share to maximize customer service and value while minimizing transportation management costs”. 

Ryder is looking to establish a Regional office to consolidate operations.  The new operation would combine offices in Ann Arbor and Farmington Hills to a single campus providing 500-800 high tech jobs.  Representatives from Ryder spoke briefly during the meeting and expressed the need to have a MEGA grant (SBT Tax Credit) to make the Regional office to happen in Novi.  City Council made a $450K commitment to fund road construction to fulfill the requirement of a local match in order for the state to consider MEGA tax credits. 

The balance of this article will review the basics of Economic Development & MEGA. 

Economic Development & MEGA 101 

In recent decades, the age-old economic competition among the United States has turned into an economic battle for specific companies and jobs.  It is a skirmish fought with targeted tax incentives, such as abatements in property or business taxes, offered to firms seen by government officials as particularly desirable for their ability to create jobs and stimulate broader economic growth. 

Kenneth Thomas, a University of Missouri-St. Louis political scientist, estimates that the cost of U.S. state and local incentives provided to corporations every year is $48.8 billion in 1996 dollars1 (though his figure excludes incentives offered in Kentucky, due to a dearth of data). Thomas is not the only scholar to tally a figure of this magnitude. University of Iowa economists Peter S. Fisher and Alan H. Peters believe the annual value of state and local incentives distributed in pursuit of “economic development” exceeds $50 billion. 

The Michigan Economic Growth Authority is Michigan’s primary tax incentive program.  Established by former Gov. John Engler and the Michigan Legislature in the hope of fostering state job growth by encouraging specific out-of-state businesses to relocate to Michigan and specific Michigan businesses to expand here, the program’s 11th birthday is April 18, 2006. 

MEGA’s agreements with targeted businesses require a contribution to the overall MEGA incentive package from the local government or local economic development unit in the area hosting the new or expanded business facility. These local business incentives usually take the form of tax abatements on real or personal property, though they sometimes include such items as permit waivers, road improvements (the form Novi elected) and even discounted access to the local municipal golf course for the business’s employees. 

Companies that seek state Single Business Tax credits must apply to the state-sponsored Michigan Economic Growth Authority and explain why they may choose not to locate or expand in Michigan. The chart below summarizes the reasons companies have listed in MEGA applications filed between April 1995 (MEGA’s inception) and December 2005. 

Does MEGA work as a job creation tool?  The jury is out and may never return.  It could be argued, as it is by many leading economists, that in order to attract and retain industry, state government should concentrate on creating an environment that produces the specialized infrastructure and human capital that will make it unreasonable for firms to even think about locating in another state.  Good infrastructure, a highly skilled labor force, and a reasonable business climate will retain high-wage, high-skill jobs in a state and countervail lowball subsidy packages from states that have to buy jobs.  Other states' project-specific incentives will not overcome the disincentives associated with a poor business climate or an unstable tax environment; nor will they do so in Michigan.

One thing is for certain.  Using tax incentives for new business attraction is risky business for state and local governments.  There is not a person on Novi City Council that does not want Ryder to relocate to Novi, however, they agreed unanimously that the local commitment was not going to be in the form of a tax abatement or any other reduction in tax revenue.  The decision on whether to offer tax incentives to Ryder now stands with the by the politically appointed MEGA Board.  Applications for credits over $1 million are processed by the board have 60 days to approve or deny the application. The MEGA Board has discretion to negotiate a tax credit percentage lower than 10 percent of the eligible investment costs.  In practice, credits over $1 million are subject to less certainty and are more difficult to obtain than credits at or below $1 million.  Hard to say how the MEGA Board will decide.  It is an election year and jobs are a currency of election campaigns for incumbents. 

One final question to ponder:  Should government be in the business of picking the winners and losers in the private sector?
 

As I returned from a weekend at Cedar Point, I passed the Jeep Assembly plant in Toledo and was amazed at the number of vehicles sitting in various parking lots along I-75.  As I drove further North towards Detroit, I was also stuck by how rare it was to see a full car carrier driving Southbound.
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During the past several weeks, I have been doing a great deal of reading on Economic Development and Tax Incentives.  There has been a great deal written on both sides of the argument and some of it high contradictory. 

A 1996 study written for the Mackinac Center for Public Policy entitled “MEGA Industrial Policy: An Analysis of the Proposed Michigan Economic Growth Authority” highlighted the problems projected to characterize MEGA. 

1.      Targeted tax credits have no significant impact on job creation;

2.      MEGA would discriminate against small businesses, retail businesses, and capital intensive businesses;

3.      MEGA would allow certain firms to be favored over their in-state competitors;

4.      General tax and regulatory reforms are already working;

5.      MEGA would be a massive realignment of Michigan tax policy;

6.      MEGA would allow a small group of political appointees to determine tax policy for some of Michigan's largest corporations;

7.      MEGA incentives would have to continually increase to be competitive;

8.      MEGA would make it more difficult to lower overall tax levels;

9.      MEGA would be difficult to terminate once established;

10.  MEGA would increase the cost of state government;

11.  MEGA would require companies to spend thousands of dollars in the application process, with no guarantee that they will be selected for an incentive, and it would require them to evaluate locating in a competing state

It could be argued that the problems with MEGA highlighted more than 10 years ago by that study have largely come to pass.  In their recent study, titled "MEGA: A Retrospective Assessment," authors Michael D. LaFaive and Michael J. Hicks, also Mackinac Center for Public Policy, provide an extensive review of MEGA’s track record during the past 10 years, noting that MEGA originally projected that the business firms to which it has offered state tax credits would create 35,821 jobs at their facilities by 2005, but have produced only 13,541 — about 38 percent of expectations — instead.

"In aggregate, the MEGA (tax) credits (to businesses) have been unsuccessful in improving per-capita income, employment and the unemployment rate" at either the state or county level in Michigan”.

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In the tradition of Ben Franklin, the Novi Post provides informed political commentary on current events in Novi, Oakland County and all of Michigan.