BILLIONS: Bad News for Michigan, Great News for Missouri
As a former Michigan resident and current Missourian, I am both dismayed and elated by the latest news from the Great Lakes State. Yesterday, Michigan’s governor announced that the state had awarded more than $2 billion (yes, billion) in tax credits. The bulk of these tax credits will go to car manufacturers: Ford Motor Company is set to receive $909 million from the state, while Chrysler, a company that has already received a great deal of public subsidy, is set to receive an additional $1.3 billion.
As has been discussed on this blog before, tax credits are not free money. A tax credit is a dollar-for-dollar reduction in an individual’s or company’s tax bill. In short, if a state awards you a $1 tax credit, that credit reduces your tax bill by $1, and the state’s revenue by $1, all else being equal. Looking at yesterday’s tax credit bonanza, Michigan has promised away more $2 billion of its future revenue. This strikes me as less than prudent, especially because the AP has recently reported that Michigan is already facing a budget deficit of more than $1 billion. It will also have negative fiscal consequences for the state’s other residents, because when targeted industries are exempted from paying taxes, the marginal tax rate for everybody else will rise if government spending doesn’t decrease by the amount of the credit issued.
This is terrible news for current Michigan residents. The governor justifies the $2 billion in credits by promising, in her press release, a great deal of new economic activity that will be spurred by the public subsidy. Michigan officials anticipate more than 6,000 new jobs, and a retention of more than 216,000 jobs.
They should know better than to make such lofty promises of job creation. The Mackinac Center for Public Policy, a nonpartisan research and educational institute, showed in an extensive study that the award of tax credits rarely creates the economic activity it promises. According to the Mackinac study of tax credits awarded in Michigan during a 10-year period, 127 projects were approved (just like the projects announced by the governor’s office yesterday), but only 10 projects had created the number of jobs promised. Michigan’s tax credit program success rate is a minuscule 7.87 percent.
Michigan’s tax credit failure rate fits with Show-Me Institute Research Analyst Christine Harbin’s recent observation, in her testimony before the Missouri Tax Credit Review Commission, that when it comes to subsidizing economic activity, governments frequently end up supporting industries in decline:
The government has no special ability to predict which businesses and industries will succeed. Yet tax credits are an attempt to identify and subsidize future successes. Unfortunately, in the game of picking winners and losers, the government almost always picks losers. This is because tax credits are an attempt to protect companies and industries that the market has already rejected to some degree. If they were successful and viable on their own, these companies and industries wouldn’t need to seek the favor of the government.
In the context of Harbin’s analysis, the following statement from the press release is downright depressing: The tax credits awarded to Chrysler and Ford will “[guarantee] the auto industry’s long-term future in Michigan.”
But there is good news for Missouri residents. The Michigan release specifically notes that two of the companies awarded tax credits were considering locating in Missouri.
Michigan awarded one company $1.5 million in order to “convince the company to expand in Michigan over competing sites in Missouri and Illinois.” Michigan awarded another company $1.1 million “to expand in Michigan over a competing site in Missouri.”
If we consider only the promised economic activity, it may appear that Missouri has lost out on some opportunities for job creation. However, now that these companies will locate in Michigan and receive subsidies from Michigan taxpayers, Missouri residents will not have to pay the millions it would have taken to persuade the companies to move here (assuming the state doesn’t decrease spending elsewhere in its budget to make up for the resulting revenue loss).
Furthermore, we have to keep the tax credit failure rate in mind. Tax credit awards, according to the Mackinac study, rarely result in the promised economic activity. More likely, Missouri would end up with the cost of the tax credit, but without promised resulting job creation and growth.
I am more excited and optimistic about the economic growth that has, and will, come about in Missouri as a result of widespread individual enterprise.