Mackinac Center for Public Policy, House Bill 5426, January 25, 2022

Summary

Testimony dated January 25, 2022 on House Bill 5426 from Michael LaFaive and James Hohman of the Mackinac Center for Public Policy. It states that House Bill No. 5426 is identical to SB 615 and would repackage the "Good Jobs for Michigan" program as the "Michigan Employment Opportunity Program," authorizing $300 million in discretionary business subsidies. The testimony argues that such subsidies are ineffective at creating jobs, citing research that Michigan taxpayers offered on average nearly $600,000 worth of incentives for every job created per year. It states that administrators could approve 40 deals a year, that companies may receive payments for up to 10 years, and that the program has a sunset provision for the end of 2026. As an alternative, it urges lawmakers to pass SB 768 to decrease the personal and corporate income tax rates.

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4.
MACKINAC & CENTER
FOR PUBLIC POLICY House Bill 5426

January 25, 2022

Michael LaFaive James Hohman
Senior Director of the Morey Fiscal Policy Initiative Director of Fiscal Policy
afaive@mackinac.org hohman@mackinac.org

Summary: House Bill No. 5426 is identical legislation to SB 615, which repackages the “Good Jobs for
Michigan” program by creating a new corporate welfare program that authorizes $300 million in
discretionary business subsidies to companies that meet specified state criteria. Michigan offers a number
of selective business subsidy programs that receive annual appropriations. This new program would not
require an annual budget authorization.

Highlights

Providing special favors and taxpayer cash to companies is an unsuccessful strategy for several reasons.

e They are ineffective at creating jobs — the economists who study the programs rarely find that they
are worth the effort.’ Per year, Michigan taxpayers offered, on average, nearly $600,000 worth of
incentives for every job created, according to a statistical analysis of state incentive programs, going
back to 1983.7

e Alarge academic review of hundreds of studies found that “economic development incentives have
little or no impact on firm location and investment decisions.”?

e ltcan be expensive to the state budget — the state treasury is expected to pay out more than $500
million this year to companies that have been awarded selective subsidy deals.*

e It is unfair to the businesses that do not get them, and the companies that do not receive deals often
pay their fair share of taxes.

Michigan should encourage job growth by improving the business climate and improving the quality of life in
the state, not by subsidizing select companies.

Background/Problem:

HB 5426 and SB 615 repackage the “Good Jobs for Michigan” subsidy experiment, which expired in 2019,
as the “Michigan Employment Opportunity Program.” The “Good Jobs” experiment was itself a repackaged
version of the failed and deservedly defunct Michigan Economic Growth Authority (MEGA), which cost
Michigan taxpayers billions with nothing, on balance, to show for it.5°

As with “Good Jobs,” the Michigan Employment Opportunity Program selects corporations believed worthy
of taxpayer subsidies and, if eligible, send them checks from the state. These would amount to up to 100%

' See, for instance, a 2018 review of the economic development research (https.//www_mackinac org/24377), and an earlier meta-
review of the literature (htips://www.mackinac.org/archives/2009/nr043009-petersfisher_pdf).

2 Economic Development? State Handouts and Jobs: A New Look at the Evidence (August 2020), https.//www.mackinac cra/S2020-05.
3 The Failures of Economic Development Incentives (Winter 2004), httos./www_mackinac ora/archives/2009/nr043009-petersfisher, pdf.
‘4 Michigan Strategic Fund 2021 Certificated Credit report,
htips:/Avww.michigan.gov/documents/treasury/Sec._94112_MEGA_and_Other_Certificated_Credits_2021_Annual_Report_743179_7.p
of

5 Good Jobs For Michigan is a repackaged MEGA (May 2017}, httos.//www.mackinac org/legislature-considers-reopening-a-closed-
business-subsidy-program.

® MEGA Mistake: Big Corporate Welfare Program Still a Waste (August 2020), https. www_mackinac.org/mega-mistake-big-corporate-
of the personal income taxes paid by new hires depending on average wages, the number of jobs at the
project and county size. Corporations can be eligible for 50% of the personal income taxes paid by new
hires if they propose smaller projects that pay average regional wages. Income taxes would be captured in a
special fund housed in the state treasury. The program is capped at $300 million and contains a sunset
provision for the end of 2026.

Data Shows Economic Development Programs are Unsuccessful

Unfortunately, this new Michigan Employment Opportunity Program is unlikely to improve Michigan's
economic situation and will waste taxpayer dollars. Research by economic experts across the country
demonstrates that results from such programs on balance are not positive.’ Michigan specific research
has found that, per year, Michigan taxpayers offered on average nearly $600,000 worth of incentives
for every job created.’

The MEGA, on which the Good Jobs program and the proposed new program rest, was found to cost
$125,000 in incentives offered per job created per year.® A similar program in Kansas was equally
ineffective. An analysis of the Promoting Employment Across Kansas program, which is structured very
similarly to the newly proposed Michigan program, found that businesses subsidized by this program were
no more likely to create jobs than similar businesses that were not.'°

Proponents of programs like those in SB 615 argue that, because the facilities receiving these deals would
not have come to the state without the deals, these are not dollars that the state would have had otherwise -
thus, lawmakers should ignore the costs. However, recent research finds that deals are only effective at
changing where projects are located in between 2% and 25% of deals."' Additionally, these deals only
account for a fraction of jobs created in a state at any given time.

Fiscal/Economic Impact:

The bill includes a cap that authorizes $300 million in total funds to be collected and distributed to selected
companies.’? Administrators are authorized to approve 40 deals a year and may carry over unused authority
to future years. Timing for payments will depend on when contracts with the state are signed and when they
expire. The bill authorizes deals to be awarded until 2027, and companies may receive their payments for
up to 10 years.

There is an unknown economic impact on Main Street businesses, which are already having major
challenges filling the job vacancies. Company-specific incentives, like this, can make labor costs more
expensive for the Main Street businesses that don't get these benefits.

Alternative Solution:

The objective of the legislation to create better-paying jobs and encourage business leaders to invest and
grow is important, especially to recover from economic losses from the pandemic. But, instead of handing
out special deals to connected companies, lawmakers should improve the overall state business
climate. Policymakers should pass bill SB 768 to decrease the personal income tax rate and corporate
income tax rate, respectively, which are established ways to improve the state’s economic prospects. This
strategy will make Michigan more competitive with and attractive to other states.

' An Assessment of the Michigan Business Development Plan (February 2018), ht(os//www.mackinac.org/24377.

® Economic Development? State Handouts and Jobs: A New Look at the Evidence (August 2020), https://www mackinac org/S2020-05.
* Ibid.

'° Corporate Handouts: Lansing Politicians Should Care About the Science (August 2021),

"' Timothy Bartik, (Juty 2018) "Incentive: What percentage estimates are plausible based on the research literature?"

"2 The fund shall not approve more than 10 agreements each year in tier 1 counties that total more than $125,000,000.00, 15
agreements each year in tier 2 counties that total more than $100,000,000.00, or 15 written agreements each year for authorized
businesses in tier 3 counties that total more than $75,000,000.00.


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