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Michigan Study: Targeted Tax Incentives Fail to Spur Economic Growth

2 min readBy: Joseph Bishop-Henchman

The Mackinac Center for Public Policy has a new study looking at Michigan taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. incentives:

In this study, the authors explore [Michigan Economic Growth Authority (MEGA)] data to see whether actual job creation meets the MEDC’s estimates. The authors inspected credits awarded from 1995 to the end of 2004 and found that while MEGA deals were expected to produce 61,043 jobs, only 17,971 were ultimately created. Hence, the actual job count was just 29 percent of the expected total – less than one-third. In practice, an announcement that 1,000 direct jobs are expected at a MEGA facility translates into 294 actual jobs on average.[…]

[F]rom 2001 to 2007, every $1 million in MEGA manufacturing tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s awarded in a county was associated with the loss of 95 county manufacturing jobs. While the statistical model cannot imply causation, it does strongly indicate that MEGA credits are not working to improve manufacturing employment.

MEGA invites scrutiny because of its size, influence and design. The program has offered more than $3.3 billion in Michigan business tax credits since its inception.

Michigan has a terrible business tax system. Rather than fix that, their focus has been on giving select businesses exemptions from it. So rather than welcoming all investment and job creation, the state’s politicians and their MEGA officials pick and choose what gets special treatment at the expense of everyone else. Given Michigan’s seemingly perpetual recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. , that strategy doesn’t seem to be working out.

Unfortunately, a lot of other states seem to be heading down that path, lured by the hopes of easy “job creation.” What should matter is wealth creation: capital flowing into the state and creating meaningful jobs that contribute to long-term economic growth. The MEGA strategy of handing out cash and goodies to the politically connected probably won’t ever achieve that.

Michigan should get rid of its politically-motivated picking winners-and-losers stuff. Offer a simple, neutral, transparent, stable tax system-apply it to everyone equally at a low rate-and junk all the targeted credits and special giveaways.