Michigan’s Unseen Tax Problem

September 14, 2011

On September 13th, the Michigan Economic Growth Authority (MEGA) approved four targeted tax credits for various redevelopment and technology firms under the auspices of creating $77.3 million in investment and 275 jobs.

The tax breaks amounted to a little over $5.6 million, and were awarded to Hexagon Metrology, a company that makes measuring machines; the Lafayette Place Lofts Project, a development of four buildings in Pontiac, MI; the 3300 Denton Redevelopment Project, a waste transfer facility; the Union at Dearborn Redevelopment Project, a plan to turn old office space into dorms for students; and the Spartan Technology Development Project, a plan to turn an old public works building into a biotech company.

While each of these ventures will likely create some sort of value in society and they are laudable for doing so, we would be wise to remember Frederic Bastiat’s lesson of “seen” versus “unseen” consequences of any public policy.

What is “seen” when government agencies endow firms with special targeted tax credits is a mobilization of capital, hiring of workers and increases in investment expenditures. There is no doubt that these credits are intended to stimulate the economy. However, often “unseen” is that these breaks have to be paid for somehow. In the case of Michigan, citizens must pay for having a tax code full of loopholes and targeted credits by having a higher statutory rate on all other Michiganders who are not politically connected.

Let me emphasize that this is what most tax loopholes look like. They are not usually nefarious groups who make backroom deals to avoid taxes. They are usually people who are creating value out in the world. We should of course encourage entrepreneurs, but shouldn’t use the tax code to pick winners and losers.

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