Tax Analysts Blog

Tax Incentives Cause Trouble For More Reasons Than You Might Think

Posted on Mar 4, 2015

In a microcosm of all that is wrong with state tax policy, Michigan Gov. Rick Snyder (R) wants to renegotiate the tax incentive agreements his state has with 240 companies. It turns out the state owes about $9.4 billion in tax credits to companies that created jobs in Michigan. That liability costs the state about $500 million a year, a cost that will continue until 2029! The tax credits reduce a company's liability under the Michigan business tax (MBT).
The Michigan Economic Growth Authority is the organization charged with giving away Michigan tax dollars to companies that would have invested in the state without being bribed. The problem is that the recipients of the tax credits have a lot of discretion as to their use. First, the businesses can claim the credits whenever they want. That makes government a little tougher. Second, there appears to be no expiration date on their use. The whole process is further complicated because corporations receiving the credits can elect to continue to "pay" the MBT rather than pay the relatively new state corporate income tax.

There are conservative legislators in Michigan who are calling for the repeal of the MBT, which would effectively end this problem (no MBT, no MBT credits). I have heard some liberal legislators say the state should find a way to negotiate away some of the credits. Snyder is talking about a more modest approach. His administration wants to negotiate with the companies the timing of the credits' use. I am unsure why any company would give up the ability to use the credits when it needs them most. Perhaps they can get something else in return, although I can't fathom what that might be.

The history of job creation tax credits in Michigan is a story of corporate welfarism. Chrysler, General Motors, and Ford alone are owed about half of the balance (over $4 billion) outstanding in MBT credits. Democrats (former Gov. Jennifer Granholm) and Republicans (former Gov. John Engler) are to blame. The chief problem with taxing business entities in general and capital in particular is that politicians can't help themselves when it comes to giving money away.

In reality, Michigan should repeal both the MBT (which is silly) and the brand-new corporate income tax (only slightly less silly). No one pays them. Combined, they account for about $865 million, only about 3 percent of the state's total revenue of $25 billion. The MBT actually loses money after accounting for the credits. Indeed, it seems like its only reason for existence is to be given away.

This post is an excerpt of an article that was published in State Tax Notes, the paper of record for the state tax community.

Read Comments (2)

robert goulderMar 3, 2015

David: I'm tempted to say stop picking on my beleaguered home state, except
that I completely agree with you.

If the MBT costs Michigan more money than it brings in, which appears to be the
case, they should refrain from calling it a 'tax' and reclassify it as an
off-budget expenditure. One is inclined to view MBT as a rather sloppy jobs
program, but it sounds like the actual linkage between it and in-state job
creation is flimsy at best. I suspect the lawmakers in Lansing don't wish to be
reminded of that.

Thus the sorry state of corporate taxation at the state level ... it exists
primarily to be bartered away. And nobody is supposed to mention that all these
'tax incentives' almost universally fail to delivered as advertised.

edmund dantesMar 5, 2015

They can't repeal the MBT, that would eliminate the chance for graft.

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