Does providing substantial tax relief create jobs and fuel economic growth?

As Michigan's economy plummets toward a full decade of job losses, the rhetoric in the state capitol would lead you to think that Lansing's partisan combatants profoundly disagree regarding the answer to this question. But they don't. The dirty little secret is that Gov. Jennifer Granholm and nearly every state lawmaker believe the answer to be "YES!"

Where they don't agree is over what kind of businesses are worthy of tax relief. Some believe that government should provide broad-based tax relief - a fair field with no favors that fosters an environment in which everyone can prosper. But on the other side, the governor and a large bipartisan majority of state lawmakers believe that they are clever enough to act as central planners who know which companies and industries will be most successful and thus most deserving of special tax favoritism. This second approach is the driving force behind most of Michigan's current economic policy.

Exhibit A is the Michigan Business Tax. During the summer of 2006, a voter-initiated law was approved by the Legislature that repealed the state's dreaded Single Business Tax and directed the politicians to create a new tax that was "less costly to employers" and "more equitable." As a replacement, the governor and the Legislature created the MBT, which slashed taxes by 97 percent on domestic automakers.

But this new tax was just as expensive overall as its predecessor and less equitable. It "makes up" for the tax cuts on car companies by raising the tax rate on many other Michigan businesses. This tax prejudice has since been compounded by the addition of a 22 percent surcharge to the MBT, costing Michigan's job providers in excess of $600 million more per year.

The premise underlying the new MBT is that tax relief is vitally important to prosperity, but only if a business model — such as that of the domestic auto industry — wins the economic stamp of approval from the governor and a majority of the Lansing political class. And the Detroit Three are not alone: Within months of the MBT's creation, bills were passed by the Legislature and signed into law by the governor that provide significant relief or tax credits to hybrid vehicle makers, ethanol gas stations, the North American International Auto Show, companies that rehabilitate historic buildings, and much more.

In some cases these were "refundable" credits, meaning that the state treasury will send a check for the difference to the politically correct company if the special credit offered exceeds the actual tax liability. This is effectively a subsidy that is paid for by the politically out-of-favor job providers who must still pay all of the MBT and its 22 percent surcharge.

Probably the most famous of the politically correct industries being granted refundable credits against the MBT is the business of fame itself: Hollywood. A package of bills signed by the governor on April 7, 2008, creates a 40 percent refundable tax credit for film production that takes place in Michigan (this also allows an additional 2 percent credit for work that takes place in "core communities.")

"We're going to grow this industry and in the process, grow our economy and create jobs," remarked Gov. Granholm as she signed the bills to provide the special tax breaks.

Last year, film production companies used this provision to escape tax liabilities and acquire subsidies totaling $48 million. In future years, the tax rebate for filmmakers is projected to climb to more than $200 million — fully one-third of the additional taxes being imposed on other Michigan businesses by the MBT's surcharge. In exchange for the first $48 million in lost tax revenue, a Michigan State University review of the film incentive program estimates that the film crews brought in economic activity of just $65.4 million to Michigan in the form of wages, lodging, meals and more. 

This is $1.36 in economic activity for every dollar of taxes that went unpaid by movie producers in 2008. In 2007, the year before these film tax credits were in place, Michigan taxpayers forked over $26 billion in taxes and fees from all sources to state government while producing $338.6 billion of economic activity — $13.02 worth of prosperity for every dollar of tax revenue that was paid.

How much wealth creation did not take place because Lansing politicians thought special tax breaks for industries like film production was a better economic policy than broad-based tax relief to everyone? Just one entrepreneurial family in Oakland County shows the other side of state government's tax prejudice.

Jerry Grubb owns the Wee Discover preschool in Waterford Township. He doesn't make movies or cars or provide any of the other politically correct goods and services favored by Michigan's political class, he just employs people to take care of little kids. For 2008, the new MBT and its surcharge will jack up taxes on his business by an estimated 334 percent. Likewise, his brother Bill owns Star EMS, an ambulance service in Pontiac. Bill's MBT liability for 2008 will jump from $71,000 to $115,000.
(A video profiling the Grubbs may be viewed at www.mackinac.org/10439.) 

What improvements or expansions or new hiring is not taking place at these established and loyal Michigan businesses — and many others like them — because they must now pay many tens of thousands each year in additional business taxes?

Meanwhile, for 2009 Lansing politicians have been busy creating more refundable tax credits allowing additional politically correct companies and industries to escape from the onerous MBT and its hefty 22 percent surcharge.

On May 12, Gov. Granholm signed into law 2009 Senate Bill 466. According to MichiganVotes.org, this will "authorize a $100 million refundable Michigan Business Tax credit and other subsidies" for a subsidiary of a Korean battery company for a plant in Michigan. A refundable tax credit that could sometimes become an outright subsidy just like the movie tax exception, MichiganVotes.org also notes that this provision is an expansion of an existing batch of "subsidies" granted to other companies. 

One month earlier, the governor signed 2009 House Bill 4515. MichiganVotes.org says this one expands "from one to three the number of refundable, $100 million, capital investment Michigan Business Tax credit agreements that could be entered into with makers of plug-in traction battery packs used in electric cars." This too, is an expansion of an existing special tax favor.

Only a handful of lawmakers opposed the creation of these refundable tax credits, thus signaling that only a small minority in Lansing opposes the subsidizing of one business by another. The MichiganVotes.org roll call votes for SB 466, HB 4515, and the film tax credit are below.

On Jan. 14, 2009, the Michigan Senate approved a bill to repeal the 22 percent surcharge on the MBT and sent it to the House of Representatives. This bill and four others like it introduced by members of the House have not been brought up for a vote in that chamber.

Ken Braun is the senior managing editor of Michigan Capitol Confidential. He may be reached at author@mackinac.org. For additional information and an opportunity to comment on the legislation referenced in this article, please see www.mackinac.org/10529.

According to one widely relied upon estimate offered by Americans for Tax Reform, more than 15,000 Michigan residents and 268,000 Americans overall turned out on April 15 at more than 200 rallies across America to express their frustration with a political class that is squandering their freedom and their money and spending them into unprecedented debt. In front of Michigan's state capitol, the attendance was estimated at 5,000. In the days since, many of the attendees and rally organizers have begun to ask what comes next, wisely and intuitively knowing that their impressive and spontaneous numbers can accomplish great things but only if they can translate the emotion into concrete and calculated action.

Samuel Adams, widely believed to be the instigator of the Boston Tea Party, once said that it didn't take an activist majority to prevail, "but rather an irate, tireless minority keen to set brush fires in people's minds."

Setting brushfires requires attitude, especially during a time described by Adams, "when vain and aspiring men shall possess the highest seats in Government, (and) our country will stand in need of its experienced patriots to prevent its ruin."

The following describes an attitude that, if widespread, would vastly improve the incentives of lawmakers to honor the principles of limited government.

1. Tea Party activists aren't impressed that their politician is a "nice guy."

Being likeable isn't needed for a person to succeed in America. An insufferable jerk can build a billion-dollar corporation from scratch, employ thousands, save the whales and cure cancer.

What he can't do is win an election. To gain votes in a democracy a candidate must be likeable. The reason political campaigns feature photos of the candidate's family and pets is not because they want voters to assume that he or she has a responsible record on taxes and spending.

Therefore, the last thing that should ever impress a Tea Party activist is a politician who's a "nice guy." Simply put: They're all nice guys, so get over it and ignore it. Hold them accountable for their deeds rather than their smile. The Tea Parties were a reaction against a lot of very nice guys doing very bad things.

2. Tea Party activists don't presume virtue in party labels.

Political parties are extensions of the politicians that they elect. They are mere instruments to gain power, not virtuous machines that exercise that power in noble ways.

Example: During the term of President Bill Clinton the budget actually had a brief surplus, while spending soared under President George W. Bush. Likewise, while Michigan Republican lawmakers boasted of their collective resistance to the $1.4 billion income and business tax hikes passed in 2007, most of them voted for most of the increased spending it funded.

There are countless other examples. An experienced patriot treats the promises of politicians and political parties with equal (and substantial) skepticism. Use political parties only as tools toward your ends, not theirs. Your loyalty is too valuable to sell so cheaply.

3. Tea Party activists really know their own lawmakers' voting records.

If the "nice guys" aren't a reliable source for a full and accurate picture of their records, and the party label doesn't do it either, then experienced patriots need to find this information on their own.

At the state level, two free tools make this much easier in Michigan. The first is MichiganVotes.org, which provides a plain-English description for every vote cast by every member of the Michigan Legislature since 2001. The second is Michigan Capitol Confidential, a periodical that gives more details on votes involving concerns regarding limited government.

An experienced patriot should use both of these tools, and compare how his or her lawmaker measures up by asking these critical questions:

Does the lawmaker always vote with their party, no matter what?

If there are a handful of dissenting votes for or against the limited government side of an issue, which side does he or she tend to fall on?

Do most of the bills he or she introduces expand the size of government, or reduce it?

4. Tea Party activists follow the money.

Is your lawmaker getting financial support from those whose values do not match up with your own? It's not hard to find out. For most past and current Michigan legislators, go to the "Search Voting Record" tab on the MichiganVotes.org homepage, choose a representative or senator and click "search." A link to a list of the legislator's campaign contributors appears below his or her photo. For members of Congress find this information at OpenSecrets.org. (Go to "Politicians and Elections," "Donor Lookup.")

5. Tea Party activists know they don't have to get elected to change the world.

They understand that electing a handful of virtuous lawmakers won't solve the problem either, because what must change are the incentives operating on the entire political establishment. Here's how Milton Friedman described it:

"I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office."

More often than not the most important effect of an election is who gets defeated, not who gets elected. When a politician loses for "doing the wrong thing" the incentives change for all of them.

6. Tea party activists don't "repress their feelings" regarding fiscal malpractice.

Having discovered the real records of elected officials in their own area and elsewhere (see Items No. 3 and 4), Tea Party activists share this knowledge widely with friends, family, colleagues, internet contacts, etc., letting all and sundry know how their lawmakers are behaving, and sharing their feelings regarding the ones who are misbehaving.

7. Tea Party activists focus on what unites them, not things that may divide. Those uniting things are:

• Grievance: Chronic fiscal irresponsibility, now become acute fiscal extremism.
• Target: A self-serving, self-perpetuating political class that no longer represents the will of the people.
• Goal: Restore genuine representative, limited government by changing the incentives on elected officials.

Ken Braun is a policy analyst and Jack McHugh is senior legislative analyst at the Mackinac Center for Public Policy. The authors may be contacted at author@mackinac.org and mchugh@mackinac.org. For an opportunity to comment on this article, please see the original version of it at www.mackinac.org/10508.