Corporate Welfare and the Michigan Business Tax

A common talking point in Michigan political campaigns this year is criticizing Republicans for “giving a “$1.8 billion tax break to business.” As is often the case with political claims, there is more to the story.

In 2011, policymakers here eliminated the much-reviled Michigan Business Tax and replaced it with a simpler corporate income tax and a separate financial institutions tax. This reduced the annual tax collected from Michigan job providers by $1.2 billion. While some firms benefited more than others, the reform was a substantial across-the-board tax cut. And it was a departure from the previous administration that approved huge subsidies or tax breaks for politically connected enterprises.

However, note that the reform’s net tax cut was $1.2 billion annually, not $1.8 billion. The difference is found in accounting for the open-ended corporate welfare that was the previous administration’s primary response to Michigan’s economic “lost decade.”

Specifically, the MBT was the vehicle used to deliver a myriad of financial “incentives” to favored businesses and industries. Through it, the state offered billions worth of “refundable” tax credits. In many cases these resulted in the state writing checks to a particular company. If the firm owed some Michigan Business Tax but less than the credit amount, the tax liability was extinguished and it was given a check for the difference.

The special treatment continues for some companies: The credits were offered through agreements that extended as long as 20 years into the future, and were contingent on a firm meeting certain job creation, investment or output milestones. For example, in 2009 and 2010 the Big Three automakers were given credit deals that will cost up to $3 billion over their 15- and 20-year durations.

To accommodate all that deal making, the “repealed” Michigan Business Tax was kept on the books, but only for firms to whom the credits were granted. Years after the special deals were inked, the state continues to write checks and/or reduce particular firms’ tax liability, both of which reduce state revenue from what it would be under a “fair field and no favors” tax system.

Thus, the MBT is gone except as a vehicle to deliver on past tax credit deals. As such, it doesn’t raise any revenue. In fact, it costs the state hundreds of millions a year. In the current year, state analysts projected that $560 million in these credits claimed by companies meeting their targets. This was later revised down to $429 million.

The political claim that “Snyder gave a $1.8 billion tax break to business” comes from adding that $560 million to the straightforward $1.2 billion across-the-board business tax cut enacted in 2011. Never mind that almost one-third of the “$1.8 billion” claim comes from selective subsidies and tax breaks granted under the previous administration’s open-ended corporate welfare programs.