Companies cashing in special tax credits have caused the state to bring in a projected $454.4 million less than previously expected. Here's the history and problems with the program.

Michigan House Democrats recently issued a press release that vilified corporate tax subsidies the state of Michigan has been giving out for 20 years and pinned the blame on Republicans.

The press release called the tax subsidies given through the Michigan Economic Development Corporation “disastrous” and House Democratic Leader Tim Greimel said the policy not only doesn’t work, “but is downright dangerous.”

"Republicans have allowed the MEDC to become a runaway organization that is devastating the state’s financial health, while not holding it accountable for creating more jobs,” House Democratic Floor Leader Sam Singh said in the press release.

What the Democrats failed to mention was that Democratic Gov. Jennifer Granholm created a press-release economy based on the MEDC’s “corporate giveaways.”

Giving selective corporate tax credits was a program started under Republican John Engler’s administration in 1995, and greatly expanded by Granholm in her eight year tenure as governor.

Called the Michigan Economic Growth Authority (MEGA) program, during its first 13 years, 1995 to 2007, the state of Michigan made 358 deals and awarded an estimated $2.6 billion in tax subsidies to corporations.

In the three-year period from 2008 to 2010 the state made 320 deals and awarded an estimated $2.5 billion in tax subsidies. The MEGA tax credit was discontinued in 2011, but the state is on the hook for paying out tax credits for up to 20 years. Gov. Rick Snyder has kept the policy of awarding tax subsidies alive via other state incentive programs.

State agencies attempt to project every year how much of these long-term tax credits will be redeemed by the selected companies in any given year. The state expects much larger payments in the current 2015 fiscal year and 2016.

The state says it pays about $300 million a year in MEGA payments to companies. Higher numbers are projected in the future but it's not clear how much higher.

“Sending taxpayer money to large business projects has been a bipartisan affair,” said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy. “It is unnecessary and unfair.”

Greimel didn't return an email seeking comment.

The tax hike proposal that goes before Michigan voters on May 5 could be interpreted as providing a loophole that future legislators could use to circumvent what has been considered a constitutional guarantee on how the state sales tax is divvied up. Meanwhile, there are those who assert that any concern over this is unfounded and the language in the proposal not only wouldn’t create a loophole, it would plug a loophole that already exists.

Under the ballot proposal, the state sales tax would be increased from the current 6 percent to 7 percent. Michigan has levied the sales tax at 6 percent since passage of Proposal A in 1994. In the Michigan Constitution, that 6 percent is split in two portions — the 4 percent that had existed prior to Proposal A, and the 2 percent that was added by Proposal A. The 2 percent portion is constitutionally earmarked for the School Aid Fund; so is the first 60 percent of the 4 percent portion.

If voters approve the ballot measure, the constitutional language for the earmarking would be adjusted for the additional 1 percent that would be levied. The constitution currently states: “60 percent of all taxes imposed at a rate of 4 percent shall go to the School Aid Fund.” That language would be replaced:

“60 percent of all taxes imposed at a rate of not more than 5 percent” shall go to the School Aid Fund.

At a glance, the current wording appears unambiguous in stating that 60 percent of the 4 percent will go to the school aid fund. To some, the replacement wording implies that the Legislature could put in less than 5 percent, nullifying the 60-percent requirement.

Currently, 60 percent of the 4 percent yields about $3 billion, roughly 20 percent of the school fund. If critics of the proposal prove to be correct, the Legislature, if it wanted to, could send that money (which would be $4.2 billion with the tax hike) to the general fund instead of the School Aid Fund. Though the likelihood of the Legislature opting to do this seems remote now, there is always a chance of that changing in the future.

Lt. Gov. Brian Calley said those who claim the potential replacement language creates an opportunity for the Legislature to avoid the 60 percent earmark have it backwards. He maintains that it would actually be more difficult to circumvent the replacement language than the current language

“Schools come out more secure with the new wording,” Calley said. “The Legislative Service Bureau drafts language based on legislative consistency. This would really be a technical change, but one that has the impact of making schools more secure. Keep in mind that the constitution doesn’t say that the 4 percent has to be applied, that’s just the amount it can go up to. So with the current language (which says “60 percent of all taxes imposed at a rate of 4 percent”), if the Legislature wanted to, it could just apply the tax at a rate less than 4 percent - such as 3.99 percent — and, arguably, it would no longer have to direct 60 percent to the schools."

“The way I look at it, the new language is less ambiguous than the current language and would really be better in terms of protecting school funding,” Calley continued. “The way this has always worked is that it runs through a formula in the constitution that includes revenue sharing and the sales tax. This is where the consistency part comes in. The new language that would go in under the proposal (“60 percent of all taxes imposed at a rate of not more than 5 percent”) would be consistent with the way the language is written in the revenue sharing part, which says it is 15 percent of all that is collected — no matter what the rate may be. By matching that language up, it ensures that schools would get their share of the entire amount, regardless of the rate applied.”

One remaining question, however, is whether education groups agree that the replacement language increases their funding security, or at least that it doesn’t jeopardize it. The answer to that question could affect whether they support the May 5 proposal.

“We had someone who flagged that language, too,” said Donald Wotruba, deputy director of government relations with the Michigan Association of School Boards. “We talked to a couple of people about it, and we’re probably going to talk about it some more. It does appear that the language would allow a reduction; but it looks like that flexibility already exists even under the current language. Apparently the only funding for the School Aid Fund that’s really constitutionally guaranteed is the 2 percent minimum foundation (which comes from the other portion of the sales tax)."

“Our concern about this still remains and it is one of the things we’re looking at as we discuss whether or not to support the proposal,” Wotruba continued. “But we have other concerns as well; for instance, there are the scholarships for community college, which are also part of the proposal. Those could be a problem for us, too. That part looks potentially like creating free college for everyone.”

The Michigan Education Association did not respond to a request for comment.