Tax Cut Deemed Budget Buster, But State Corporate Subsidies Total $623 Million This Year

In 2017, the Michigan House of Representatives rejected a promised reduction in the state’s income tax rate. That tax cut, had it been passed, would have saved individuals and households $463 million this year. Opponents deemed the measure a budget buster.

But this year, the state of Michigan will pay $623 million in taxpayer-funded subsidies to a small number of favored corporations. Many of the recipients have likely been collecting large payments for years. The last of these payments won’t be sent to companies until 2032.

The payments were authorized by dozens of economic development laws enacted by Michigan lawmakers from 1998 through 2017. The biggest was called MEGA, which was begun by former Gov. John Engler but used most heavily by his successor Jennifer Granholm, especially at the end of the 2000s. The program was suspended in 2011 by what was at the time the new Rick Snyder administration.

Cash disbursements to corporations will, under current law, continue until 2032. Altogether, lawmakers have authorized $16 billion in payments to corporations, although it’s likely that far less will ever be collected.

One reason the Snyder administration suspended MEGA is that the costs of its deals with individual companies are not for fixed amounts. Rather, they rise and fall from year to year with a firm’s payroll and other factors. The Department of Treasury recently said that its previous estimate for the program's costs through 2032 was $86 million too low.

This aspect of the program has drawn criticism from state Treasury officials who have to estimate and budget for the annual payments to firms, which are styled as refundable tax credits under the subsidy laws.

Ron Leix, the deputy public information officer at the Michigan Department of Treasury, said that these numbers are just estimations and subject to change.

“Forecasts change as economic conditions change,” Leix said. “Reports are developed on the best information available at the time.”

The credits are not fixed, he explained. Many of them are instead performance-based credits. Their payouts can change based on job growth, employee wage growth, and changes in health care costs, among other factors. This means that Michigan likely will owe more in credits when the businesses and the overall economy are performing better.

Leix pointed to another subsidy programs called the Renaissance Zone credit, which he blames for most of the recently projected cost increase. Companies benefitting from that program are claiming more than expected.

“Businesses have been doing better than expected in these renaissance zones,” Leix said. “However, as zones expire, the cost will decline.”

According to Leix, the expected increase in credit payouts is a positive sign.

“There is a tradeoff on these credits since they are performance-based,” Leix said. “If some of these businesses closed in an economic recession, yes, the credits would cost less, but that’s not good news for total revenue collections.” When the economy is doing well, he added, it is likely that both business tax revenue and business tax credits will increase. 

James Hohman is the director of fiscal policy at the Mackinac Center for Public Policy. Both he and the Mackinac Center have studied the subsidy programs and found them ineffective. For Hohman, their ineffective nature is not the only reason he objects to them: “Taxpayers are still on the hook for billions of business subsidy deals that were approved two administrations ago,” he said. 

Hohman recently co-authored a study documenting that the majority of legislators from both parties voted “yes” on most or all the subsidy authorizations that came before them.