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Sunday, 01 March 2015 22:00

As policies shift, state incentives continue to favor manufacturers

Written by  By John Wiegand and Joe Boomgaard
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While Gov. Rick Snyder famously campaigned against the government picking winners and losers, the state’s economic development agency during his first term made a clear bet on one segment of the Michigan economy: manufacturing.

Despite the Snyder administration’s evolving economic development strategy, its focus on providing incentives to manufacturing companies looking to grow or expand in the state has remained constant.

Of the companies receiving performance-based grants or loans under the Michigan Business Development Program since it was launched in December 2011, 60 percent have been involved in a form of manufacturing, said Josh Hundt, director of development finance for the Michigan Economic Development Corp. (MEDC).

By contrast, Michigan’s manufacturing industry accounted for approximately 19 percent of the state’s total gross domestic product in 2013, according to data from the U.S. Bureau of Economic Analysis.

In supporting the manufacturing sector, the state is effectively helping to attract and grow companies that could produce spin-off technologies that create even more jobs for Michigan residents, said Steve Arwood, the director of the new Department of Talent and Economic Development (TED) and CEO of the MEDC.

“Manufacturing will continue to be manufacturing, but it will also continue to spin off into these other opportunities that should be here,” Arwood told MiBiz.

To qualify for assistance under the current Business Development Program, a company must pledge to create at least 50 new jobs — unless it’s based in a rural area or involved in a high-tech sector, in which case the threshold is 25 new jobs. The projects must also have the support of a local municipality and not be for retail or corporate retention projects, according to the MEDC’s website. The state can give grants up to $10 million to support any single project. In rarer cases, the agency can also provide performance-based loans up to the same amount.

To date, the largest single Business Development Program grant of $6 million was awarded last September to Plasan Carbon Composites Inc. to support an expansion project that the auto supplier expects will lead to the creation of 620 jobs at its carbon fiber production facility in Walker, a Grand Rapids suburb.

Through the 2012 to 2014 fiscal years, 46 manufacturers in west and southwest Michigan have received grants totaling more than $36.2 million under the program, according to an MiBiz analysis of MEDC data.

However, when state economic developers favor legacy sectors such as manufacturing over new high-growth technology or service sectors, it can perpetuate longstanding economic cycles rather than move beyond them, as well as act to over-inflate certain sectors of the economy.

That’s according to economists including Ohio State University professor Mark Partridge, who spoke with the Milwaukee Journal Sentinel in November for a report on Wisconsin’s business incentive programs. During Republican Gov. Scott Walker’s first four-year term in office, the Wisconsin Economic Development Corp. gave away 37.1 percent of the state’s $1 billion in incentives to manufacturing companies, the report stated.

While Grand Valley State University’s Paul Isely agrees that incentives can over-inflate parts of the economy, he argues the state’s heavy focus on incentivizing manufacturing companies has had more to do with refilling the capacity left as a result of the recession in Michigan.

“We’d all be much better off if all states didn’t do anything,” said Isely, the dean of GVSU’s Seidman College of Business. “Basically, we have firms pitting states against each other and seeing what package they can get. But because other states are doing it, you can’t disarm.”

Michael LaFaive, director of fiscal policy at the Midland-based Mackinac Center for Public Policy, sees continued economic development incentive programs as a blatant example of government waste.

“We think there are huge inefficiencies with handing out targeted incentives versus letting people keep what they earn,” LaFaive said. “It doesn’t matter if they target an industry or particular business: both represent the fatal arrogance of central planners.”

TALENT TRANSFORMATION

During Gov. Snyder’s first four years in office, he’s pushed for a continued evolution of the state’s economic development policies, a process that culminated in December with the creation of the new Department of Economic Development and Talent (TED). While the state’s economic developers will remain focused on corporate retention and new business attraction, they’ve now added a talent component to their mix of priorities.

“When you look at talent, finding, keeping and retaining people in the state has become our number one economic development issue,” Arwood said.

TED wraps together several existing state entities, including the Workforce Development Agency, Unemployment Insurance Agency, Talent Investment Board, Michigan State Housing Development Authority, Michigan Strategic Fund and the newly minted Talent Investment Agency (TIA).

The MEDC remains legally separate from the department, but will work closely with it in practice, Arwood said.

In creating TED, the state hopes to better execute on its economic development policy by giving government agencies with economic development roles collaborative weight, Arwood said.

“If you harness all of these elements together and move them in one direction, then you can really leverage (economic development) to a larger degree,” he said. “The people responsible to the state for these activities are now on the same team. That’s what I think has been the somewhat missing element over the years.”

The formation of TED marks yet another structural adjustment in the state’s economic development strategy since Gov. Snyder took office in 2011. That playbook has shifted from riding out the policies of the previous administration, to economic gardening to support the state’s second-stage companies, to seeking out major corporate expansions or relocations, to a hybrid approach that combined both economic gardening and hunting for bigger deals.

But as state government continues trying to determine what efforts will provide the “best bang for the buck,” it isn’t necessarily considering the long-term impacts of its decisions, Isely said.

“I think they are searching for how their money can best be spent,” he said. “The pot that we have is small compared to our competitors, so we have to be more strategic about it. But at some point, you have to pick a strategy and stick with it to see if it works. There are many ways that (strategy) would work, but if you keep changing, then you’ll never get traction on what you’re going to do.”

LINGERING IMPACT OF TAX CREDITS

While Gov. Snyder continued the targeted tax credit policies that carried over from former Gov. Jennifer Granholm’s administration, he would take sweeping action to move beyond those strategies in his first year in office by enacting the new 6-percent Corporate Income Tax in 2011.

The new tax code took effect in 2012 and effectively ended the Michigan Economic Growth Authority (MEGA) program that offered tax breaks for companies to apply to their Michigan Business Tax bill, which no longer existed under the Corporate Income Tax scheme.

The MEGA program was replaced with the Business Development Program, which gave the Michigan Strategic Fund — the overseer of the MEDC — the ability to offer performance-based grants and loans to qualifying companies.

Many saw the change as a necessary step away from the open-ended MEGA credits, which continue to pose an annual challenge for state budget officials as they try to estimate the dollar value of the credits that recipients will claim in a given year.

Approximately $9.4 billion in MEGA tax credits can still be claimed by companies through 2036, according to a February report in Crain’s Detroit Business. By comparison, from the 2012 through 2014 fiscal years, the state committed $189.93 million total via the Business Development Program, per MEDC data.

Just this year, a rush by profitable companies to claim MEGA credits contributed to a $289 million budget shortfall that lawmakers must address through a series of budget cuts, according to reports.

“It’s definitely garnering a lot of attention in Lansing right now,” said Andy Johnston, vice president of government and corporate affairs at the Grand Rapids Area Chamber of Commerce, referring to the lasting effects of the MEGA program. “The state will see what they can do to tighten their belts. It sounds like we’re going to correct this year’s budget, but it’s going to be the focus for years after that.”

Beyond proposed budget cuts to make up the shortfall, the Snyder administration plans to engage the companies that have outstanding tax credits so the state can improve the budgeting process, said Deputy Press Secretary David Murray.

“The challenge is to expand transparency so the companies and state can work more closely together to help in planning,” Murray said via email. “We expect there to be ongoing discussion about the legacy tax credits.”

HUNTERS AND GATHERERS?

Beyond changing the way the state incentivized growing companies, the Snyder administration also shifted its focus to a policy of “more emphasis on economic gardening as opposed to hunting,” as the Governor outlined in his first State of the State address.

To grow the economy, he argued, the state needed to renew its focus on encouraging growth among Michigan’s existing second-stage companies, which are defined as operations with 10 to 99 employees and $1 million to $50 million in sales.

That policy ultimately spawned the Pure Michigan Business Connect (PMBC) program in 2011. PMBC aims to link second-stage companies looking for assistance in getting to the next stage of growth with other in-state service providers such as law firms, accountants and web developers, all of whom provide help at a discount or free of charge. The PMBC program also encouraged matchmaking between in-state buyers and suppliers.

Since the PMBC’s inception, the program has facilitated 5,000 buyer-supplier meetings, generating $2.1 billion in new contracts and supporting approximately 10,500 jobs, according to data provided by the MEDC.

However, the administration’s strategy would shift in 2013, when the MEDC once again emphasized attracting high-profile firms in growth industries. At the time, former MEDC CEO Mike Finney told Crain’s Detroit Business that the agency didn’t plan to abandon economic gardening, but the shift back to hunting was in reaction to growing interest from out-of-state businesses that resulted from the state’s wave of regulatory and tax policy reforms.

The MEDC’s efforts shifted back to more of a hybrid approach in 2014 that balanced continued economic gardening efforts such as the state’s export assistance program with attracting large international corporations to locate in Michigan. That effort led to two global automotive suppliers — China-based CiTic Dicastal Co. Ltd. and INglass-HRSFlow of Italy — investing in new operations in West Michigan. Both companies received Business Development Program grants totaling $3.5 million and $300,000, respectively, to support their investments.

AVOIDING UNCERTAINTY

While many of these economic development policy changes — including adding talent attraction and retention this year — have been evolutionary, some experts are questioning the state’s ever-shifting economic development agenda and advocating for a more succinct and consistent policy.

The constant shift of economic development strategies “doesn’t spur development and neither do the programs that are continuously being reinvented or renamed by different administrations and legislatures,” said LaFaive of the Mackinac Center.

Governors dating back to Kim Sigler, who led the state from 1946 to 1948, have “tried to put their own stamp on the central planning economic development narrative that’s woven by the state,” LaFaive said. “This is just another chapter.”

Moreover, the constant tinkering with economic development policies can create dreaded uncertainty for businesses. That’s why groups such as the state’s business roundtable, the Detroit-based Business Leaders for Michigan, would like to see the state implement a long-term plan and stick to it, regardless of the election cycle or who’s in the governor’s office, said President and CEO Doug Rothwell, who also chairs the MEDC’s executive committee.

“I think it absolutely has to be a hybrid approach with always the major emphasis on (business) retention,” said Rothwell, who also served as the first CEO of the MEDC when it was founded by Gov. John Engler. “That’s where your bread and butter is going to be and most of the new jobs are going to come from.”

Rothwell added that BLM did not include business attraction among its recommendations for lawmakers’ top priorities in 2015.

“We thought the ROI wouldn’t be as great as (it would be) if we focused on leveraging our existing assets,” Rothwell said.

For its part, the Governor’s Executive Office says the administration’s continued evolution in economic development strategy reflects its pursuit of efficient policy rather than a pattern of indecisiveness, spokesperson Murray said.

“The Snyder administration always has adopted a variety of approaches to economic development,” Murray said. “There are no quick fixes, and there is no one path.”

Ultimately, Arwood views the role of state economic developers as finding ways to help grow Michigan’s economy by helping companies.

“We have a lot of economic activity that’s been started a couple years ago and now we have a lot of outside interest, too,” Arwood said. “In economic development, you have to have the flexibility in terms of what you can do and I think we’re going to need that, particularly with the talent side of the equation.”

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