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Published in Breaking News

Report finds targeting state business incentives, resources could produce better ROI

BY Sunday, April 09, 2017 08:00pm

Michigan could generate higher returns on its economic development activities by targeting the tax incentives it still offers toward high-tech, high-wage industries.

Additionally, it could also focus its resources to offer more upfront assistance such as job training for employers that are expanding or relocating to the state.

Those assertions come from Tim Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo who examined tax incentives offered across the U.S. from 1990 to 2015 and created a database of 33 states and 45 industries.

Among the ideas the Upjohn Institute suggests is targeting incentives to industries that pay high wages and spend heavily on R&D, offer them up front, include clawbacks when a company does not meet job-creation thresholds, and regularly evaluate their effectiveness.

“To target incentives, to design them better, and use incentives that have the highest bang for the buck, and then if we make sure that we evaluate what we do — in the end, we’re going to increase the economic impact of Michigan incentives,” Bartik told state lawmakers in a recent presentation to a legislative committee. “I don’t think we necessarily need to spend any more on incentives than we currently do. We might be able to actually reduce our costs and have a higher impact.”

The Upjohn Institute report indicates that the use of tax incentives to drive job creation varied widely between states and tripled from 1990 to 2015, when they cost $45 billion or a little more than $2,400 per job.

The cost of incentives in Michigan grew 16 percent from 1990 to 2015. Michigan’s costs, as a percentage of the state economy, were lower than Indiana’s and higher “by quite a bit” than Illinois, Wisconsin and Ohio, Bartik said.

In 94 percent of the times nationally where a tax incentive was used to lure a business investment, it was not a deciding factor in a company’s expansion or relocation plans, Bartik said.

“Ninety-four of the times (out of 100), pretty much the same thing would have taken place anyway,” he said. “The other six times, you actually induced a new investment or job creation.”

Given that scenario, the question for policymakers is whether the benefits from the six companies outweigh the overall cost of all 100, according to Bartik.

“In order for that to occur, you have to basically target industries with high benefits and choose incentive designs that have a high bang for the buck,” said Bartik, who noted that few states, Michigan included, specifically direct their incentives to industries that pay high wages or conduct a lot of R&D.

“In the nation, this doesn’t happen very much. In Michigan, this doesn’t happen at all,” he said. “Essentially, whether a business is high wage or low wage, Michigan hands out the same thing. Whether a business has a lot of research or no research, Michigan hands out the same thing.”

In his presentation last month to the House Tax Policy Committee, Bartik cited job-training assistance as one incentive that can make an impact on business investments by small and medium-sized employers. Research shows that access to customized job training influences an employer’s decision on where to expand and add jobs, Bartik said.

Small and medium-sized companies often have a difficult time accessing job training or lack the staff to organize it, he said. The state can offer assistance, both financially to cover the cost and by coordinating training with local community colleges.

“Free or low-cost training can be an incredibly effective inducement. If you’re trying to get in production quickly and have high quality control in your production so you can meet whatever quality standards your customers demand, having the trained, productive workers right away is very important to the competitiveness of your company,” Bartik said. “There are several studies that per dollar, they may be 10 times as effective (as) tax and other cash incentives, and that’s because they’re targeting some critical service needs.”

Much of the incentives in Michigan have come through industrial tax abatements of up to 12 years.

Tax abatements “politically can be tempting because it’s easier to give away future tax base, but it really doesn’t have much effect on location decisions,” Bartik said. Evidence also suggests that many businesses are “very short-term oriented” in making location decisions, “so upfront incentives are more effective.”

“The tax abatement you provide in year 11 of a facility’s life probably has no affect at all on location decisions whatsoever,” Bartik said. “You’re simply giving away the next mayor’s or the next governor’s tax base.”

Michigan Economic Development Corp. CEO Steve Arwood told lawmakers in a prior presentation that the agency has focused incentives on “more and better jobs” from companies that pay higher wages.

“We’ve actually looked at how, when we do incent jobs, are we working with the job types that are actually helping to bring up wages or hire in the regional average wage,” Arwood said.

In the 2016 fiscal year, the MEDC targeted “having everything we did” assist employers who exceeded the statewide average wage by $1.80 an hour. The agency easily beat that goal and ended the year exceeding the average statewide wage by $4 an hour for incentives.
The MEDC also has been more focused on capping incentives and awarding them for shorter durations, and knowing future liabilities.

“What we’re doing now seems to fit into some of the best recommendations that the Upjohn Institute would make if you did business incentives,” Arwood said.

Legislators and Gov. Rick Snyder eliminated many of the state’s economic development incentives in 2011. That includes the former brownfield credits for redeveloping obsolete properties, and MEGA tax credits to drive job creation that are largely blamed for creating state budget problems as they were cashed in by companies years later.

The state projects a $6.9 billion liability from 2016 to 2029 in MEGA incentive payouts, according to the MEDC.

That kind of obligation has left some lawmakers reluctant to restore tax incentives, although one new proposal would create a program for large projects.

State Sen. Jim Stamas, a Republican from Midland, introduced legislation last month to create a so-called “Good Jobs for Michigan” initiative that would provide up to a five-year, 50-percent abatement on the personal income tax withholdings of new employees in projects that create at least 500 jobs.

Companies creating at least 250 jobs that pay wages at 125 percent or more of the average regional wage could get up to a 10-year, 100-percent abatement. The legislation would limit incentives to 15 projects annually and cap the maximum value for all outstanding projects at $250 million.

The legislation has the backing of a coalition of business groups in the state, including chambers of commerce and economic development organizations across West Michigan.

Legislators also are considering bills to reshape brownfield incentives for major projects in urban areas.

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