Experts divided on Michigan's economic development strategy of reducing tax breaks

BY KATHERINE YUNG
DETROIT FREE PRESS BUSINESS WRITER

The jury is still out on whether Michigan's new economic development strategy will work. But one thing's for certain. The state is making a 180-degree shift from its previous strategy of using billions of dollars in tax breaks and other incentives to jumpstart growth in five key industries.

Under Gov. Rick Snyder, Michigan economic development officials are betting that spending fewer dollars more wisely, helping existing businesses grow and giving many companies a big tax cut will enable the state's economy to flourish.

"It's not necessary to offer ever-increasing incentives in order to be competitive as a state," said Michael Finney, CEO and president of the Michigan Economic Development Corp.

The state is already reducing its reliance on tax breaks. So far this year, Michigan has awarded $62.5 million in MEGA tax credits, which are given to companies that create or retain jobs over a multi-year period. That's just a sliver of the $2.7 billion in MEGA tax credits that were approved last year. Starting in January, these tax breaks will no longer be given out.

Instead, Michigan plans to attract businesses with loans, grants and equity investments. The state has set aside $100 million to do this, but some of this money must also be used to help offset the cost of preserving historic buildings and redeveloping contaminated properties.

Experts who specialize in helping companies find the best locations for new factories or headquarters are divided about whether getting rid of MEGA tax credits is a smart move.

"It's a step in the right direction for Michigan," said Lee Higgins, senior vice president and incentives practice leader for Dallas-based Site Selection Group. "They are being very proactive in doing this, and I applaud them."

But Robert Price, a director at Atlanta-based Herron Consulting who has worked on more than 250 site-selection projects, said "eliminating corporate tax credits does not put Michigan in a good competitive position."

State's new approach draws praise, criticism
Under Gov. Rick Snyder, Michigan is drastically overhauling the way it attracts, retains and grows businesses in the state, embarking on a new path that's drawing praise and criticism.

Gone are the days when the state eagerly doled out billions of dollars in tax breaks to lure new companies. No longer are business development teams in Lansing targeting a few promising industries like alternative energy and homeland security and defense.

Instead, the state is taking a different approach to spurring economic growth. Starting in January, it's eliminating $1.8 billion in taxes for many businesses. To help offset this lost revenue, tax breaks for companies that create and retain jobs will disappear next year. And the state has stopped rolling out initiatives to help certain industries while ignoring others.

A key part of the plan involves helping the state's existing businesses grow, a concept called "economic gardening." Many employees at the Michigan Economic Development Corp., the state's economic development agency, are trying to assist companies with their need for more capital, customers and talented employees.

"We see enormous potential to help existing businesses grow," said Michael Finney, the MEDC's CEO and president.

To be sure, Finney and other economic development officials are not ignoring opportunities to attract new businesses. In the new fiscal year that starts Oct. 1, the state plans to spend $100 million on incentives for business relocations and expansions, the preservation of historic buildings and the redevelopment of contaminated or brownfield properties.

How the $100 million will be divided among these projects will depend on the requests received, Finney said. Companies interested in setting up facilities in Michigan could get grants, loans or equity investments from the state. But it's unclear how the process would work because the MEDC is still working on the details.

"The market should dictate how we spend it," Finney said of the $100 million. "At the end of the day, jobs are the highest priority."

Experts in site selection and economic development incentives differ on whether Michigan's new approach will be successful. Some lauded the move away from tax credits and toward grants. Many companies cannot take advantage of tax credits because they have no tax liabilities so grants are more effective for them, said Jason Hickey, president of Hickey & Associates, a Minneapolis-based site-selection firm. "It's smart for Michigan to go away from tax credits," he added.

But several other experts said that $100 million may not be enough money to keep the state competitive, especially in cases where companies are looking to make capital-intensive investments. Last year alone, businesses in Michigan claimed $214 million in tax credits for expansion, relocation and brownfield projects.

Lee Higgins, senior vice president and incentives practice leader at Dallas-based Site Selection Group, said the $100 million should be devoted solely to business attraction and retention deals, with money for brownfield projects coming from elsewhere. Texas allocates $200 million in grants over two years for this purpose, he noted.

Robert Price, a director at Atlanta-based Herron Consulting, a location consulting firm, said $100 million is a "very low cap." "I don't see where that would provide Michigan with an advantage versus its competitors," he said.

So far, Michigan has not yet encountered a situation where it needs to pony up a hefty incentive in order to win a new factory or corporate headquarters. The state's last major economic development win occurred in June 2009 when General Electric announced it planned to open an advanced manufacturing and software technology center in Van Buren Township that would employ 1,200 workers. GE received a $74-million, 12-year tax credit from the state.

Big deals like this are rare. Finney said if the state ran into a situation where the $100 million was not large enough to attract a big corporate investment, then MEDC officials would ask the state Legislature for more money.

Whether this contingency plan will work remains to be seen. Richard Barr, co-chair of the investment incentives and tax savings practice group at the Detroit-based law firm Honigman Miller Schwartz and Cohn, said many companies do not want to publicize their site-selection process for fear of disrupting their employees unnecessarily.

"It's a nice commitment to consider, but it will be unusual for these circumstances to present themselves," Barr said.

Hickey said this kind of legislative process would be tough for businesses to do because nowadays expansions and relocations are getting done quickly as companies rush to snap up office and industrial space at bargain rates. "Companies realistically may not have enough time," he said.

Meanwhile, the competition for new business investments remains fierce. Ohio awarded $286 million in job-creation and retention tax credits in its 2011 fiscal year that ended June 30, a 66% increase from fiscal 2010 levels. It also restructured its tax system to be more pro-business.

Bethany McCorkle, a spokeswoman for the Ohio Department of Development, said Ohio has not yet seen an increase in business investments because of the changes in Michigan. "However, time will tell and we may see the impact as companies realize its true impact," she said.

Finney acknowledged that Michigan's new approach -- which has not been tried before by other states -- has drawn mixed reactions from people outside the state.

"It's been both skepticism and encouragement," he said of the calls that have poured into his office. "We feel pretty confident this is the right thing to do."