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Industry Insider

By Mike Johnston
VP of Government Affairs
Michigan Manufacturers Association
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When you have something that someone else wants, you should do what is necessary to keep it. When that thing is jobs and a large manufacturing base, it must be protected.

Michigan has a very large industrial base — by far the largest sector of Michigan’s economy — making up 21 percent of the gross state product. Other states are working aggressively to lure away our industrial assets. They are offering very lucrative incentives that include up-front capital, land, job training and often fewer regulations. Surprisingly, some policymakers in Michigan are willing to disarm in the battle with other states for retention of our industrial assets and the attraction of future investments.

States focus their economic development efforts primarily on industrial assets because economic models prove that manufacturing inherently yields a high job multiplier effect. For example, take the auto industry. An automobile contains tens of thousands of parts and auto companies rely on a huge network of companies in the supply chain to make those parts. Think about all of the different kinds of products that go into a vehicle: steel for the body and frame, glass for the windows, rubber for the tires, plastic for the interior, fabric for the seats, computers, radios, GPS systems, anti-lock brakes, door locks, heating and cooling, traction control, transmissions, engines, fuel systems, paints and adhesives, steering systems, wiring, seat belts… you get the idea.

Plus, companies that make a part for an automobile usually rely on other companies down the value chain to make a part for them. Take a car seat for example. A seat needs steel from a steel company, which is then fabricated into tubing by tooling made by another company, then shaped into a seat with springs made by another company, and then covered with fabric produced by yet another company, and then you need electronics to move or heat the seat and brackets to secure the seat to the car. This multiplier effect is critically important for Michigan’s economy. In fact, the Center for Automotive research reports that every job in an auto company creates 7.6 jobs down the value chain. The multiplier effect is inherent throughout the manufacturing sector; it is not just limited to the auto industry.

It’s no wonder that other states work so aggressively to lure away our substantial industrial base. It doesn’t matter whether they go after the top of the manufacturing chain or further down the supply chain; each level brings its own job multiplier effect. Talk to any economic development expert in Michigan and they will tell you other states have offices in Michigan and are contacting Michigan companies every day to attract them with substantial economic incentives to bring their jobs and investment to their state.

Michigan’s tax policy encourages other states to go after our industrial assets in two ways. First, Michigan charges a personal property tax on industrial production equipment, while most states do not. Secondly, the Michigan Business Tax includes a gross receipts component that disproportionately taxes our industrial base. Manufacturers have relatively low profit margins, but the gross receipts tax ignores this fact and focuses on the relatively large gross receipts. This component taxes manufacturers even when they are not making money.

During the economic downturn of the last decade, Michigan has lost about 500,000 manufacturing jobs and about 1 million total jobs. However, we have recently seen successes generated directly by economic incentives. Michigan has beaten the nation in attracting several advanced battery companies. This is critical for the future of Michigan as the automobile becomes increasingly electrified. The next auto plants will likely be close to where the batteries are produced.

Furthermore, Site Selection magazine has ranked Michigan third in major new corporate facilities and expansions in 2009. This was largely due to the advanced battery investments attracted through economic incentives.
A few weeks ago the Michigan Education Association released a study produced by the Anderson Economic Group that compared the relative effectiveness of lowering business tax rates to economic incentives. The study indicated that lowering business taxes created slightly more jobs than incentives over the last decade. We agree that lowering business taxes will increase investment and job growth. However, we also believe the successful effort to attract advanced battery investments is a real world example of the need for economic incentives. We must not unilaterally disarm against other states that are offering both low taxes and substantial economic incentives.

What Michigan needs is to reduce costs, reduce business taxes and become even more aggressive in the battle for job creating investments in industries with high job multiplier effects, such as manufacturing. Michigan needs a full tool box to revive our economy.

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