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Industry Insider

By Mike Johnston
VP of Government Affairs
Michigan Manufacturers Association
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Does it make sense for Michigan to provide economic incentives to attract and retain jobs? Recently the venerable W.E. Upjohn Institute for Employment Research released a study that concluded the answer is yes. As stated in the report’s introduction, “The paper concludes that MEGA passes a benefit-cost test.” MEGA is the Michigan Economic Growth Authority, which is the primary tool used by the state to compete with the efforts of other states and nations for locating, expanding and retaining jobs in Michigan.

Using tax credits to promote economic growth and to create jobs is clearly a legitimate public debate. Particularly with a struggling economy such as Michigan’s, it makes sense to evaluate all programs in state government to ensure that they are effective from a cost-benefit perspective. Appropriately, this is exactly the fundamental question addressed in the Upjohn Institute report.

The MEGA program was created in 1995 to provide an adaptable economic development tool for the state. As the report indicates, “Eligibility for MEGA credits is restricted to industries that are thought to be part of the state’s “export base” (industries that primarily sell their goods or services to non-state residents, or that compete with businesses outside the state that sell goods or services to state residents).

The fact that the primary focus of MEGA is manufacturing is significant, especially for a large manufacturing state like Michigan. Jobs in manufacturing, even in a challenged economy, bring two critical and inherent benefits: first, relatively high wages; and second, the ability to create multiple additional jobs down the value chain. The Upjohn study suggests that the multiplier effects of the direct job creation by MEGA grew over time and reached 3.88 in 2007. That means for every job created by MEGA, 2.88 other jobs were created in the Michigan economy.

What about accountability? It is important to note that the program is inherently accountable, because only jobs that are actually created are eligible for tax credits. Jobs that are not created do not get tax credits. The report identifies the success threshold for MEGA to tip the decision for investments in Michigan instead of taking the jobs elsewhere. “This turns out to be 16.8 percent. In other words, of the MEGA credits actually awarded, only about one in six needs to be decisive, a batting average of 0.168… It turns out that because multiplier effects of job creation grow over time, this 0.168 batting average actually yields a surplus of $33 million for state and local governments in 2007.”

The report also indicates that “MEGA causes considerable job creation, which grows over time. By 2007, these two scenarios (MEGA is decisive in job creation between 8.2 percent and 16.8 percent) yield MEGA job creation of between 18,000 and 39,000 jobs. Even with a low .082 batting average scenario, the institute indicates the net fiscal cost of the entire 1996-2007 time period averages $3,490 per job-year. Under almost any reasonable social valuation of the benefits of one job, this fiscal cost seems well worth undertaking for such benefits.”

Recently, the Anderson Economic Group (AEG) conducted an evaluation of MEGA credits for the Michigan Education Association suggesting that Michigan would have been better off lowering taxes instead of competing for jobs with other states through incentives. However, the Upjohn Institute describes the analysis as “flawed.” In the explanation, the authors write, “AEG compares the MEGA program with the alternative of cutting business taxes by 10 percent. But the MEGA program does not cost enough in the short run or long run to allow for a 10 percent cut in the Michigan Business Tax.”

The Michigan Manufacturers Association (MMA) supports and welcomes evaluations of MEGA. This report clearly suggests that MEGA is effective, indicating that MEGA has a ratio of economic development benefits to costs of at least 5 to 1. The report also suggests the program could be improved by targeting more high-multiplier businesses, with higher wages and stronger supplier links. Since manufacturing remains the largest sector of Michigan’s economy at 21 percent of the gross state product, it is important that the report endorses more focus on the economic characteristics of the manufacturing sector.

MMA is interested in talking to legislators about how to improve the effectiveness of the MEGA program. We are also interested in talking about lowering the effective tax rate on high job multiplier sectors like manufacturing. However, we are very much opposed to those who would suggest that Michigan can disarm in the highly incentivized battle for jobs with other states and nations that jealously covet our economic assets. The Upjohn report clearly supports the job creation powers of the MEGA program.

For a copy of the W.E. Upjohn Institute for Employment Research study, visit the following link: http://www.upjohninst.org/publications/wp/10-164.pdf

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