Wednesday, February 09, 2011

Dropping (Another) Economic Atomic Bomb on Michigan

As if losing manufacturing in the past decade wasn't enough, now it appears we are going to do our best to disrupt the precious recovery we have started here in Michigan. Want to know why you never heard any specifics on Snyder's plans to deal with our budget issues?

"I think our message on the 17th of February is going to be dropping an atomic bomb on the City of Lansing." - Lt. Gov. Calley, to the Holland Chamber of Commerce

While that might have made a rather impressive visual in a campaign commercial, it makes you wonder if the citizens of Michigan would have considered Snyder a moderate choice had they know that he was going to raise taxes on the working poor, dismantle all of our economic development efforts, and produce an "all cuts" budget of nearly $3 billion from an $8 billion general fund. Doesn't sound so "moderate" now, does he?

Apparently, we are going to get Engler Redux, the mistake made in the early 90s that removed our state's economic incentive efforts. We are going to do it in a global economy that demands incentives now more than ever, and we are going to do it in spite of all the evidence that shows that it's a bad idea that hasn't worked in the past. Lt. Gov. Calley confirmed the plan of destruction he so appropriately worded to the Holland Chamber yesterday.

Calley said a plan to create a 6 percent corporate tax will be achieved by closing tax loopholes and doing away with about $2 billion in state business tax credits.


“The tax system is unfair to business and way too complicated. It picks business winners and losers,” said Calley noting the present unfair system collects taxes from all companies and gives away about $1.8 in tax credits to only certain companies and industries.

As proposed, the new tax would phase out of many existing tax credits, including the Michigan Economic Growth Authority credits and others for specific industries, such as the film tax credit.

Calley also said the governor and Legislature is working to eliminate the personal property tax that businesses pay on the cost of building new plants, expanding existing facilities or buy new equipment.

The news this morning that Snyder will break up the Department of Energy, Labor and Economic Growth (DELEG) and move functions to MEDC is only further proof of the plan - but Calley was the one who really confirmed what had been only vague rumors up to this point.

The personal property and sales taxes account for nearly 71% of taxes paid by Michigan businesses according to a report from the Council on State Taxation, and they found that overall, our business tax burden was pretty much in line with the rest of the nation as of 2009. All the screeching about high business taxes was an election ruse, the standard Republican trump card when it comes to... well, everything. Just cut taxes, and the rest will work itself out, right?

The ruse worked again, and elections have consequences, and it appears we are entering a new "race to the bottom" when it comes to the systematic dismantling of revenue streams to state governments, complete with horrific cuts to public services that will be done in the name of this new competition to serve business interests. And it's not just Michigan. Across the nation, it is easy to find examples of these newly elected Republican governors and legislatures slashing and/or flat-out eliminating business taxes as fast as they can. Florida has an eye on cutting their business tax from 5.5% to 3% this year, with the goal of eliminating it altogether by 2018. Georgia is talking about blowing up their entire tax code to lower income and corporate taxes to 4%. Closer to home, Wisconsin will propose eliminating the state's corporate income tax - and they recently passed new targeted business tax incentives to locate there as well.

And so on. We won't know where Michigan sits on the grand scale until these plans actually make it through their respective state legislatures and the details are worked out, but a cursory glance around the country indicates that a flat 6% sounds like it might be on the high side already. The most troubling aspect is the removal of the incentives, because you know that other states and countries will be in line to take that business. Companies are more than happy to "pick winners and losers". Engler tried to dismantle the incentives in 1990, and quickly restored them after "Michigan quickly gained a reputation around the country as having unilaterally disarmed in the war among the states for business investment". And here is Rick Haglund, just last year, when Mike Bouchard proposed the same thing during his campaign:

Republican Mike Bouchard, Oakland County's sheriff, said Wednesday he would eliminate the targeted tax credit program if he is elected governor in November. The cheers you hear are coming from economic development offices in other states.

If you don't want to listen to the words of an economic columnist as proof, just listen to the businesses themselves. All those new jobs at Ford and Chrysler announced last fall? They wouldn't be here. The same could probably be said for the new jobs at GM as well.

Auto officials said the $2 billion in investments wouldn't have happened without the tax incentives.

"Without the tireless efforts of the state of Michigan, Chrysler could not have made this business decision," Chrysler's Brian Glowiak said.

In come cases, Michigan was competing with other states for the same investment.

"Red carpets are rolled out for manufacturing around the world," said Curt Magleby, director of state and local government relations for Ford. "Michigan understands that."

If the state didn't make it financially attractive to invest here, "there are a lot of other red carpets," he said.

The advanced battery manufacturers? Those credits will also be under review. There are plenty of other states who are poised to step up should Snyder yank the rug out from under us.

State governments have already jumped in with incentives to land winners of federal funds along with their desirable manufacturing jobs. Michigan plans to provide $555 million in incentives and has already awarded credits to four projects. Texas, Indiana, Massachusetts, California, and Kentucky are also offering tax breaks and other incentives.

That article was from 2009, and it explained how far behind America is in general when it comes to advanced battery production; a disinvestment at this point might send the entire business back overseas. Hope not, but we might find out if federal and state support is halted.

Eliminate the film incentives, and that industry will be gone in a heartbeat. Michigan's first CGI studio opened yesterday in Livonia, with the promise of hiring an all-Michigan crew of up to 100 people. Maxsar Digital Studios did not buy the buildings though, because they plan to leave if the credits are discontinued.

Like others in the industry, Martinez is waiting to see whether changes will be made to the film incentives. Rumors about the demise of the tax breaks have already caused headaches for his business, generating fear among employees and investors.

"We cannot make the investment to buy (the buildings) until we know the tax credit is stable," the Northville resident said. "If they are going to change the law, tell us now. We need some stability."

If the tax breaks are eliminated or scaled back significantly, Martinez said, at least half the studio's 50 employees would leave Michigan.

The film industry credits around the country are in flux - but some states, such as Alaska with credits that can reach up to 44%, are stepping up efforts to get in this game. Very much up in the air at this point, but you can be sure others will be there if Michigan walks away.

One last word on incentives comes from the regional economic development heads.

Birgit Klohs, CEO of The Right Place Inc. in Grand Rapids, says the present policy of targeting high-growth sectors, such as life sciences and alternative energy, is a proper strategy.

“There is no state, there is no business, that doesn’t decide what sector it wants to compete in, and we have to decide what sectors are growth sectors and what can add to our economy,” Klohs said during a recent roundtable discussion with her colleagues from West Michigan.

They say companies across the U.S., even when they consider states with a lower business-tax burden than Michigan, have come to expect some kind of incentives. “We cannot stop incentivizing companies that are looking to grow to protect companies that are looking to stay put,” Lakeshore Advantage President Randy Thelen said.

The Governor's Office is "distancing" themselves from Calley's words this morning, but it appears that the guy was just being honest. Arrogant and glib to be sure, but honest. This will be an "all cuts" budget, and ordinary citizens are going to suffer for it with the loss of revenue from business taxes. Holland officials were left wondering yesterday how they would replace that funding.

Holland Township Manager Don Komejan said elimination of the Property Tax would result in a 9 percent reduction in township revenue to the tune of $870,000 a year.

“It sounds attractive to lower business taxes, but they have to look at the local impact and the cut in public services it would produce,” said Komejan noting the township has not heard any plans on how that tax revenue would be replaced.

It won't be, unless you want to raise the taxes yourselves. And not only that, we are going to pursue a failed economic strategy that will only serve to drive businesses either out of state or overseas - and it certainly won't attract any new businesses to locate here.

Don't worry though, we're pretty sure this is all President Obama's fault. Another arrogant Republican, Florida Governor Rick Scott, has already tipped his strategic hand in that direction; look for other state level Republicans to follow suit as they destroy their public services with tax cuts, and then seek to blame Washington for the damage.

2012 has already started, and draconian cuts at the state level will fit in nicely with all the future misleading attack ads, don't you think? You betcha.