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Rod Meloni: Michigan's tax credit trouble

Michigan Gov. Rick Snyder (AP)

LANSING, Mich. – Just when it seems as if Michigan is really on the road to economic recovery, the sins of the past keep pulling it back.

Governor Rick Snyder today made it clear he is proud of the state's progress in the past four years, attracting or creating more than 300,000 jobs, filling a multi-million dollar budget deficit hole and showing the lowest unemployment rate in a decade.

READ: Gov. Snyder's budget executive order

This is all good news, but with the government in Michigan it always seems like there is a sense of futility.

The Granholm administration ran a program called the MEGA tax credit. The MEGA credits went to about 100 companies, including some of the state's largest, through incentive-laden contracts. Some of these deals run to 2032.

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This is an exceptionally expensive way to incentivize business activity and it's causing budget holes that are preventing a stronger recovery. This is also an expensive lesson born out of the desperation of the auto bankruptcies and Michigan's desire to grown an economy than just the motor city. A laudable goal considering the automotive bankruptcies, but four years later it looks like even the car companies received some of these tax credits.

Here is a paragraph from a 2009 release by the State of Michigan describing the MEGA program, whose design was to diversify Michigan's economy: "High-Wage MEGA credits are available to eligible businesses that create jobs paying a minimum of 300% of the Federal Minimum Wage to each and every employee for which the business will receive a tax credit. However, for initial qualification under the High-Wage MEGA, the company must pay an average 300% of the Federal Minimum Wage for all its employees. Job creation objectives are identical to the High-Tech MEGA program."

The easiest way to understand the MEGA tax credits is that they are similar to your mortgage interest tax exemption. When you do your taxes this year and you have a homeowner's tax write off, it reduces your overall federal tax bill.

If you have worked your withholding so you don't owe the feds any money, you will likely see a tax refund later this year. Well, as the Michigan economy improves Michigan's largest companies [although some smaller companies are in on this too] who have these MEGA tax credits have reached the contractual credit triggers.

They file for credits and get sizable credit checks from the State of Michigan. It comes out of the general fund. This all sounds entirely reasonable, but it goes off the rails when you discover that these contracts are tax-related and therefore private.

Snyder, much to his dismay, said today he cannot see these contracts in their entirety. That's right, the Governor of Michigan and the second party to these contracts can see no more of these MEGA tax credits than you or I if we filed a Freedom of Information Act request because they contain tax information they come "redacted" with large sections blacked out.

Now you wouldn't want just anyone to see your tax return with your personal information and a company should be able to expect the same. Still, the mind bending practical effect of this is that the State of Michigan has no way of knowing exactly how many these companies stand to receive benefits from the MEGA program in any tax year!

Therefore the State has no way to properly budget for them and this is at least part of the reason why Michigan is about $325 million in the hole for income tax projections this year.

This situation prompted the Governor today to publish, simultaneously with his 2016 budget, an eight-page executive order requiring targeted budget cuts to make up that unexpected deficit.

The executive order only cuts $103 million in state spending, sparing schools and revenue sharing for local communities. That's not enough to completely close the gap, so there's also going to be a supplemental spending bill run through the legislature looking to cut still more from the 2015 budget to keep it balanced.

Snyder says there will be job cuts, but they will likely take place through attrition and he says they won't cause significant visible job loss throughout state government.

Snyder made it clear he doesn't like what he calls these "legacy tax credits" granted in 2011. He says they are a moving target and one he can't control.

Snyder also said  some companies have approached the state to discuss a process where the state can see trouble on the horizon before it gets out of hand.

"These should be reasonable topics that could be discussed in terms of better visibility and how we encourage Economic Development and growth going forward in Michigan because there are some of our largest employers," Snyder said. "I want to make sure we understand and respect that and they've grown a lot in the last few years and we should be thankful for that piece of it."

Politically, it's generally considered a bad idea to get combative with large employers around the state and that's never been his style anyway.

Still, while not blaming anyone, Snyder did go out of his way to contrast the cost of MEGA and the new incentive program he instituted in its place in 2012.

He claims while MEGA's job creation numbers are hit and miss, nearly 100% of the jobs forecasted are actually created under his program.

But here are the really damning numbers: Snyder's budget documents claim, under MEGA, it cost the state $14,310 per single job created and $74,661 per job retained. Under the new system, the cost for job creation is significantly smaller at $6818.

The Governor says fixing this problem is only accomplished through transparency, something he says the Treasury Department can speak with the credit holders to get better projections one or two years out.

However, you can bet Snyder will be angling to get companies to forgo some of the MEGA credits they are receiving. In the meantime, the more things improve, in Michigan, the more things end up looking like an upstream swim.


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