Michigan Tax Incentives Corporate Welfare Discussion Read Michigan Tax Incentives—Corporate Welfare? and A Primer on Certificated Credits Under the Michiga

Michigan Tax Incentives Corporate Welfare Discussion Read Michigan Tax Incentives—Corporate Welfare? and A Primer on Certificated Credits Under the Michigan Business Tax. (attached)

Then, in your initial post, consider the following questions:

Is it the role of government to provide incentives to business? Why or why not?
Do you agree with Michigan’s decision to extend tax credits in the manner it has? Why or why not?
Is it ethical for a business to accept government incentives in all cases? Alternatively, is it the fiduciary responsibility of businesses to seek government aid in every instance? Explain and defend your responses.
How might a business that accepts incentives effectively respond to criticism that it is accepting corporate welfare? 4/24/2019
Michigan Tax Incentives — Corporate Welfare?
8,586 views | Mar 10, 2015, 09:40am
Michigan Tax Incentives -Corporate Welfare?
David Brunori Subscriber
Tax Analysts Contributor Group
Taxes
In a microcosm of all that is wrong with state tax policy, Michigan Gov. Rick
Snyder (R) wants to renegotiate the tax incentive agreements his state has with
240 companies. It turns out the state owes about $9.4 billion in tax credits to
companies that created jobs in Michigan. That liability costs the state about $500
million a year, a cost that will continue until 2029! The tax credits reduce a
company’s liability under the Michigan business tax (MBT).
The Michigan Economic Growth Authority is the organization charged with
giving away Michigan tax dollars to companies that would have invested in the
state without being bribed. The problem is that the recipients of the tax credits
have a lot of discretion as to their use. First, the businesses can claim the credits
whenever they want. That makes government a little tougher. Second, there
appears to be no expiration date on their use. The whole process is further
complicated because corporations receiving the credits can elect to continue to
“pay” the MBT rather than pay the relatively new state corporate income tax.
There are conservative legislators in Michigan who are calling for the repeal of the
MBT, which would effectively end this problem (no MBT, no MBT credits). I have
heard some liberal legislators say the state should find a way to negotiate away
some of the credits. Snyder is talking about a more modest approach. His
administration wants to negotiate with the companies the timing of the credits’
use. I am unsure why any company would give up the ability to use the credits
when it needs them most. Perhaps they can get something else in return,
although I can’t fathom what that might be.
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4/24/2019
Michigan Tax Incentives — Corporate Welfare?
The history of job creation tax credits in Michigan is a story of corporate
welfarism. Chrysler, General Motors, and Ford alone are owed about half of the
balance (over $4 billion) outstanding in MBT credits. Democrats (former Gov.
Jennifer Granholm) and Republicans (former Gov. John Engler) are to blame.
The chief problem with taxing business entities in general and capital in
particular is that politicians can’t help themselves when it comes to giving money
away.
In reality, Michigan should repeal both the MBT (which is silly) and the brandnew corporate income tax (only slightly less silly). No one pays them. Combined,
they account for about $865 million, only about 3 percent of the state’s total
revenue of $25 billion. The MBT actually loses money after accounting for the
credits. Indeed, it seems like its only reason for existence is to be given away.
This post is an excerpt of an article that was published in State Tax Notes, the
paper of record for the state tax community.
Read Comments (2)
David Brunori Subscriber
I’m deputy publisher of Tax Analysts. I specialize in tax and government issues. I’m a
contributing editor of State Tax Notes and author of its weekly column The Politics of State
Taxation. I also write for the Tax Analysts blog. I teach state and local public ?nance and
?scal federalism at George Washington University’s Trachtenberg School of Public Policy and
Public Administration and state and local tax law at the George Washington University Law
School. I have authored numerous books on state and local tax policy, and received the 2001
Choice Award for my book State Tax Policy: A Political Perspective. I previously served as an
appellate trial attorney with the U.S. Department of Justice Tax Division. I also served as a
David C. Lincoln Fellow at the Lincoln Institute of Land Policy from 2001 to 2004. I have a MA
in political science from George Washington University and a JD from the University of
Pittsburgh. Read Less
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4/24/2019
Michigan Tax Incentives — Corporate Welfare?
Tax Analysts Contributor Group
Tax Analysts is the leading publisher of tax news, analysis and commentary for the global
community. More than 150,000 tax professionals in law and accounting ?rms, cor… Read More
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State Notes
TOPICS OF LEGISLATIVE INTEREST
Winter 2015
A Primer on Certificated Credits under the Michigan Business Tax
By Elizabeth Pratt, Fiscal Analyst, Cory Savino, Fiscal Analyst, and David Zin, Chief
Economist
Introduction
State General Fund/General Purpose (GF/GP) revenue estimates for fiscal year (FY) 2013-14, FY
2014-15, and FY 2015-16 were revised downward at the January 2015 Consensus Revenue
Estimating Conference. The revenue decrease was due primarily to the larger-than-expected
amount of refunds issued for the Michigan Business Tax (MBT). Although the Michigan Business
Tax Act was repealed on January 1, 2012 for most business tax filers, some businesses continue
to file MBT returns in order to claim refundable tax credits. While new MBT tax credits have not
been issued since the MBT Act was repealed, previous tax credit agreements are still in place and
have been amended, and the improving economy has made it more likely that eligible businesses
can complete the investments and job increases required to claim credits; thus, the amount of
credits claimed by eligible businesses has continued to grow. This article reviews the tax credits
that are now being claimed, summarizes the recent history of business taxes in Michigan that led
to the award and continuation of these tax credits, discusses reasons for the volatility in the
amounts being claimed, and describes possible options for limiting the impact of these tax credits
on GF/GP revenue.
Background
Public Act 24 of 1995 created the Michigan Economic Growth Authority (MEGA) tax credit program
to attract, retain, create, and increase job and capital investment in Michigan. The Michigan
Economic Growth Authority tax credits are refundable tax credits, which means that if the credit
amount is greater than the tax owed, the State will pay the cash difference to the company as a
refund, whether or not the company has any tax liability. At its inception, the program authorized
the award of credits against the Single Business Tax (SBT) to approved companies in targeted
industries that met criteria for job creation and investment.
The business tax structure in Michigan has changed dramatically since the MEGA credit program
was first enacted. The Single Business Tax was replaced effective January 1, 2008, by the MBT.
The Michigan Business Tax raised an amount of revenue similar to the SBT revenue and allowed
previously issued tax credits to continue to be claimed. Under the MBT, new MEGA credits also
continued to be approved by the MEGA board through the end of 2011.
Effective January 1, 2012, the MBT was repealed (for most taxpayers) and replaced with the
Corporate Income Tax (CIT). The Corporate Income Tax generates substantially less revenue from
business taxpayers than either the SBT or MBT raised. Under the MBT, businesses (including
corporations, partnerships, S-Corporations, sole proprietorships and limited liability companies)
were taxed at a rate of 4.95% on business income and 0.8% on gross receipts, although a 21.99%
surcharge effectively made the rates 6.04% on business income and 0.98% on gross receipts.
Under the CIT, only corporations are taxed and the rate is 6.0% of corporate income. The Corporate
Income Tax legislation permitted MEGA credit holders to choose to switch to the CIT and forego
the MEGA credits or to continue to file under the MBT Act and claim credits, giving companies the
option to continue to benefit from refundable credits for which they were eligible. Approximately
200 taxpayers continue to file MBT returns in order to claim MEGA credits and other certificated
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
www.senate.michigan.gov/sfa
State Notes
TOPICS OF LEGISLATIVE INTEREST
Winter 2015
credits. Because of the value of these credits, it is likely that these businesses will continue to do
so until they have redeemed all of the MEGA tax credit certificates for which they are eligible.
The 2011 legislation that effectively eliminated the MBT for most taxpayers also prohibited the
issuance of new tax credit awards after January 1, 2012. Additional legislation created a new
incentive program beginning in FY 2011-12 that functioned by issuing grants and loans instead of
tax credits. However, because some MEGA awards may be claimed for as long as 20 years,
companies are expected to continue to be eligible for credits through 2032. Furthermore, FY 203132 will not be the last fiscal year that payments on these credits will be made and the MBT Act will
not officially be repealed until all credits have been redeemed.
Credits were issued by the MEGA board from 1996 through 2011. Claims of credits by companies
started in 1996. Based on the potential credits that have been awarded, claims of credits can
continue through 2032. Even though new credits cannot be issued, the Michigan Strategic Fund
board can amend previously issued credits, which can either increase or decrease the refund
amount.
Michigan Business Tax Credits
The 2011 legislation preserved a variety of different types of credits under the MBT. In addition to
credits issued in the MEGA program, certificated credits that may be claimed include the Early
Stage Venture Capital credit, brownfield redevelopment credits, credits for photovoltaic technology,
anchor company payroll credits, Federal government employment credits, anchor company taxable
value credits, polycrystalline silicon manufacturing credits, credits for high-power energy batteries,
hybrid technology research and development credits, media production credits, media
infrastructure credits, historic preservation credits, renaissance zone credits, NASCAR Speedway
credits, and farmland preservation credits. For most of these credits, the credit awards were
approved by the Michigan Economic Growth Authority board, which was located within the
Michigan Strategic Fund, and staffed by the Michigan Economic Development Corporation since
Executive Order 1999-1. The MEGA board was dissolved by Executive Order 2012-9, which moved
all of the responsibilities of the MEGA board to the MSF board. No new credits have been issued
by the MSF board since the end of 2011, although credit agreements have been amended.
Generally, MEGA credits involve some sort of quid pro quo arrangement in which the taxpayer is
required to accomplish certain goals in exchange for the credits. While awards can be for as long
as 20 years, distinct criteria generally are specified for each individual year during that period and
the first year of the award period may be several years after the formal award agreement is
approved. The criteria vary by the nature of the credit or program, but often include provisions
regarding creating or maintaining a certain number of jobs and/or making investments in plants and
equipment of at least a specified level, whether in terms of developing new facilities or rehabilitating
old facilities. Taxpayers may fail to qualify for a credit in one year but then later qualify for the credit,
while others may never qualify for the credit. The nature of the agreements, in which the taxpayer
is promised some sort of tax compensation in exchange for pursuing specified economic activities,
has resulted in the development of policies to preserve the credits even as the tax structure has
changed.
In the debate over the value of economic development incentives, an issue that often arises is
whether an incentive is generating new economic activity or merely subsidizing activities that
otherwise would have occurred. Evaluating this aspect of incentives is very difficult for even a single
Page 2 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
www.senate.michigan.gov/sfa
State Notes
TOPICS OF LEGISLATIVE INTEREST
Winter 2015
year, let alone when done for awards that may have been made almost two decades ago. An
incentive may make no difference or all of the difference in a project, by raising the return on a
project to a level at which the project can proceed. The following example illustrates this point:
Assume a taxpayer is considering a business investment and requires a 5.0% return on the
investment to pursue it. Also assume that the State offers an incentive that will improve the rate of
return on the project by 2.0%. Three scenarios can be considered based on three different states
of the economy. Assuming the taxpayer’s forecast of the market is correct, the following three cases
describe the potential outcome if, absent the incentive, the taxpayer will receive a return of:
a) 1.0%
b) 7.0%
c) 4.0%
In scenario a), the economy will return 1.0% on the investment and the tax incentive will improve
that return to 3.0%. The taxpayer will not pursue the investment because even with the incentive,
the project will fail to generate sufficient returns. In this case, the incentive made no difference to
the business decision and ultimately would not cost the State any revenue.
In scenario b), the economy will return 7.0% to the taxpayer and the incentive will boost that return
to 9.0%. The taxpayer will pursue the investment and, because of the incentive, will receive a return
of 9.0% rather than 7.0%. In this case, the incentive did not change taxpayer activity but did cost
the State revenue, which simply made the firm’s activities more profitable than they otherwise would
have been.
In scenario c), the economy will return 4.0% on the investment and the taxpayer would not pursue
the investment without the incentive. However, the incentive raises the return on the project to
6.0%, now making it profitable for the taxpayer to proceed. In this case, the incentive will reduce
State revenue, but will also generate economic activity that would not otherwise occur.
An important caveat to mention with economic development incentives is that there also may be
cases in which the incentive does not affect whether or not the taxpayer pursues the investment
but affects where the taxpayer pursues the investment. It is not difficult to locate media articles
describing states or local units that effectively bid against each other in order to attract a business
investment, or to find businesses that attempt to pit governments against each other in such
bidding. In these circumstances, a condition such as scenario b) might exist, but if one state is
offering an incentive that improves the rate of return by 2.0% and another state offers an incentive
that improves the return by 4.0%, the business is going to pursue the activity regardless of whether
an incentive is offered by any state, but will more than likely pursue the investment in the second
state in order to maximize its return.
Mechanics of the MEGA Credit Process
To qualify for and receive a MEGA credit, businesses are required to go through a number of steps,
listed in Figure 1. First, a business must undergo an application process and receive approval of a
credit agreement by the MEGA board. Second, an approved company must complete the required
investment and job creation. Third, in order to receive the financial benefit of the credit, the business
must apply for a credit certificate. Fourth, after review of the application, the MSF/MEDC issues a
credit certificate. Fifth, the company then submits the certificate, with an MBT return, to the
Department of Treasury. If the company has already submitted a return for that tax year, the
Page 3 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
www.senate.michigan.gov/sfa
State Notes
TOPICS OF LEGISLATIVE INTEREST
Winter 2015
company will submit an amended return. The Department of Treasury may have audit issues that
must be resolved before it issues any refund. Finally, once approved by Treasury, the business
receives the credit. Businesses have flexibility on when they can redeem the credit certificates. In
some cases, the tax returns are due before credit certificates have been received and the business
must file an amended tax return. Businesses also can amend multiple tax returns in the same year.
With reviews and audits possible at each stage, the time frame can be several years from when a
business first applies for the credit to when it receives the payment, explaining why payments for
redeemed tax credits could continue well beyond FY 2031-32.
As of November 2014, the MEDC estimate of the amount of MEGA credits that were awarded for
the years 2015 through 2032 but not yet redeemed totaled $6.5 billion, up $1.6 billion from an
estimated $4.9 billion in March 2011, as shown in Figure 2. The increased value of awards reflects
new awards made during 2011 and amendments to agreements that were made before 2011.
Additionally, the MEDC has made changes in certain calculations used to estimate future credit
amounts.
According to the MEDC, the $1.6 billion change in the estimated value of MEGA awards from March
2011 to November 2014 represents approximately $73.0 million in new awards made during 2011,
approximately $391.0 million in increased awards attributable to amendments to previous awards,
and approximately $1.1 billion from the revised calculations made to estimate the value of the
awards. The majority of these revisions affect job retention credits, and the value of those credits
depends heavily on the compensation (wages, health care costs, etc.) paid to retained employees.
Apparently, earlier estimates not only assumed an average compensation rate on retained jobs
that was too low, but also assumed no growth in compensation rates over the 20-year period of the
awards. While the MEDC has updated the projected costs to reflect compensation costs submitted
under recent claims, the projections continue to assume no growth in future years from those
revised levels.
As a result, the data illustrated in Table 1 and Figure 2 likely understate the future value of both the
awards and the projected claims. It is unknown what portion of the award amounts reflect these job
retention credits, but if 50% of the amounts shown represent job retention credits and compensation
costs rise 5.0% per year, the total value of the awards is approximately $1.7 billion more than
shown in Table 1, and the projected cost of the credits is approximately $1.4 billion higher. If the
retention credits are 70% of the total and compensation costs average 8.0% growth, the value of
the awards is approximately $4.2 billion higher than shown in the table, and the value of projected
claims is approximately $3.5 billion higher.
Furthermore, predicting the number and amount of credits that will be redeemed is difficult, and
generally depends much more on economic factors specific to the taxpayer than on general
economic conditions forecasted by the Consensus Revenue Estimating Conference. Previously,
estimates assumed that approximately 35.0% of awards would ultimately be claimed, while more
recent estimates have been adjusted to reflect taxpayer claims over the last few years and predict
that, on average, approximately 75.0% of the award amounts will be redeemed. The combination
of timing issues in the credit process, amendments to credit agreements and calculations, and
changes in redemption rates makes it difficult to predict the amount of redeemed tax credits that
will be paid in a single budget year.
Page 4 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
www.senate.michigan.gov/sfa
State Notes
TOPICS OF LEGISLATIVE INTERE…
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