James M. Hohman, Mackinac Center for Public Policy
Democrats hold majorities in both Michigan legislative chambers for the first time in a generation, and now that they’ve had a few months in office, we’re getting a sense of what their priorities are. Their top priority is to offer big businesses more subsidies.
The Legislature has approved five bills as of this writing. Three of them authorize more business subsidies.
Public Act 1 authorizes $706.2 million in state spending, $450 million of which goes to subsidies for select businesses.
House Bill 4001, approved but not yet signed, establishes exemptions for pensions but not for any other source of retirement income. It increases the state’s Earned Income Tax Credit, even though more than 25% of recipients collect these credits without qualifying for them. And it earmarks $1.65 billion of corporate income tax revenue to selective business subsidy programs.
House Bill 4016, also approved but not yet signed, authorizes $828.6 million in state spending, $800 million of which goes to selective business subsidies.
It’s clear that Democrats’ top priority is to subsidize big businesses. They’ve authorized $2.9 billion so far this year. That’s much more than a year’s worth of funding for local roads.
Budgeting is supposed to be about putting your money where your mouth is, but Democrats didn’t say much about the need to write big checks to a handful of companies during last year’s campaign.
Nor should they. Giving money to select businesses is unfair to the businesses that don’t get them, ineffective at creating jobs, and expensive to the state budget.
There is a political calculus that leads lawmakers to offer corporate handouts. Elected officials are told that they need to award subsidies in order to outbid other states that may be competing to persuade a corporation to build or maintain local factories. Everyone would be better off if legislators in different states instead came together to agree to stop offering competing bids for projects.
Michigan lawmakers should stop even without an agreement. They hand out subsidies to create jobs, and the subsidies they offer fail to deliver on that promise. The states that have grown the most are not the ones writing the biggest checks to select companies; they’re the ones that have better business climates. No states have added jobs in the pandemic recovery more than Idaho, which increased its jobs by 7.1%, and Utah, which increased its jobs by 6.5%. It’s no surprise that the two states’ tax systems are ranked highly by the Tax Foundation. The Fraser Institute gives the states top marks for economic liberty. They’ve been magnets for the people fleeing California.
Academics use sophisticated methods to isolate the effects of business subsidies and other preferences on economic growth. Some of them find positive effects, most of them find negative effects. None of them find large effects. States can spend huge amounts subsidizing a handful of businesses, but it won’t make a dent in their economic performance. In the war for jobs, Michigan is shooting blanks with its $2.9 billion in new business subsidies.
These laws have been added to the business subsidy scorecard. Legislators in this session have already approved of more business subsidies than every legislature since 2008.
Instead of handing out checks to a handful of businesses, lawmakers ought to improve the state’s business climate. They can change the tax treatment of a firm’s equipment purchases in order to encourage growth. They can better regulate utilities to offer people cheap and more reliable electricity. And they can eliminate occupational licensing requirements that make it harder to find gainful employment but do nothing to protect the public.
Democrats’ agenda has been to subsidize select businesses rather than improve the state’s business climate. They can do both, even if subsidies don’t work. So far, it’s been all subsidies.
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James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy.
