James M. Hohman, Mackinac Center for Public Policy
“Let’s keep our foot on the accelerator,” Gov. Whitmer tweeted about her plan to hand out more selective business subsidies during last week’s Mackinac Policy Conference. But the governor is not stepping on the gas; she’s flipping the switch on a Useless Box.
Handing out subsidies to select companies generates headlines but does not improve the state economy. Michigan continues to fall behind the rest of the country. Real growth, not apparent growth, is what will bring the state out of its slump.
Most states — 32 of them — have fully recovered the jobs they lost during the pandemic. Michigan has not. There are 70,768 fewer people employed in Michigan than there were before the pandemic, a 1.5% decrease that is the eighth-worst among the states.
Michigan has problems, and handing out checks to big companies won’t solve them.
One part of Whitmer’s proposal is to give developers more subsidies to construct buildings. Lansing already gives select developers the taxes generated by construction of the building, plus the income taxes of people who will live in the building afterward. Senate Bill 289, which passed the state Senate with a 25-13 vote last month, would let administrators make more such deals and expand the payout to developers by awarding them the taxes generated by shops in subsidized buildings.
The bill’s supporters argue that the program is costless — an extraordinary claim, given that developers walk away from these deals with checks signed by the state treasury.
To believe that this is costless requires some mental gymnastics. The first move is to argue that the building would not be built but for the subsidies. Possibly.
The next move is to assume that construction workers would not be working on any other jobs if not for the subsidized building project. The key difference is that they’d be working on nonsubsidized jobs where the state, rather than the developer, gets to collect its tax revenue. The claim that contractors would have no work without the subsidy is likely not valid.
Even less likely is the notion that the people who will live in one of these buildings, and whose income taxes will go to developers, moved to the area specifically to live in a particular building that was constructed with public assistance. Without the subsidies, the income tax money of residents would have gone to the state treasury. Clearly, this costs the state money.
Writing checks to developers has clear costs, and lawmakers ought not pretend otherwise.
Another part of Whitmer’s proposal is to create new programs to hand out more money. The state already operates a program that allows it to give out however much money it wants to whomever lawmakers choose. The only limitation is a requirement to get the appropriation committee’s approval. Why officials need another program to hand out more money to favored interests is unstated.
While there are particular problems in current state business subsidy policy and in Whitmer’s proposals, the broader issue is the false assumption that handing out taxpayer checks creates jobs. Economists have paid a lot of attention to attempts to grow the economy through select favors. Every once in a while, they find programs that justify their costs. Most of the time they don’t. But they never — never — find that these programs do what Whitmer claims: boost the overall economy. No select business subsidy program generates large effects.
“[M]any public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence,” one review of the literature concluded.
Instead of chasing big companies using policies that don’t deliver results, Whitmer ought to be paying attention to the data about growth.
Lawmakers spend taxpayer money on economic statistical agencies to track what is going on in the country. The states that are growing the most right now are Utah and Idaho. These states offer the least in business subsidies. They have some of the best rankings for economic freedom and tax policy. They also have been magnets for people fleeing California, which has high taxes and is ranked low for economic freedom.
States don’t grow because lawmakers spend money chasing firms. They grow because the people in the state find ways to do things better, to meet customers’ wants and needs with newer, better products and services. Growth is a bottom-up endeavor. The role for state lawmakers is to make the state a better place for people to figure out how to do things better, and the best way to perform that role is to remove burdens on productive enterprise.
Lawmakers can do a lot to improve the state business climate. They can change the tax treatment of business equipment. They can ensure state occupational licenses protect the public more than they protect established practitioners. They can update state withholding tables to reflect the actual income tax rate and stop pretending there’s going to be a tax hike next year.
Any of these would do a better job than hitting the Useless Box.
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James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy.
