Tax-Subsidy Programs Fuel Budget Deficits: States Looking at Ways to Bring Corporate-Subsidy Programs Under Control

February 11, 2015

By Matthew Dolan Feb. 11, 2015

Michigan’s corporate-tax incentives helped jump-start the state’s lagging economy, officials say, but now those same curative measures are hurting the state’s budget.

During the past two decades, Michigan promised companies, including its fabled car makers, more than $10 billion in corporate incentives. These subsidies are fueling a $325 million shortfall in the state’s general fund this fiscal year after a pair of tax credits were unexpectedly cashed in a few months ago.

In states across the country, corporate-subsidy programs are coming under greater scrutiny from elected officials on both sides of the aisle because of the significant impact these initiatives are having on governments’ ability to balance the books.

A number of states, such as Michigan, have offered generous tax incentives to businesses without certainty about how much money would be doled out and when, forcing officials to scramble when deficits balloon.

Michigan Gov. Rick Snyder, a Republican, on Wednesday slashed more than $100 million in state department spending to help plug the state’s budget gap. He also proposed $500 million in additional cuts through 2017, his staff said Wednesday evening.

Mr. Snyder said the state has moved toward ensuring all future corporate subsidies come with an estimated timeline and price tag. But Michigan and other states will likely be spending years paying off tax credits that ramped up during the recession at the end of the last decade.

“We’re going to take them on,” Mr. Snyder told reporters, referring to the delayed costs of business-tax credits.

Kenneth Thomas, a political-science professor at the University of Missouri-St. Louis who has studied corporate subsidies for years, estimated state and local incentives to businesses nationwide cost taxpayers at least $70 billion annually.

In Oklahoma, where officials are grappling with a $300 million budget gap, Jeff Hickman,a Republican and speaker of the state House of Representatives, is calling for greater scrutiny of the $1.7 billion he said the state gives away each year on tax credits, incentives and exemptions.

In Louisiana, the state faces budget gaps estimated at more than $1 billion a year for the next five years—that is roughly the same amount the state hands out in annual tax exemptions and incentives to businesses, some of which are granted automatically to companies that meet certain targets.

“It’s open-ended and unappropriated,” Louisiana’s chief legislative economist, Greg Albrecht, said of some escalating tax breaks. “It’s on autopilot.”

Since 2010, 10 states and the District of Columbia passed laws that require regular evaluation of economic development tax incentives or an improved evaluation process, according to a recent report from the Pew Charitable Trusts, a nonprofit. A proposal floated by the Governmental Accounting Standards Board, an independent organization that establishes accounting standards for state and local governments, would require all states and localities to disclose the total spent on tax abatements every year.

Paying off incentives to businesses is just one element of the overall budget picture, officials said. In recent years, Michigan and several other states have also cut business taxes, lowering revenue to the states’ coffers.

If companies are qualifying for tax incentives, it could be viewed as a sign that businesses are meeting their targets, adding more jobs to the local economy and investing in facilities as promised. But the question is whether those benefits outweigh the cost of the subsidies to taxpayers.

Proponents of corporate-tax subsidies said the incentives are a drop in the bucket, compared with the return to a state’s economy. In many cases, they said, the credits are only used when a company hires enough workers and invests enough in its facilities to justify the tax break.

“We have to make sure that in any incentive program, you talk about overall rate of return. You don’t just look at what that thing costs,” said Mark Morante of the Michigan Economic Development Corporation, the state’s business arm. Michigan typically earns $2.5 back for every dollar it invests, he said.

Tesla Motors received a $1.3 billion incentive package in Nevada, one of a number of deals nationwide being questioned.PHOTO: REUTERS

Critics from the left and the right say too many states still use business incentives and tax breaks that aren't appropriated annually and receive little oversight from state lawmakers because the money is given away before it ever comes in the door.

“There is a lot of incentive by people putting together incentives to want to claim huge success but it’s usually based on very, very weak evidence,” said David Merriman,professor of public administration at the University of Illinois at Chicago.

The controversy surrounding corporate-tax incentives doesn’t always cut neatly along party lines. For example, leading Democrats in New Jersey have supported many of GOP Gov. Chris Christie’s business-incentive initiatives, estimated at $2.1 billion last year, a state record.

In Michigan, some liberal critics are decrying the impact of business tax breaks even though the corporate-incentive program swelled to its greatest heights under former Gov. Jennifer Granholm, a Democrat who approved billions for the auto industry.

In recent years, Michigan announced promises of hundreds of new jobs when it awarded tax credits to a number of film studios and battery companies that in some cases never used the credits or delivered the jobs.

In 2009, for example, the state awarded more than $125 million in state corporate tax credits to A123 Systems, a rechargeable lithium-ion battery maker working with the auto industry outside Detroit. State officials said the project would create 5,000 jobs, but that total was never reached and the company filed for bankruptcy in 2012. A representative from the company didn't return a request for comment, and state officials declined to say how much of its tax credits the firm redeemed.

With Michigan’s economy falling apart and its population fleeing in the 2000s, Ms. Granholm lifted the cap, starting in 2006, on the number of tax credits issued a year and touted the program as a way to help diversify and grow an economy that had been battered by a declining auto industry.

Soon Michigan led the nation in supersize deals. According to Good Jobs First, a nonprofit group that tracks economic-development subsidies, Michigan ranked first among states nationwide in the number of awards, at both the local and state level, worth at least $75 million, spending $7.1 billion in total, according to 2013 report. Today, the total cost of the state’s program is pegged at $10 billion, $6.5 billion of which still needs to be paid out.

“My concern is that those estimates could be understated,” Mr. Snyder said.

When Mr. Snyder took office in 2011,