Teri Battaglieri Testimony

Good morning.

My name is Teri Battaglieri.

I am the special assistant to the president of the Michigan Education Association. In that role, I coordinate the MEA’s TEF initiative.

This initiative focuses on the integration of taxes, economic development and funding for public schools.

Madame Chairwoman, members of the committee, thank you for this opportunity to address you.

Madame Chairwoman, on a personal note, it is very good to see you again.

My comments this morning are based on research commissioned by the Michigan Education Association with the Anderson Economic Group.

Effective business tax incentive programs are imperative when a state is in economic decline, when its business tax burdens are considered uncompetitive for many industries, or when state budgets are strained.  Michigan suffers from all three of these conditions and over the years has pursued an aggressive strategy when it comes to awarding tax incentives to businesses and corporations.

In fact, in 2008 alone, nearly $900 million in nominal tax expenditures was dedicated to eight of the 36 available business tax incentive programs in our state. One of these eight is the film incentives program, perhaps the most publicized and well-known of all tax incentive programs. With such an enormous investment of taxpayer dollars in a state with a serious budget shortfall, the debate ought not to be limited to whether tax incentives are bad or good, but should focus on whether the tax incentive programs Michigan offers are creating the good jobs and economic recovery that our state so desperately needs.

To address this, the Michigan Education Association in partnership with the National Education Association, commissioned the Anderson Economic Group to do a research study which would create a systematic inventory of Michigan’s tax incentive programs and, using existing data, evaluate their effectiveness in attracting and retaining businesses and creating good jobs.

The goal of the study, entitled Michigan’s Business Tax Incentives, was to provide a foundation upon which taxpayers, policymakers, community leaders and business groups could debate, discuss and analyze the efficacy of investing tax dollars in specific programs as a means of creating long-term state economic recovery.  

The study inventoried the 36 available tax incentive programs in Michigan and did a more in-depth analysis on eight of the most popular ones in terms of their relative effectiveness. In addition to the film incentives program, the other   programs included tax abatements for manufacturers updating their facilities, special incentives for businesses and developers who want to rehabilitate dilapidated properties and substantial “MEGA” grants for high-tech industries.

One of the major findings of the study is that the researchers found a troubling lack of transparency in reporting the results of these major taxpayer investments. In fact, up until the completion of the study, there existed no comprehensive, publicly available inventory of business tax incentive programs and their effectiveness – despite the fact that hundreds of millions of taxpayer dollars are spent on such programs every year.

Another finding is that there is no independent agency which administers, evaluates or collects information on all of Michigan’s tax incentive programs. The majority of tax incentives identified in the study are awarded by the local unit of government with final approval from the State Tax Commission or by the Michigan Economic Development Corporation (MEDC) or the Michigan Economic Growth Authority (MEGA). The film incentives are approved by the Michigan Film Office.

Additionally, existing data on the effectiveness of tax incentive programs is deeply affected by self-interest. Several of the eight programs which were evaluated in detail rely on self-interested reporting to estimate projected results. For example, applicants for MEGA grants must report the number of jobs they will create or retain IF they receive the grant. While MEGA has the authority to revoke future credits if the recipient does not live up to its claims, there is no auditing or verification of the information once the grant is provided.

The report also found that no true measurement exists of the degree to which programs designed to create, attract or save jobs in the state actually do so. Indeed, no systematic measurement of actual jobs created exists and no firm criteria exist for determining if employment at the business receiving the credit is genuinely new to the state.

And finally, the study demonstrates an enormous variation in terms of the effectiveness of the eight tax incentive programs reviewed in encouraging jobs in Michigan. Two were rated as highly effective, three were rated as moderately effective and three, including the film tax incentives were rated as low in effectiveness.

Another way of looking at this relative effectiveness is to compare the “cost per job”, meaning the lost tax revenue divided by the number of actual new jobs for a specific year and program. For all but two of the eight programs, the data required for this calculation was non-existent. However, for two programs, MEGA and the film tax incentive, enough data was available to provide a plausible range. Assuming that the incentives actually “work” in bringing new jobs to the state, the MEGA program has been estimated to cost the state about $5,000 in foregone tax revenue per new job per year.  This is based on an estimate that a new professional or industrial job in this state, with pay and benefits that average $50,000 per year, will result in about $75,000 in additional personal income for the state on which roughly $6,000 in state taxes would be collected.

The film incentives program, meanwhile, has been estimated to cost in excess of $50,000 per new job, per year in terms of foregone tax revenue.

In terms of being in the best economic interest of the state, an incentive costing the state $5,000 per year is probably a good investment of taxpayer dollars. On the other hand, a credit of $50,000 means that taxpayers aren’t just incentivizing the activity – they’re actually paying for it. In fact, the Senate Fiscal Agency has estimated that for 2008-09, despite the economic activity created by the film program, there was still a net loss of $99 million for the state.

And finally, the study finds that state and local governments forego a significant, but ultimately unknown amount of revenue due to business tax incentives. Again, unknown because there is no reliable estimate of the actual cost of tax incentives, nor of the number of jobs or amount of earnings that are retained in the state because of them.

While the effectiveness of tax incentives varies and there is a troubling lack of clear evidence regarding their ability to create good jobs and grow Michigan’s economy, the budgetary impact of these incentives is being felt across the state – especially in the public schools charged with preparing a workforce for the jobs Michigan needs.

Unlike tax incentives, there is no lack of data on the value of investing in public education. Research from the Political Economy Research Institute at the University of Massachusetts-Amherst shows that of any type of government spending (including tax incentives), spending on education generates the largest number of jobs – 23.1 jobs per $1 million in spending. Businesses consistently point to work force quality as being more important than tax incentives in choosing where they locate. Universities, community colleges and public schools prepare that workforce, which is why investing in public education is a good, stable investment in our economic future.

The Michigan Education Association isn’t against using tax incentives to create new jobs and grow our economy. We simply want our political leaders to make informed decisions about spending tax dollars in order to ensure that we get the biggest bang for our buck.
As stated in a Free Press editorial co-authored by the Executive Director of the MEA and the author of our study, “Michigan could encourage more jobs, train workers for them, maintain or decrease tax rates, and bring in the same or greater tax revenue merely by reforming certain tax incentives.”

Michigan taxpayers deserve detailed information and transparency when it comes to how their tax dollars are spent. To that end, the MEA supports the passage of “sunshine legislation” to guarantee corporate accountability for every taxpayer dollar received from state incentives. The MEA will continue to sponsor research by the Anderson Economic Group. Phase two of Michigan’s Business Tax Incentives will be released later this fall and will feature more in-depth analyses quantifying the effectiveness of tax incentives along with recommendations for improvement.

Thank you again for this opportunity to address the committee.

Updated: October 9, 2009 7:33 AM

2009-10 State Budget crisis quick links:

Talking Points on State Budget

A Better Michigan Future budget campaign site