The Mielke Way: Can Michigan Wheel and Deal?
Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University
Michigan is scoring some big economic development wins this year, a streak that has brought more jobs and investment with new incentives programs. We have heard the news that Taiwanese electronics giant Foxconn Technology group plans to establish a research and development facility centered around the auto industry–details to follow. And now Amazon has announced that it is searching for a second North American headquarters. It appears that Detroit will submit a proposal to land that development. What is the likelihood that Detroit could be successful? What have been the economic development successes for Michigan so far this year? But are there existing issues with deals already booked years ago? Before Michigan offers new incentive packages do the need to clean up the old ones? Does it make sense to offer economic incentives for economic development? What is the “Right Thing to do?” Let’s look at some issues:
- Through August, Michigan has drawn at least $4.3 billion in investment and 6,700 jobs from roughly two dozen projects that received such incentives as performance based grants or loans, brownfield financing, state equity investments and private bond funding. The list of companies includes Amazon (a new distribution center), Lear, Kroger, Stryker, Penske and LG Electronics. The total of state and local incentive commitments has not been tallied.
- Amazon is soliciting proposals for a second headquarter location, investing more than $5 billion and creating up to 50,000 high paying jobs, many in software development. Proposals are due October 19 with a decision expected next year. Cities from Toronto to Chicago to Denver to California said they would submit proposals.
- Amazon has set a number of criteria for the location including, a metropolitan area of at least 1 million people that can attract and retain strong technical talent, a strong university system to provide the talent, a location within 45 minutes of an international airport, a preference for access to mass transit, specifically asking for direct access to rail, train, subway/metro and bus routes, and location of about 1 million square feet of office space available and an eventual 8 million square feet that could cover up to 100 acres.
- Detroit and Michigan meets some of the criteria, but has challenges for others. The Detroit metropolitan area including surrounding counties has more than 4 million people. The location could easily be within 45 minutes from Metropolitan International Airport. It is a plus that both Detroit and Amazon’s main headquarters in Seattle are Delta hubs, providing many direct flights. We do have a strong university system with U of M, Michigan State and Wayne State as members of the Michigan Research Corridor.
- Challenges include talent that is iffy. Detroit’s area public schools are below average, in fact in the lowest 10% of the national systems. 29.5% of residents in the metro area have a bachelor’s degree or above, compared with 30.6 nationally–and much higher in many of the metro areas that will submit proposals. The region’s transit system is definitely a strike against it. Dan Gilbert has existing and planned office space to meet the initial need but assembling 100 acres in or around downtown would be difficult.
- State incentives are a major challenge. The new Good Jobs Bill and brownfield tax benefits for new development are helpful, but the total incentives available are lacking. The national average economic development package is $2,457 per job. That would equate to about $123 million for Michigan. Wisconsin offered $3 billion for the Foxconn development or $15,385 per worker. Michigan has no incentives in that ballpark.
- Before Michigan considers offering new incentives, the state has to deal with a legacy of past promises. The Mega program expanded under Governor Granholm included tax credits for job retention, not just job creation. A recent state audit found 732 Mega credits were approved between April 1995 and December 2011, when the program was terminated, were worth a total $14.2 billion. When companies started to cash in the credits in 2015, it caused an unanticipated budget shortfall of $325 million, causing a mid-year budget cut. The state’s current liability totals $7.3 billion.
- As a result, the state started to renegotiate tax deals with the 3 Detroit automakers, which had agreed to retain or add 86,000 jobs for a total of $4.5 billion. In 2015, Fiat Chrysler and Ford redid and disclosed their deals with the MEDC, with Ford capping their credits at $2.3 billion and Fiat Chrysler at $1.7 billion. GM negotiated a secret deal and did not divulge any information on its cap.
- Earlier this month, state auditors criticized the Michigan Strategic Fund for the failure to report the cumulative value of tax credits in 2014 and 2015 and raised questions about the confidentiality agreement with GM about its renegotiated tax credits in that year. The MSF said it was an oversight and will comply. The Michigan Strategic Fund is claiming a tax secrecy rule under the law, that many if not most, states have long abandoned.
- Policy questions were raised concerned the lack of disclosure in particular when committing taxpayer funds, when do state officials have the discretion to negotiate confidentiality agreements and overall lack of transparency.
Governor Snyder declared that Michigan is perfectly positioned to become home to Amazon’s second headquarters because of the state’s wealth of talent and vastly improved business climate. How likely is it that Detroit would get serious consideration for the Amazon development? Should Michigan be more concerned about the outstanding credits already promised? How can the state budget for credits cashed in when secret deals like the one with GM are not disclosed? What if the Michigan Strategic Fund negotiates a secret deal with Amazon? Should the state continue secret deals or even consider proposals for mega deals like Amazon? What would be the budget impact? What is the “Right Thing to do?” To its credit Michigan has drawn $4.3 billion in investment and 6,700 jobs in its economic development this year. This is notable, but we must remember that this is the best case scenario and those numbers are not always hit when the projects actually occur. However, to think Detroit has even a sliver of a chance with Amazon is unrealistic. The talent is clearly not here, the Detroit public schools are sub-par at best, college educated residents are below national averages, mass transit is non-existent and land and location issues are serious. To commit millions of additional tax dollars for a project this size will cause even more problems given the existing $7.3 billion in commitments already outstanding. We still have no idea what may be committed to Foxconn and what the total is that has already been committed for the successful deals this year. What’s worse, we don’t even know how much and when the GM incentives might hit our budget. Legislation should be passed immediately to stop secret deals and require the disclosure and transparency that taxpayers need and deserve. They are our tax dollars, not an economic development agency’s slush fund to give away. Yes, we have to have tax incentives for economic development to be competitive with other states, but there is a limit as to how much Michigan can wheel and deal.