By Kaitlyn MacDonald
DETROIT, MI-More than 30 years after Michigan installed an industrial development tool that substantially reduces property taxes in order to stimulate job growth in the manufacturing sector, an important new study by state university researchers has found that the strategy, commonly deployed by local governments, is not only ineffective at aiding economic growth, it is actually contributing to fiscal distress in many communities.
The authors of the new report, Gary Sands, professor of urban planning at Wayne State University, and Laura Reese, director of the Global Urban Studies at Michigan State University, found:
§ Local governments in Michigan are giving up $1 billion annually in tax revenue in a largely futile effort to attract and keep manufacturing jobs in Michigan.
§ With the exception of heavy transportation equipment manufacturing, in which abating taxes helped to preserve jobs, the tax breaks did little or nothing to increase employment in other industrial sectors.
§ The 70,000 jobs that abatements were supposed to produce in the high tech manufacturing sector in the 1990s never materialized, or actually left Michigan.
§ Abatements were largely useless in helping Michigan communities diversify their economies and attract new industries.
§ Cities focused their tax abatement strategy on preserving dying manufacturing sectors while faster growing suburbs awarded generous tax breaks for industrial installations that added to sprawl. “These new suburbs would likely have attracted manufacturing investment and jobs even without granting abatements,” said the report.
“Abating property taxes on industrial development does not appear to be a guarantee of increased prosperity,” said the authors of the report, Industrial Facilities Tax Abatements: Current Practices and Policy Recommendations. “Indeed communities that seldom, if ever, granted abatements during the 1990s were about as likely to experience economic growth as communities that were generous in granting abatements.”
These and other conclusions, which are consistent with previous academic studies in and out of Michigan, are nevertheless likely to attract vigorous debate. Many economic development specialists and local government officials assert that they need every tool available, including tax abatements, to compete for new businesses and jobs.
“They’re essential.” said Rick Chapla, vice president of The Right Place, a non- profit economic development organization in Grand Rapids. “As long as every other state in the union has tax abatements and incentives the reality is that Michigan has to have these incentives to compete. We have to fight to be competitive and tax abatements are the cornerstone of economic development tools.”
The new study, which was conducted for the Land Policy Institute at Michigan State University by the authors, is the focus this week of a policy forum in Lansing hosted by the Land Policy Institute and the Institute for Public Policy and Social Research, also at Michigan State University. The event, “Rebuilding Michigan: Effective Economic Development Incentives,” takes place on October 3rd in the Anderson Office Building, starting at 11:45 a.m. Other featured speakers are Jack McHugh, legislative analyst for the Mackinac Center for Public Policy in Midland, and Greg LeRoy, the director of Good Jobs First in Washington.
This study is one of several studies being conducted by the Land Policy Institute. Two additional studies are in the pipeline, including “How States Grow” and “How Regions Grow,” to be released early in 2008.
According to Dr. Soji Adelaja, Land Policy Institute director, “One of the goals of the Land Policy Institute is to bring the prowess of the academic community to bear on important policy issues that relate to land and to the strategic growth of Michigan.”
Tax abatements have been a favored industrial development tool in Michigan since 1974, when the Legislature approved Public Act 198 following the Chrysler Corporation’s threat to shutter the Mac Avenue stamping plant in Detroit unless the company secured significant tax relief.
Under the law, the tax breaks are awarded as incentives for businesses to either remain in a community to retain jobs, or to encourage new businesses to locate in a community. The abatements cut in half taxes the firm must pay for new equipment or property. In return, the facility agrees to create jobs or prevent their loss. Tax abatements can be granted for up to twelve years. On average, about 600 abatements are awarded each year, sharply diminishing local tax revenue statewide by $1 billion annually.
Abatements are popular and generally not monitored after they are awarded, the researchers found. Since 1980, according to the new study, more than 40 percent of 1,773 local governments approved at least one tax abatement. Grand Rapids has made the most use of the tool, approving 522 of the 16,700 abatements issued by local governments in Michigan.
Nearly $70 billion in industrial investments during the past 25 years received tax abatements, said the study, 63 percent since 1996. And manufacturers asserted that with the help of tax abatements, they retained one million existing jobs since 1980, and generated 286,000 new jobs.
The question that Dr. Sands and Dr. Reese sought to answer is whether reducing industrial property taxes makes any difference to Michigan’s well being. State and local government officials assert tax abatements are essential. “I think that it’s one of the main tools that we use in terms of doing an economic development project,” said Jackie Zamarron, the tax abatement specialist at Michigan Economic Development Corporation. “I think it will keep on being the most popular tool for attracting companies so long as there is no change in the laws”
But Wendy Hill, a development associate at the Detroit Economic Growth Corporation, said most of the projects in her city “would have happened with or without the tax abatements.”
“Tax abatements are a nice tool,” Ms. Hill added, “but if someone needs to be in the city of Detroit, they will be in the city of Detroit.
Dr. Sands and Dr. Reese agree with Ms. Hill. Their conclusion: tax abatements don’t add nearly as much value as communities think.
In reality, said Dr. Sands, “If Indiana and Ohio kept on giving firms abatements, then, yes, some plants would leave, but most of the investment covered by tax abatements could continue to happen.”
“Many times, abatements are granted to the same companies over and over again,” said Dr. Reese, adding that abatements are a expensive way to forestall the inevitable for maintaining firms that are struggling to stay afloat in dying industries.
“Despite billions of dollars in foregone tax revenues,” Dr. Reese added, “manufacturing jobs have declined in Michigan in almost every category.”
Only the transportation equipment sector, which added 37,000 jobs between 1992 and 2002, appears to have clearly benefited from tax abatements. Since 2002, though, the sector’s employment has plummeted. The study also wondered whether continuing tax abatements for this sector was smart policy.
“The reality is that significant financial incentives have been directed at industries suffering from permanent structural decline,” said the authors.
Other industrial sectors lost jobs despite heavy local government investment in tax abatements. The high technology manufacturing industry, which linked 107,000 jobs to tax abatements from 1992 to 2002, employed less than 37,000 workers in 2002, 8,000 less than a decade earlier.
Dr. Sands and Dr. Reese suggest that instead of giving tax abatements to major manufacturing corporations, they should be used to target the new knowledge-based industries of the 21st century, such as information technology, biotechnology, computer sciences, software development, biofuels development, and others.
Another important conclusion reached by the researchers is that communities, especially those in the suburbs of Grand Rapids and Detroit, are awarding lucrative property tax breaks when none are really required to attract or retain employers. Companies that settle in the suburbs and apply for abatements would do so with or without property tax relief. Other factors are more important in their business strategies. The result for communities, however, particularly in the current economic climate, is deep deficits.
Detroit gave up $40,000 annually in tax revenue for each job a company receiving a tax abatement said it would retain or create. Alpine Township, outside Grand Rapids, lost $19,615 annually for each tax abated job retained or created there.
“In the long run, if those communities receive the income they lost from tax abatements, they could provide better services,” said Dr. Sands. “Better services make them more competitive places.”
A last significant finding explored in the study by Dr. Sands and Dr. Reese is that communities award tax abatements virtually to any company that asks. But most do not closely monitor whether the assurances companies made to retain or add jobs actually occurred. A survey by the author found that “55 percent of municipalities do no evaluate the outcomes of their abatements, and another 28 percent evaluate only occasionally.”
“There are no mechanisms in place to assess the extent of job creation after the fact,” said the authors. “And it is entirely possible that firms know going in that it is likely they will not be held accountable for any lack of performance on abatement conditions.”
Effective Economic Development Incentives was held on Wednesday, October 3, 2007, for more information call 517.432.8800 Ext. 103.
For More Information:
Michigan State University Land Policy Institute
Wayne State University
The Mackinac Center for Public Policy
Good Jobs First
Web site: www.Goodjobsfirst.org
The Right Place
By Kaitlyn MacDonald