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Strategy to Provide Tax Incentives to Attract Companies Being Questioned by Michigan Legislators.
Proven Economic Gardening Program of MEDC
Could Be Viable Alternative
LANSING - State-funded tax incentives for businesses are coming under increased scrutiny here in the state Capitol these days.
The Michigan House last Thursday overwhelmingly voted to prohibit future tax credits for companies still using the Michigan Business Tax and end the subsidies after 2031. The bills now go to the State Senate.
State lawmakers were surprised earlier this year when a surge in redemption of the so-called MEGA tax credits meant they had to cut $325 million from the current budget.
The House's bipartisan action represents the first efforts lawmakers have taken to contain a $9.3 billion long-term liability that has ballooned in recent years, poking holes in the state's general fund budget.
Since 2003, when the state was trying to thwart a deepening economic downturn by enticing new companies to the state, Michigan's strategy was to invest in 20 venture capital companies. These were called funds of funds and this raised more private money to invest in entrepreneurs and their start-up companies.
The initial money came from the banks, guaranteed by tax vouchers from the state. The Venture Michigan Funds received about $450 million from the banks, resulting in lending of $150 million to 41 start-up companies, according to an analysis of the program done by the Michigan House Fiscal Agency.
The tax vouchers, however, are now coming due and the state is on the hook for about $140 million over the next three years, the Fiscal Agency said.
On top of a $325-million hole in the current budget from businesses cashing in tax credits with the state, the cost of the venture capital funds has some lawmakers raising the question of ending the program.
The Michigan Economic Development Corporation (MEDC) runs the "economic gardening" program that aims to assist existing Michigan companies grow and has had a solid result of success since its inception. Similar gardening programs have been run for the past 25 years in several states across the nation with excellent results.
"The Venture Michigan fund was started with all the right motives," said state Rep. Al Pscholka, R-Stevensville. "But venture capital is by nature a risky investment, and we should not be risking taxpayer dollars."
He's introduced legislation that would prohibit any more money from being invested in venture capital firms and ensure that as the loans are repaid, that the money comes back to the state and doesn't go back into the venture capital fund.
One of the biggest problems, he said, is that since the state funds are co-mingled with money given to venture capital firms by private investors, it's hard to determine, that is measure results of what the state money has done.
The legislation would prohibit Gov. Rick Snyder's administration and future governors from amending tax credit deals with companies that would increase the value of the credits or extend their redemption beyond 2031.
Under the legislation, the Michigan Business Tax tied to the credits would end on Dec. 31, 2031.
Rep. Lee Chatfield, one of the bill sponsors, said the legislation is necessary to prevent the cost of tax credits mostly awarded under former Democratic Gov. Jennifer Granholm from further escalating for future taxpayers.
The Republican-controlled House voted 105-5 and 104-6 in favor of House Bills 4333 and 4334. The bills now head to the GOP-run Senate.
The bills aim to curtail Michigan Economic Growth Authority tax credits that have been awarded to some of the state's largest employers for creating or keeping jobs in Michigan, including Detroit's Big Three automakers. MEGA tax credits are awarded by a state board and administered by the Michigan Economic Development Corp.
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