Before the Great Recession of 2007-09, there was the Single-State Recession. Michigan’s dismal economic decade of the 2000s led to some truly terrible subsidy deals that would create new crises a decade later, and are still being paid for today.
Unlike most of the rest of the country, Michigan never fully recovered from the post-9/11 economic downturn before the next recession began. The state’s automakers had already been in the process of losing market share to foreign competition, and between 2001 and 2006 the number of cars and trucks built in the state dropped by 27 percent, eliminating 120,000 jobs.
Politicians panicked, and a tax credit program created by a Republican governor and expanded by a Democratic governor was used to try to hold onto automotive industry jobs at all costs. The Michigan Economic Growth Authority (MEGA) tax credit program gave selected employers tax breaks equal to the wages, profit sharing and health care benefits they paid qualifying employees in Michigan. For Detroit’s Big Three, whose high wage and benefit cost structures were large contributors to their poor competitiveness with foreign automakers, this meant a potentially gigantic subsidy payday.
The state’s leaders had no idea just how gigantic a problem they had created, though. In 2011, after the MEGA program finished awarding new credits, the state estimated that it was likely to end up paying out $4.9 billion in MEGA credits. By November 2014, the estimate was $6.5 billion. In December 2014, one company unexpectedly cashed in $224 million of tax credits with the State of Michigan. Two months later, in February 2015, the estimated price tag reached $9.5 billion as newly profitable automakers decided to start redeeming their credits at close to a 100% rate.
That year, Michigan’s legislature had to make $325 million in unexpected spending cuts in the face of a $532 million state tax revenue shortfall, with cuts falling hardest on state police and corrections funding. This was the first in a series of years of budgetary uncertainty driven by the will-they-or-won’t-they issue of some of the state’s largest employers suddenly deciding to create a massive tax revenue shortfall. In 2019, for instance, the state collected $1.3 billion in corporate income taxes but paid $511 million in MEGA refunds.
But while the state was holding up its end of the bargain, it was less clear that companies were doing their part. A 2017 performance audit by the state’s Auditor General found that in 2015, companies receiving MEGA credits had only created 48% of the “standard” new jobs they had promised, 39% of the “high-tech” jobs and retained just 83% of the jobs they had promised to keep in the state.
Despite no new tax credits having been awarded since 2011, they still cost the state around $500 million per year, or roughly 7.5 percent of the state’s General Fund budget, and Michigan’s taxpayers will still be on the hook for them until 2030. The most recent estimate in September 2021 was that $4.57 billion of MEGA credits remained to be redeemed. Meanwhile, one independent study by researchers at Ball State University and Michigan’s Mackinac Center for Public Policy found that each job saved or created by MEGA deals cost taxpayers an estimated $125,000 per job, per year.
Supporters claim that the MEGA credits “saved the auto industry in Michigan.” However, General Motors still went bankrupt. Chrysler was purchased by a private equity firm, went bankrupt and was then purchased by Fiat. Ford mortgaged its most important assets – including even the rights to its name and blue oval trademark – to get the money it needed to survive the downturn and retool for the future.
It’s hard to believe that the potential of tax breaks years or even decades down the road meaningfully changed the in-the-moment hiring and site selection decisions of companies facing these kinds of existential challenges. But Michigan’s taxpayers are still paying the price today.