Business Incentives and Ecnmic Expenditures: An Overview f Michigan s Prgram Investments and Outcmes Summary Acrss the cuntry, state ecnmic develpment incentives have evlved int a cmplex mixture f prgrams with diverse structures and gals. The Cuncil fr Cmmunity and Ecnmic Research (C2ER) and the Center fr Reginal Ecnmic Cmpetitiveness (CREC) have been wrking t catalg and dcument the range f available state prgrams thrugh the C2ER State Business Incentives Database, which includes detailed infrmatin abut almst 2,000 state administered incentives prgrams frm every state, and the C2ER State Ecnmic Expenditures Database, a cmpilatin f ecnmic develpment expenditure budget data frm every state. This reprt builds n that wrk by taking a deeper lk at Michigan s full array f incentive prgrams, including an examinatin f the available utcme data analyses that are used by state plicy makers and prgram administratrs t gauge prgram effectiveness. In rder t create a cmprehensive picture f Michigan s ecnmic develpment landscape, we reviewed and culled data frm a range f state statutes, reprts and websites. The numbers cntained in this reprt are CREC and C2ER s best estimate f the dllars spent n ecnmic develpment incentives in the state f Michigan. The Center fr Reginal Ecnmic Cmpetiveness (CREC) is wrking with The Pew Charitable Trusts (Pew) n the Business Incentives Initiative. This initiative engages frward- thinking teams f ecnmic develpment plicymakers and practitiners frm six states, including Michigan. These leaders are wrking tgether t identify effective ways t manage and assess ecnmic develpment incentive plicies and practices, imprve data cllectin and reprting n incentive investments, and develp natinal standards. The initiative is supprted by a grant frm the Laura and Jhn Arnld Fundatin. At the beginning f 2011, Michigan began emphasizing the need fr structural imprvements t its ecnmic business climate, and fcusing n keeping and grwing businesses lcated in the state. The result t date has been a simplificatin and reductin in crprate incme tax, the eliminatin f the persnal prperty tax, and the net eliminatin f ver 1,500 regulatry requirements. Additinally, the new apprach significantly reduced reliance n tax credits as an ecnmic develpment tl, and increased investment in a cash- based clsing fund and business services including exprt and prcurement supprt fr small and medium sized businesses. In 2012, the mst recent year fr which spending data are available fr all prgram types, Michigan spent $200 millin n ecnmic develpment prgram expenditures, and $1.2 billin n ecnmic develpment tax expenditures. Hwever, during this fiscal year the state awarded n Michigan Ecnmic Grwth Authrity (MEGA) tax credits, after awarding a high f $4.0 billin in 2009. Overview f Michigan s Business Incentives Cmpared t ther states, Michigan has a mderate number f incentive prgrams, with a ttal f 36 active prgrams in 2014. The C2ER State Business Incentives Database defines state business incentives 1 P age
Figure 1: Michigan State Business Incentives by Agency, 2014 State Agency Crpratin Michigan Energy Office Department f Agriculture and Rural Grsvenr Capital Management Glence Capital Michigan Acceleratr Fund 1 Michigan Cmmunity Cllege Assciatin Michigan Department f Treasury Michigan Film Office State Tax Cmmissin Surce: C2ER State Business Incentives Database Number f Prgrams 24 2 2 2 1 1 1 1 1 1 as state- administered prgrams designed t influence business investment behavirs. States design their prgrams t influence these behavirs thrugh tax incentives as well as thrugh nn- tax prgrams such as grants, lans, business assistance, and ther investment vehicles. These incentives help businesses address ne r mre business needs, such as capital access frmatin, wrkfrce preparatin, technlgy transfer, site facility imprvements, and s frth. Michigan s incentive prgrams are administered by 10 different state agencies. The Crpratin (MEDC) is the state s lead ecnmic develpment agency and administers tw- thirds f the state s incentive prgrams. The ther agencies invlved in ecnmic develpment incentives versee nly ne r tw prgrams. (See Figure 1.) Michigan and the MEDC have de- emphasized tax- based incentives as a leading tl f their ecnmic Figure 2: Business Incentives by Type (2014)** Surce: C2ER State Business Incentives Database ** Nte: Prgrams may appear mre than nce if they prvide multiple incentive types. 2 P age
Figure 3: Business Incentives by Business Need (2014)** Surce: C2ER State Business Incentives Database ** Nte: Prgrams may appear mre than nce if they are intended t fulfill multiple business needs. develpment strategy. The state has instead invested in a cash- based clsing fund and develped r expanded a variety f financing and business service activities cmmnly gruped tgether as ecnmic gardening. Activities include business financing (debt capital and equity capital), exprt and prcurement supprt, and cmmunity develpment financing prgrams (cmmunity revitalizatin prgrams, brwnfield prgrams, and CDBG administratin). The MEDC has versight and/r reprting respnsibility fr a brad range f ther prgrams that affect ecnmic develpment, bradly defined. These include the Michigan Film Office, the Michigan Energy Office and the Michigan Cuncil fr Arts & Cultural Affairs. MEDC ften cllabrates with ecnmic develpment ffices in ther state agencies, such as the Department f Agriculture and Rural (MDARD), the Michigan State Husing Authrity (MSHDA) and Department f Transprtatin (MDOT). MEDC is expanding its rle in wrkfrce issues (via Cmmunity Ventures, fr example) while cntinuing t wrk with ther wrkfrce rganizatins in the state (such as the Wrkfrce Agency). 1 prgrams cnstitute a large share f Michigan s incentive prgrams. (See Figure 2.) Helping facilitate capital access and business frmatin is the fcus f the verwhelming majrity f Michigan s incentive prgrams. Prduct and prcess imprvement and facility and site lcatin are ther ntable businesses needs that are emphasized in Michigan s incentives prtfli. (See Figure 3.) Ecnmic Prgram Expenditures Examining Michigan s state budget fr ecnmic develpment prgram expenditures reveals hw varius state agencies utlay mney fr ecnmic develpment prgrams. Expenditures fall int 15 1 The MSF, the primary surce f funding fr the MEDC, has recently been rerganized int the new Michigan Department f Talent and Ecnmic. 3 P age
functinal areas fr ecnmic develpment, as defined by the C2ER State Ecnmic Expenditures Database. 2 Accrding t Michigan s apprpriated FY 2012 state budget, the state apprpriated $200 millin fr ecnmic develpment in FY 2012. This level f spending represents an average f $834 per business establishment, which is slightly higher than the natinal median level f $791 in spending per business establishment. All f Michigan s prpsed ecnmic develpment expenditures went t the Michigan Strategic Fund (MSF)/MEDC, the Gvernr s Office, and the Department f Agriculture and Rural. The MSF/MEDC received the bulk f funding, with almst 72 percent f prpsed spending. State Ecnmic Expenditures Functin Areas Business Finance Strategic Business Attractin Fund Business Assistance Internatinal Trade and Investment Dmestic Recruitment/Out- f- State Wrkfrce Preparatin & Technlgy Transfer Entrepreneurial Minrity business develpment Cmmunity Assistance Turism/Film Special Industry Assistance Prgram Supprt Administratin Other Prgram Areas Michigan has increased ecnmic develpment spending by arund nine percent since the lw f $200 millin set in FY 2012. Despite spending increases since that fiscal year, FY 2015 ecnmic develpment spending is 43 percent lwer than the high f $403 millin set in FY 2008. This is cnsistent with natinal trends. (See Figure 4.) Between FY 2010 and FY 2011, there was an verall 40 percent drp natinally in state ecnmic develpment expenditures, as states decreased spending acrss the bard fllwing the Great Recessin. While ecnmic develpment expenditures have increased markedly natinally since Figure 4: Ttal State Ecnmic Funding** Surce: C2ER State Ecnmic Expenditures Database ** Nte: All fiscal years represent apprpriated spending. 2 See Glssary definitins here - http://www.stateexpenditures.rg/abut/definitin_f_ed_functins.pdf 4 P age
Figure 5: State Ecnmic Funding by Functin** Surce: C2ER State Ecnmic Expenditures Database ** Nte: All fiscal years represent apprpriated spending FY 2012, they have nt yet reached pre- Recessin spending levels. Cmpared t ther states in FY 2012, Michigan devted a higher prprtin f its ecnmic develpment budget than average in the functinal areas f business assistance, technlgy transfer, and wrkfrce preparatin and develpment. The state dedicated a lwer prprtin f its ecnmic develpment budget than the average fr ther states n business finance, cmmunity assitance, special industry assistance, and turism and film. (See Figure 5.) Ecnmic Tax Expenditures Tax expenditures can be defined as revenue lsses attributable t tax prvisins that ften result frm the use f the tax system t prmte scial gals withut incurring direct expenditures. 3 Ecnmic develpment tax expenditures in this cntext represent thse tax prvisins that use the state tax system t prmte business investments that prmte state ecnmic pririties. The FY2012 Executive Budget Appendix n Tax Credits, Deductins, and Exemptins, published by the Michigan Department f Treasury (Treasury), was used fr the analysis in this sectin. Data were cllected by reviewing and recrding all line items in the Reprt related t ecnmic develpment, including all tax credits, abatements, refunds/rebates and exemptins that are designed t influence business investment behavirs. It is imprtant t nte, hwever, that since the release f the data used in this analysis, Michigan has been making a majr shift away frm the use f tax incentives fr ecnmic develpment. In FY 2012, the state f Michigan spent a ttal f apprximately $1.2 billin in tax expenditures. 4 Michigan administered tax expenditures related t ecnmic develpment thrugh several different state agencies, including MEDC, Treasury, Grwth Authrity (MEGA), Michigan Film Office, the Department f Energy, Labr and Ecnmic Grwth Wrkfrce Agency, and Department f Agriculture and Rural. 3 Tax Expenditures: What are they and hw are they structured? Tax Plicy Center. Accessed Nvember 25, 2014 at: www.taxplicycenter.rg/briefing- bk/backgrund/shelters/expenditures.cfm 4 Tax expenditures ttal may include credits taken FY12 fr which cmmitments were made in years prir t FY12. 5 P age
Fr FY 2012, ver 90 percent f Michigan tax incentives were fr crprate taxes, and the remainder were fr individual and ther tax types. The primary ecnmic develpment functins fr these tax incentives were dmestic recruitment, special industry assistance, cmmunity assistance, turism and film, technlgy transfer, and business assistance. Michigan used tax incentives t assist many different industries in FY 2012, with abut 40 percent f line items ging tward specific industries. The primary industry categries that received tax assistance were transprtatin equipment manufacturing (72 percent); mtin picture and sund recrding (6 percent); and prfessinal, scientific, and technical services (4 percent). Other prminent industries included agriculture, mtr vehicle and parts dealers, and chemical manufacturing. Analysis f Available Outcme Data Michigan has made significant strides in screcard develpment and use in the last three years. All utcmes frm incentive effrts (and ther effrts driving investment and jb creatin) by the MEDC are captured mnthly in a screcard that identifies targeted and actual utcmes t date. These screcards are distributed bradly, including t the public n the State f Michigan and MEDC websites. 5 Incentive awards and utcmes are bradcast live via the MEDC s data warehuse t prvide up- t- the- minute understanding f incentive- driven utcmes t staff. The rganizatin als adheres t Return n Investment (ROI) targets that reflect strategic pririties, the ecnmic and cmpetitive landscape, and ther factrs. The MEDC s primary tl fr calculating ROI with incentive data is a Michigan- specific ecnmetric mdel frm Reginal Ecnmic Mdels, Inc. ( the REMI mdel ) cupled with a rigrusly develped tax rate factr that estimates state tax revenue flws frm the persnal incme generated by a prpsed private investment r jb creatin pprtunity. ROIs generated by the REMI mdel are assessed bth prspectively and retrspectively. Prspectively, as part f the award decisin prcess fr business incentives, an ROI is calculated factring in the incentive amunt (cst) with the prpsed private investment and jb creatin (benefit), and reviewed fr cmpatibility with rganizatinal targets. Retrspectively, after milestne dates have been reached, ROIs are calculated with actual private investment and jb creatin utcmes and evaluated against targeted, prspective utcmes. In certain strategic circumstances, the MEDC engages third parties t develp ROI assessments. Fr example, Michigan s natin- leading Pure Michigan travel and turism campaign is assessed annually by an industry leader in brand strategy and ROI research (and in 2011, the Pure Michigan campaign wn a prestigius David Ogilvy Award fr Excellence in Advertising Research); and natinal accunting firms have been engaged t measure the impact f Michigan s film incentive prgram. Likewise, the MEDC strategically engages academic ecnmists, and public plicy and labr market experts frm the state s tp universities t prvide independent reviews f majr attractin pprtunities and pilt prgrams. Mst effrts at determining incentive ROI typically identify direct incentives as the ttality f the state s cst burden. The MEDC has begun incrprating a mre rigrus and cnservative apprach that integrates activity- based csting ( ABC ) t allcate assciated general and administrative expenses ( G&A ) t incentive packages. These csts including prgram administratin wages, legal, marketing, and cmmunicatin expenses ften vary significantly by prgram and cntribute nn- trivially t the 5 See http://www.penmichigan.gv and http://michiganbusiness.rg/abut- medc/transparency, respectively. 6 P age
verall ROI f an effrt. In additin t incrprating G&A int a cmprehensive ROI, the MEDC als plans t review G&A regularly as an imprtant measure f peratinal efficiency. The MEDC distinguishes between gd ROI and prgram effectiveness. Because incentive prgrams are typically designed t distribute milestne payments based n utcmes, there is n dwnside risk t ROI subsequent t a cntractual award (i.e., if fewer jbs are created than targeted, then prprtinally less award is distributed and the ROI is nt diluted). Hwever, at the same time that marginal ROI may remain gd in the face f underperfrmance, the effectiveness f the prgram in driving utcmes may be negatively impacted. The MEDC perfrms regular assessments f prgram effectiveness tgether with retrspective ROI evaluatins. Cnclusin Michigan s ecnmic develpment structure has changed drastically ver recent years with its large shift away frm tax incentives and a mve tward ecnmic gardening. Cmpared t ther states, Michigan has an average number f incentive prgrams, cncentrated in ne majr agency (MEDC). In additin, the actual amunt f verall ecnmic develpment spending per business establishment in the state is abut average relative t ther states. Michigan s utcmes analysis is spearheaded by its Screcard, which has been cntinually imprving. They use an analysis f ROI t evaluate prgrams based n their current pririties. 7 P age
Appendix A: Full List f Michigan State Business Incentives (2014) Prgram Name Prgram Prvider Business need Type Bimass Gasificatin and Methane Digester Prperty Tax Exemptin Department f Agriculture and Rural Prduct & prcess imprvement Tax exemptin Invest Michigan - - Michigan Opprtunities Fund Glence Capital Capital access r frmatin Equity investment Venture Michigan Fund (VMF) Grsvenr Capital Management Capital access r frmatin Equity investment Invest Michigan! Grwth Capital Prgram Grsvenr Capital Management Capital access r frmatin Equity investment Acceleratr Fund Michigan Acceleratr Fund 1 Capital access r frmatin Equity investment New Jbs Training Prgram Michigan Cmmunity Cllege Assciatin Wrkfrce prep r develpment Strategic Grwth Initiative (SGI) Michigan Department f Agriculture and Rural Capital access r frmatin; Tech & prduct develpment Michigan Sales and Use Tax Exemptins Michigan Department f Treasury Prduct & prcess imprvement Tax exemptin Persnal Prperty Tax Abatement Crpratin Tax/Regulatry burden reductin Tax abatement; Tax exemptin 8 P age
Michigan Cllateral Supprt Prgram (MCSP) Michigan Business Prgram Next Michigan Act Capital Access Prgram Michigan Lan Participatin Prgram (MLPP) Tl & Die Recvery Renaissance Znes 21st Century Investment Fund Renewable Energy Renaissance Znes (RERZ) Michigan Cmmunity Revitalizatin Prgram (MCRP) Cmmercial Rehabilitatin Act Industrial Prperty Tax Abatement Tax Increment Financing Authrity (TIFA) Alternative Fuel Fueling Statin s (Ethanl and Bidiesel Matching ) Frest Prducts Prcessing Renaissance Znes (FPPRZ) Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Crpratin Capital access r frmatin Capital access r frmatin Capital access r frmatin Capital access r frmatin Capital access r frmatin Capital access r frmatin; Prduct & prcess imprvement Capital access r frmatin; Prduct & prcess imprvement; Tech & prduct develpment; Wrkfrce prep r develpment Capital access r frmatin; Tax/Regulatry burden reductin Facility/site lcatin Facility/site lcatin Facility/site lcatin; Tax/Regulatry burden reductin Other Prduct & prcess imprvement Tax/Regulatry burden reductin Cllateral Supprt ; Lan/Lan Participatin ; Tax exemptin Lan/Lan Participatin Lan/Lan Participatin Tax exemptin; Tax credit; Tax deductin Equity investment; Tax exemptin ; Lan/Lan Participatin Tax abatement; Tax exemptin Tax abatement; Tax exemptin Other; Tax abatement 9 P age
Pure Michigan Micr Lending Initiative Private Activity Bnds (PAB) Pre- Seed Capital Fund/SmartZnes Michigan Emerging Technlgy Fund (ETF) Urban Land Assembly (ULA) Prgram Agricultural Prcessing Renaissance Znes Brder Crssing Renaissance Znes Centers f Energy Excellence (COEE) Business Cnnect Crpratin (MEDC) Crpratin (MEDC) Crpratin (MEDC) Crpratin (MEDC) Crpratin (MEDC) Crpratin (MEDC) Crpratin (MEDC) Crpratin (MEDC) Crpratins Capital access r frmatin Capital access r frmatin Capital access r frmatin; Tech & prduct develpment Capital access r frmatin; Tech & prduct develpment Facility/site lcatin Prduct & prcess imprvement; Tax/Regulatry burden reductin Tax/Regulatry burden reductin Tech & prduct develpment Marketing & sales assistance; Prduct & prcess imprvement; Tech & prduct develpment Energy Revlving Lan Prgram Michigan Energy Office Capital access r frmatin Michigan Bimass Energy Prgram s (MBEP) Film and Digital Media Incentive Obslete Prperty Rehabilitatin Act (OPRA) Michigan Energy Office Michigan Film Office State Tax Cmmissin Prduct & prcess imprvement Prduct & prcess imprvement Other; Facility/site lcatin Lan/Lan Participatin Other Equity investment Lan/Lan Participatin Tax abatement Tax abatement Other Lan/Lan Participatin Other Tax abatement; Tax exemptin 10 P age
Appendix B: MI Ecnmic Prgram Expenditures (2012) Functin Activity Ttal State Funding Administratin Inf systems, accunting, human $2,719,386 resurces, etc. Business Assistance Business retentin/expansin $48,800,990 Business Assistance Other Business Assistance $24,400,495 Special Industry Assistance Agriculture/agribusiness $2,266,929 Technlgy Transfer Other Technlgy Transfer $24,400,495 Turism/Film Film Prmtin $25,149,005 Wrkfrce Preparatin & Dev. Custmized training $15,804,005 Wrkfrce Preparatin & Dev. Other Wrkfrce Preparatin & Dev. $56,935,500 11 P age
Appendix C: MI Ecnmic Tax Expenditures (2012) Descriptin Agricultural Prducers Anchr Cmpany Credit Bidiesel Infrastructure Credit Brwnfield Redevelpment Credit Entrepreneurial Credit Film Credits Flr Plan Interest Deductin Histric Preservatin Credit Hybrid Technlgy R & D Credit Internatinal Aut Shw Credit Investment Tax Credit MEGA Federal Gvernment Credit MEGA Phtvltaic Technlgy Credit MEGA Plycrystalline Silicn Manufacturing Credit MEGA Vehicle Battery Credit Michigan Early Stage Venture Capital Vucher Grwth Authrity (MEGA) Mtin Picture Grss Receipts Exclusin Mtr Vehicle Sales Finance Cmpany Grss Receipts Exclusin NASCAR Speedway Credit New Mtr Vehicle Dealer Inventry Credit Private Equity Fund Credit Renaissance Zne Credit Research and Credit Small Brewer s Credit Small Business Alternative Tax Credit Stadium Credit Ttal Funds $47,800,000 $0 $250,000 $76,800,000 $260,000 $75,000,000 $3,400,000 $14,662,000 $1,500,000 $250,000 $223,700,000 $0 $7,500,000 $0 $40,000,000 $0 $109,400,000 $2,100,000 $0 $1,800,000 $25,000,000 $0 $108,600,000 $24,200,000 $90,000 $431,500,000 $1,700,000 12 P age