The Business Lesson of Pfizer and Ann Arbor

Should cities offer select 'corporate welfare'?

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In 2001, drug manufacturer Pfizer Inc. was trying to get only the second tax abatement in the city of Ann Arbor’s history and the first since 1982.

Frustrated by the City Council’s tepidness to award the incentives, then-Pfizer Senior Vice President David Canter said the council seemed “anti-business” and implied that the drug manufacturer would completely abandon Ann Arbor if a deal wasn’t forthcoming.

The City Council eventually worked out an $84.2 million tax incentive deal over 20 years. However, just six years later, Pfizer announced it was closing its Ann Arbor facilities by 2008.

Pfizer’s announcement left city officials stunned and media reports followed about the devastating impact the company’s departure would have on the local economy. Pfizer was thought to be a rock of Ann Arbor’s robust economy. It was the city’s largest taxpayer and The city's largest private employer with more than 3,000 workers.

Now, in 2012, Ann Arbor has proven there is life after Pfizer, which raises the question of how important it is to provide big name companies tax incentives in fear of them leaving.

“The big business news rarely translates into significant economic impact,” said James Hohman, a fiscal policy analyst for the Mackinac Center for Public Policy. “The general knee-jerk reaction is, ‘You’ve got to do something for these big businesses.’ But in reality, they don’t account for much. If state policy wants to encourage actual economic growth, then it needs to continue broad-based policy reforms.”

The city of Ann Arbor’s unemployment rate was 5.5 percent in June of 2007 before Pfizer announced it was leaving. By July 2009, the unemployment rate had jumped to 10.3 percent.

“I don't think you can say that the loss was overstated,” said Don Grimes, a University of Michigan economist, in an email. “Pfizer did eliminate 2,000 jobs in Ann Arbor. Add to that the jobs lost as Borders downsized and eventually went into bankruptcy liquidation, the loss of jobs at the Ann Arbor News, the loss of thousands of jobs in auto manufacturing plants (mostly in the eastern part of the county), and even the loss of white collar auto jobs elsewhere in Southeast Michigan, many of whom resided in Ann Arbor, and it’s hard not to conclude that Washtenaw County was hit by a tsunami of job losses.”

By November 2011, Ann Arbor’s unemployment rate had dropped to the 5.5 percent of the Pfizer days. The unemployment rate was 5.9 percent as of January 2012, the most recent data available.

In June 2007, Washtenaw County’s private-sector employment was 127,959. In 2010, it decreased to 112,006. In September 2011, it was up to 120,058, according to the most recent data available. Ann Arbor's overall population has remained virtually unchanged since the 2000 census.

“The interesting question is, ‘Why hasn't [sic] there been bigger negative consequences?’ ” Grimes said. “But, the city of Ann Arbor appears to be thriving.”

Grimes said he thinks the "better educated" residents of Ann Arbor were able to reinvent themselves in new jobs.

“My hunch is that a lot of the former Pfizer workers, Borders workers and white collar auto industry workers made the same sort of transformation. My guess is that the unionized blue collar workers were not as successful in transforming themselves, but that would be the hypothesis to be tested by (a) research project.

“I think Ann Arbor might be a great example of how people successfully adapt to challenge, the eastern part of the county less so I suspect,” Grimes said. “The so-called ‘job security’ of those auto industry union contracts may have allowed the workers to forget their entrepreneurial spirit. If your job/income is not so secure, I think people are always thinking about doing something else and thus when you lose your job/income the person is better prepared (mentally and psychologically) to make the necessary adjustment.”

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See also:

Michigan Capitol Confidential Coverage of Special Tax Incentives