News Story

State's Corporate Welfare Agency Tone Deaf to Requests for Transparency

MEDC treats transparency 'as an annoyance'

Making transparency a condition for receiving selective state subsidies and tax breaks is apparently a foreign concept at the Michigan Economic Development Corporation, which is the state’s corporate welfare arm.

At a Feb. 18 meeting of the House Tax Policy Committee, the Mackinac Center for Public Policy recommended that, to provide much-needed transparency at the MEDC, companies accepting tax credits be required to waive a right to privacy related to these transactions.

At the conclusion of the hearing, the MEDC's chief executive, Steve Arwood, was asked this question:

“Considering the amounts of money at stake, is it likely that a business would reject the offer of a tax credit because part of the deal required it to waive its privacy rights to provide public transparency concerning the agreement?”

“I haven’t had that come up,” Arwood responded. “It might; there are a lot of competitors. I don’t know the answer to the question. I haven’t had it come up before.”

Arwood's response reinforces a longstanding belief that MEDC presumes the public can't expect its state government to be transparent in its dealings with business interests.

“The MEDC should have insisted that the taxpayer support offered to companies be public information,” said James Hohman, assistant director of fiscal policy at the Mackinac Center. “But the MEDC has treated basic transparency as an annoyance rather than a goal.”

The revelation that MEDC has stuck the state with $9.38 billion in tax credit liabilities – an amount just shy of the entire annual revenue of $9.5 billion to Michigan’s General Fund – dominated media coverage of that Feb. 18 hearing. But portions of the hearing also focused on the agency’s lack of transparency, an issue brought to the forefront after Gov. Rick Snyder and the Legislature were apparently blindsided by the hit these long term corporate incentive deals delivered to this year's state budget.

Jack McHugh, senior legislative analyst with the Mackinac Center, told the committee that most MEDC programs are political development programs, not economic development ones. He suggested the best solution to the problems at the agency would be to just get rid of it, but if that isn’t going to happen, it must be made more transparent.

“The MEDC is almost certainly Michigan’s least transparent government agency,” McHugh said. “A 2009 Mackinac Center policy brief gave startling details of this dismal record. The current administration has tried to change this. Still, as the budget drama of the past few weeks has shown, the liabilities created by past MEGA deals are still surrounded in mystery, secrecy and uncertainty.”

“Actually, the MEDC wasn’t always quite so secretive,” McHugh continued. “From 1995 through part of 2009, when asked, it routinely provided breakdowns of the value of credits claimed and the companies claiming them. However, our 2009 study of MEGA could not be replicated today because since then officials have asserted ‘administration of tax’ confidentiality. To the extent that this is anything more than a specious effort to dodge accountability, the assertion raises troubling questions.”

McHugh then asked whether anyone had lost their job for allowing the data to be published prior to the policy change. He also asked for the name of the person who had decided that such data was off-limits, and why wasn’t the determination made sooner.

During the testimony of Department of Treasury chief economist Jay Wortley, Rep. Bill LaVoy, D-Monroe, asked if the reason details about companies claiming the tax credits couldn’t be publicly disclosed was because it would violate the State Revenue Act.

Wortley responded that “the Revenue Act is pretty clear on that point.”

Committee members then pressed the issue – previously articulated by McHugh – that prior to 2009, the identities of companies receiving the credits were routinely disclosed.

Arwood confirmed that what McHugh had asserted was true, but offered no explanation as to why it was at first deemed legal to release the data or why, in mid-2009, it was determined that such data could no longer be disclosed.

Almost all of Arwood’s testimony centered on various aspects of the $9.38 billion in MEGA tax credit liabilities the state will likely have to wrestle with throughout the next decade-and-a-half, as well as discussions about their immediate impacts on the current and next year’s budgets.

A defense of the agency and its tax credits was spearheaded by Mike Johnston, president of government affairs with the Michigan Manufacturers Association. Johnston argued that between 2011 and 2014, the Big Three automakers (which reporters and officials have generally ascertained are the companies claiming most of the tax credits) had invested $16.3 billion in Michigan.

Over the past five years, the Big Three automakers increased employment (in Michigan) by 37,000 people,” Johnston said. “That's like adding another auto company. Collectively, the industry employed 124,500 people.”

“There is a never-ending interstate battle,” Johnston continued. “That (the money and employment), could easily have gone to other states. I can assure you many other states would have liked to have the $16 billion.”

Rep. Jim Townsend, D-Royal Oak, the ranking Democrat on the committee, said he thought the tax credits had played a role in the Big Three's investment in Michigan. But he suspected that role was being exaggerated.

“During the Great Recession the automakers did prioritize and preserve jobs in Michigan,” Townsend said. “But what we have seen since is more likely the result of a much more robust industry nationally.”

According to Townsend, who once worked in the auto industry, tax credits weren’t the driving force behind expansion.

“The way issues of expansion were decided really didn’t involve tax credits much,” Townsend said. “What it really had to do with was demand.”

Hohman said the dynamic of government incentive programs sets up a rhetorical “can’t lose” situation for corporate welfare supporters.

“Now the MEDC is claiming a heads-I-win, tails-you-lose approach to the state economy,” Hohman said. “Its leaders claimed that the recession was beyond their ability to influence and now claim that the recovery is because of their actions. The truth is that their press releases are an expensive luxury that the state ought to cast aside.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.