Commentary

Budget Reforms: In Praise of Cuts to Corporate Welfare

Tax increases aren't the only way to find funding

There is ongoing debate in Michigan about how to fund state legislative priorities, such as road funding. The Mackinac Center has weighed in repeatedly with recommendations on how to increase road funding while avoiding a large net tax increase.

One area for spending cuts the Mackinac Center has pointed to over the years involves Michigan’s corporate-handout industrial complex. Friends of free markets and sound fiscal policy may be nearing a small policy victory as lawmakers have proposed cuts to state business subsidy programs. There seems to be some bipartisan cooperation in this arena, and it’s worthy of applause. Consider two examples.

The House-passed budget calls for a $55.6 million cut to the line item called “Business attraction and community revitalization.” This is the most important part of the budget for corporate welfare, for it subsidizes the Michigan Business Development Program. The cut, if passed into law, would represent a 52.7% decline in funding over fiscal 2019. The state Senate also recommended a cut to the “business attraction” line item, but of only $2.5 million, or 2.6%.

These budget comparisons, it should be noted, exclude the value of a supplemental appropriation made for this fiscal year, which will apparently not be repeated in fiscal 2020.

We have argued that the state economy would be better off without the business development program. Our 2018 study found that for every $500,000 in subsidies handed out to corporations, there was a corresponding loss of some 600 jobs in the county in which the program’s deals were located. Moreover, we found that one-third of the deals between 2012 and 2016 were or had been in some stage of default or dismissal.

Pure Michigan is another area where policymakers — in this case, the governor and the House — have called for cuts. Gov. Gretchen Whitmer’s proposed budget came with a $5 million cut to the Pure Michigan program, a 14% reduction. The budget proposal passed by the House recommended $4 million in cuts.

Government tourism promotion is an ineffective economic development tool. Our 2016 study found that for every $1 million increase in spending there was only a $20,000 increase in economic activity in the state’s accommodations industry, and impacts were even smaller in other segments of the tourism industry. In other words, the program doesn’t help the state; it hurts it.

The state House and the governor deserve applause to some degree for trying to shift money away from corporate and industry handouts to some more productive arena. The state Senate does not see eye-to-eye with either the House nor the governor on Pure Michigan. Instead, it called for increasing Pure Michigan’s funding by $1.5 million.

With the governor proposing and each side of the legislature passing their own version of the next budget, the work has shifted to a small group of House and Senate members who will sort out their differences.

Let us hope for the sake of sound policy that the House members can persuade the Senate that cuts to corporate welfare can and should be made for the sake of wiser spending elsewhere — transportation infrastructure being just one good example.

Recommended Readings

How to Prioritize the Budget to Spend $1 Billion More on the Roads in a Single Year

If You Seek a Pleasant Road Funding Plan, Look About You

Study: Pure Michigan a Poor Investment.”

Pure Fiction: State Tourism Cost-Benefit Analysis Ignores Costs

Study: Michigan Business Development Program of Questionable Merit

State Corporate Welfare Agency Picks Winners That Turn Out To Be Losers

Failed Company Skipped On $2.1 Million State Loan, Wants More