State Budget 2022: Not Too Early to Cut Corporate and Industry Handouts

Michigan needs a fair field for all and favors for none

In a previous blog post, I provided a year-end assessment of the fiscal goodies offered to corporations and industries in Michigan. Our state gives these taxpayer-funded subsidies to a lucky few in the name of “economic development.” That is, bureaucrats give your money to handpicked corporations in the hope of creating more jobs and economic growth than they think might exist without it.

State employees, officeholders and special interests are probably jockeying already over the next state budget. With the new calendar year closing in, and a fiscal year 2021-22 budget proposal just a month or two away, it is worth reminding lawmakers that there is low-hanging fruit available to trim.

What follows is a list of cuts that should be made to the state budget. All figures used are based on gross appropriations in the fiscal 2021 budget, unless otherwise noted.

1. Business Attraction and Community Revitalization: $100 million

This line item subsidizes direct grants and loans to businesses and developers. The “business attraction” portion has been the subject of two major studies by the Mackinac Center. The first, in 2018, found that for every $500,000 the program handed out, employment decreased by about 600 in the county in which the project was located. The second, published in August, found that the state offered $29,400 per year for every job created by the program, hardly a cost-effective outcome.

2. Entrepreneurship Ecosystem: $15.7 million

This line item underwrites economic development efforts for “business incubation” and “accelerators” and other small business initiatives. We have not seen much in the way of evidence that this spending is effective.

In his 2010 study “Boon or Boondoggle? Business Incubation as Entrepreneurship Policy,” scholar Alejandro Amezcua studied the performance of business incubators in the public and private sector and at universities between 1990 and 2009. Thirty-two of these incubators were located in Michigan. He found that “incubation is not associated with a major increase in the survival, employment growth, or sales growth of new ventures on average.”

3. Pure Michigan: $15 million

The official appropriation for Pure Michigan is $25 million, but $10 million is expected to come from local and private sources. Mackinac Center research shows the program to be ineffective. Specifically, for every $1 million increase in state spending on tourism promotion, there is a corresponding increase in activity in the accommodations sector of just $20,000. This represents a huge loss on the state’s investment.

In addition to the finding above, there have been reports that Pure Michigan is prepping a winter advertising campaign to encourage travel as the state copes with troubling infection and death rates due to the COVID-19 pandemic. The governor has asked residents not to travel, but the state is also spending taxpayer money to encourage them to do so.

4. Job creation services: $22.3 million

This line items funds employees in the state’s economic development department and represents a target-rich environment for saving money. As programs are rolled back, so too should the number of state bureaucrats needed to run them.

5. Administrative services: $3.2 million

Similar to the previous line item, this is spending for the personnel employed by the state’s economic development arm. This covers executives, human resources and finance. Smaller and fewer programs should mean fewer executives and support staff are needed.

Corporate and industrial handouts do not consistently produce positive net benefits, and the preponderance of evidence supports that argument. A great deal of it is produced by academic researchers with no particular interest in Michigan policy. Other research has been performed by the Mackinac Center.

Last August the Center released a comprehensive look at state subsidy programs, “Economic Development? State Handouts and Jobs: A New Look at the Evidence.” We examined the performance of incentivized firms as far back as 1982 and found some evidence of job creation. Unfortunately, it came at a cost of nearly $600,000 in incentives offered per job.

Michigan doesn’t need a large corporate and industrial handout complex to thrive. It needs a fair field for all and favors for none. Lawmakers should cut state subsidy programs in favor of higher priorities.

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.