Michigan is potentially on the hook for $9.4 billion in business tax credits over the next two decades, nearly $3 billion more than projected just weeks ago, the state's top economic development official said Wednesday.
Michigan Economic Development Corp. CEO Steve Arwood told lawmakers that 95 percent of the liability is to honor deals with companies that agreed to keep jobs in the state. He said in April 2008, the state made incentives for a retained job at least two times more lucrative, and officials have had a difficult time forecasting the budget ramifications because of growth in wages, health care benefits and businesses' investment in an improving economy.
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Others factors are that companies are allowed to redeem their credits in later years, taxpayer information is confidential and the redemption rate is higher than in the past, making it difficult to predict the impact on the state's budget year to year.
"We revised the estimate, and it's up sharply," Arwood told the Republican-led House Tax Policy Committee.
The $9.4 billion estimate is $2.9 billion, or 45 percent, higher than estimates provided to legislators at a revenue-estimating meeting in January.
"Wow," said Committee Chairman Jeff Farrrington, a Utica Republican.
Republican Gov. Rick Snyder and lawmakers have been forced to cut spending in the current budget primarily because of large businesses, possibly the Detroit Three automakers, cashing in old Michigan Economic Growth Authority tax credits as the economy improves. Snyder ended the system beginning in 2012 under a new business tax code — in favor of direct cash incentives as opposed to tax credits — but it will continue having a budget impact until the program ends in 2032.
Snyder has said his administration is working to get a better handle on when the incentives will be redeemed.
Arwood said there will be no amendments to MEGA deals that increase the state's liability — his administration had been revising agreements as recently as several months ago. The state will ask companies to take their credits in the year they are certified, to annually project a three-year credit redemption schedule and continue talking with companies about transparency and credit stability, he said.
Mike Johnston, vice president of government affairs for the Michigan Manufacturers Association, said economic development deals struck with automakers in the Great Recession were important to keeping the industry in the state.
"Some policymakers are attributing the budget challenge to the MEGA program," he told the committee. "I would submit that the budget challenge would be far greater if the $16.3 billion in auto investment had not come to Michigan and instead went to another state."
Some lawmakers questioned how much the credits really had to do with the industry's rebound, while Johnston countered that Michigan had to be aggressive because other states were vying for auto investment.
Arwood was appointed as MEDC CEO on Jan. 20 after joining the agency in August. He had previously served as director of the Licensing and Regulatory Affairs Department and is also the director of Snyder's newly created Talent and Economic Development Department.
"In my opinion, we have not done the job we should have done in estimation (of the credits' value) because we did not apply the kind of growth factors across the line that probably could have been pursued," Arwood said.
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