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In the classic post-apocalyptic film Mad Max: Beyond Thunderdome, those who back out of deals in Tina Turner’s Bartertown face a wheel of fortune to determine their punishment. Hero and road warrior Max busts his deal with her, spins the wheel, and seals his own fate. The huge, lucrative tax subsidies Michigan gave the Big Three automakers (as well as tax breaks it gave to about 220 other lucky firms) got me thinking about Max. Nobody’s quite busted any deals, but Michigan taxpayers like me may have to face the wheel for years to come.
Here’s the story: Back in the '90s, when the auto industry was speeding toward a figurative financial cliff, Michigan offered the Big Three sizable tax credits. Ford, General Motors and Chrysler employed hundreds of thousands of people in Michigan—but the jobs were rapidly disappearing—down from 482,000 in 1978 to 375,000 in 1986 and 288,000 in 1994. In 1995 Republican Governor John Engler offered the automakers and a handful of other firms the aptly-named MEGA tax credits (for Michigan Economic Growth Authority). A MEGA credit is worth up to 100 percent of the state’s personal income tax rate multiplied by the actual wages and employer-paid health care costs on qualifying new or retained jobs. If the credit in any given year exceeds a firm’s tax liability, it gets a refund. The credit may be awarded annually for up to 20 years.
Despite MEGA, auto industry jobs continued to plummet. Just before the industry crashed with the economy in 2008, the Big Three employed only about 220,000 in Michigan. During the Great Recession, Democratic Governor Jennifer Granholm expanded the program. By the time the state stopped offering new credits in 2011, the automakers were on track to employ as many in Michigan as they did before the crash. A lot happened in those three years. Ford restructured. The feds bailed out General Motors and Chrysler. And most recently, Fiat acquired Chrysler (now known as FCA).
But while the state is no longer granting new credits, it must continue paying out the old ones—which are now being redeemed at a rate close to 100 percent. Historically, they’d been redeemed at between 35 and 50 percent. Adding misery to state budgeters’ lives: It’s nearly impossible to determine when the credits will be redeemed. Once awarded, they become tax information, which the state’s Treasury is not allowed to share. Given the higher redemption rate and credit formulas, Michigan expects to pay out $9.4 billion over the next two decades, with about $5.5 billion going to the Big Three—about double what the state originally anticipated. Ford’s share is roughly $2.3 billion, General Motors’ is $2.1 billion, and Chrysler’s is pegged at $1.3 billion. (Remarkably, Michigan has been able to disclose complete information on the Big Three’s MEGA-jobs only through 2009).
Those numbers are likely to grow: The auto business is doing well, with more jobs tied to the MEGA tax credits. There are no foreseeable layoffs or relocations, but a deal’s a deal. Michigan started writing MEGA tax refund checks from its $10 billion general fund last fall, contributing to a 2015 budget shortfall of about $289 million. Who “faced the wheel?” In February, Governor Rick Snyder cut $106 million from state agency budgets, including the State Police, Department of Corrections, and the Department of Community Health. Thanks to spending cuts and an improving economy, Michigan has balanced its 2016 budget. The only thing missing: a long-term funding plan for roads.
In May, voters resoundingly defeated a ballot initiative that would have funded over $1 billion-a-year for infrastructure. While it scrambles to come up with another plan, the state has had to shift $400 million from the general fund to build and repair roads for the coming year. That’s the same money it needs to cover the checks for MEGA tax credits.
Tax deals can, thankfully, be renegotiated: Last month, Ford promised to spend an additional $3.1 billion on its Michigan facilities through 2025 and limit its MEGA tax credit to $2.3 billion over ten years. To get the credit, Ford would need to retain 40,200 jobs, or more than 91 percent of its in-state workforce. It was a remarkable feat of compromise and negotiation—and might serve as a model for retooled deals with General Motors and Chrysler.
Suspend your disbelief a minute: What if voters were asked if they’d be willing to fund roads and infrastructure by canceling all current MEGA tax credit deals? Maybe Michigan could fund its roads for a decade or more. Higher infrastructure investment could boost job growth. Better roads could boost tourism during our “Pure Michigan” summers, and small business development might accelerate in response to that. Or, what if Michigan just shifted some of the MEGA dollars from the Big Three to encourage a healthier, more diversified economy?
Given its history, Michigan may fear that busting the MEGA deals will prompt a new job-killing auto exodus. I can see why it won’t risk a spin of the wheel—even if voters were willing. My “what ifs” may as well be science fiction. Meanwhile, we taxpayers will continue to bounce along on our failing roads that feel a lot like those traveled by Mad Max. We’ll face the wheel, despite intact, if modified, tax deals. I just hope that our actual wheels survive the ride. Few of us would make very convincing road warriors. The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.