Report: tax credit boosts economy

Michigan's MEGA tax credit program has yielded considerable job creation for the state, at a reasonable cost per job created, say Upjohn Institute researchers Tim Bartik and George Erickcek in a study released today.

They estimate that by 2007 MEGA had increased Michigan's employment by at least 18,000 jobs, compared to what most likely would have happened had MEGA never existed and the funds instead been used for greater government spending.

Bartik and Erickcek also find that this job creation has come at a relatively low net fiscal cost to the state. The report finds that over the period of 1996 to 2007, MEGA's net cost is no more than $3,500 per job created. According to Bartik, "The net cost of MEGA's job creation is modest compared to the likely economic and social benefits of higher employment rates for Michigan residents."

The report shows that by boosting Michigan's economy, MEGA has increased tax revenues faster than it has increased public service costs. "These fiscal benefits for the state offset about two-thirds of the financial costs of the MEGA credits," said Erickcek.

Michigan's MEGA tax credit program, created in 1995, awards discretionary tax credits to businesses, to encourage them to add or retain jobs in Michigan. The new study estimates that at least 8 percent of the jobs subsidized by MEGA were induced by the program.

"Even though MEGA induces a modest percentage of all the jobs it subsidizes, the program has high economic benefits because of its high multiplier effects," says Erickcek. The report finds that by 2007 MEGA's multiplier effect stood at 3.88—that is, for each job induced by MEGA, an additional 2.88 jobs are created elsewhere in the Michigan economy.

The report's baseline estimates compare the economic impact of MEGA with the alternative of devoting the resources used for MEGA credits to increased government spending. This comparison yields the 18,000-plus jobs figure mentioned above.

The report also analyzes the impact of MEGA versus using the same resources for cuts in Michigan's main state business tax. In that comparison, the report finds that by 2007 MEGA had created 16,700 more jobs than would have been created by using the same resources to cut the Michigan business tax rate. According to Bartik, "MEGA is more targeted at business investment decisions with high multiplier effects."

The report concludes that there would be gains to making the MEGA program more selective. MEGA's benefits would increase by choosing more projects with high multiplier effects, or projects where the MEGA credit would be more likely to influence the location decision. The report's findings suggest that although MEGA already passes a benefit-cost test, reforms could make it even more cost-effective.

"The Employment and Fiscal Effects of Michigan's MEGA Tax Credit Program" is available at http://www.upjohninstitute.org/publications/wp/10-164.pdf.