This blog post is structured differently than former posts. First, we give a brief synopsis of two articles that assess the economic impact of the MEGA tax credit program. We then explain those differences between the Upjohn Institute report, which shows a positive gain, and the Mackinac Policy Center report, which shows no benefit or slight negative impact. A third conducted by the Anderson Economic Group is also addressed though not abstracted. Finally, we explain the fundamental role of these credits in relation to Michigan’s long term survival and indicate why these incentives are so attractive to policy makers.
Citation: Bartik, Timothy and George Erickcek (2010). “The Employment and Fiscal Effects of Michigan’s MEGA Tax Credit Program.” W.E. Upjohn Institute for Employment Research
Abstract: This paper examines the employment and fiscal effects of the Michigan Economic Growth Authority (MEGA) tax credit program, while contesting previous analyses regarding MEGA’s ineffectiveness. The authors obtained data from the Michigan Economic Development Corporation (MEDC) on the paid MEGA tax credits, and the job creation and retention numbers from the tax credits for the years, 1996 – 2007. Bartik and Erickcek used the Upjohn Institute’s version of the REMI model to compute the economic impacts from the program employing a lower-bound. Using the lower bound, they found that the average MEGA job cost was less than $4,000 per year. They note that the benefit to cost ratio of the MEGA program is about 5:1 and that while it only accounts for .03% of Michigan’s Gross State Product (GSP), it yields .033-.066% of Michigan’s GSP. However, they determine that if MEGA selects the right business 8.2% of the time then it will essentially be revenue neutral, taking into account the multiplier effects. However, if MEGA can increase its batting average to .168 then it would yield a $33 million fiscal surplus. Bartick and Erickeck suggested choosing export base activities with strong local linkages. This suggests that scaling up the program would make fiscal sense and efforts to increase the probability of business success have the potential to make dramatic improvements on Michigan’s economy.
Citation: Lafaive, Michael and Michael Hicks (2005). “MEGA: A Retrospective Assessment.” Mackinac Center for Public Policy
Abstract: Lafaive and Hicks test whether MEGA credits were responsible for economic gain (employment or income) at the county, state, and sector levels in Michigan. Using a fixed-effects instrumental variable model with spatial and time autocorrelation functions, they found no employment or per-capita income gains. They used an OLS and 2SLS (two-stage least squares) to test all of these relationships and allowed for time lags of up to 7 years from approval. They found a decline in construction and manufacturing as a result of these credits. While the MEGA credits had no statistically significant effect on the construction industry according to the OLS model, the 2SLS model indicated that “for each $1,000,000 MEGA credit, the average construction worker will see his total annual wages drop by less than a quarter.” They account for their results being different from previous studies, because they do not factor in indirect economic impacts while most other studies include these impacts. Therefore, the authors only take into account those jobs directly created by the MEGA credits and exclude any potential spin-off effects. They do so, because they note that economic multipliers are subjectively employed. More...