+1(978)310-4246 credencewriters@gmail.com


Discussion : Government Incentives


Michigan Tax Incentives—Corporate Welfare?


A Primer on Certificated Credits Under the Michigan Business Tax



(Note: When you click on the Forbes article, it may redirect you to the Forbes home page. To locate this article, you may need to search for the article title in the search box in the upper right-hand corner of the page or manually copy and paste the following hyperlink into your browser: https://www.forbes.com/sites/taxanalysts/2015/03/10/michigan-tax-incentives-corporate-welfare/)

Then, in your initial post, consider the following questions:

Is it the role of government to provide incentives to business? Why or why not?

Discuss your four reasons for or against Michigan’s decision to extend tax credits in the manner it has

Is it ethical for a business to accept government incentives in all cases? Explain and defend your responses.

Is it the fiduciary responsibility of businesses to seek government aid in every instance? Explain and defend your responses.

How might a business that accepts incentives effectively respond to criticism that it is accepting corporate welfare? defend your responses.

Do you agree with Michigan’s tax credit program? Be sure to justify your responses.

State Notes
Winter 2015
A Primer on Certificated Credits under the Michigan Business Tax
By Elizabeth Pratt, Fiscal Analyst, Cory Savino, Fiscal Analyst, and David Zin, Chief
State General Fund/General Purpose (GF/GP) revenue estimates for fiscal year (FY) 2013-14, FY
2014-15, and FY 2015-16 were revised downward at the January 2015 Consensus Revenue
Estimating Conference. The revenue decrease was due primarily to the larger-than-expected
amount of refunds issued for the Michigan Business Tax (MBT). Although the Michigan Business
Tax Act was repealed on January 1, 2012 for most business tax filers, some businesses continue
to file MBT returns in order to claim refundable tax credits. While new MBT tax credits have not
been issued since the MBT Act was repealed, previous tax credit agreements are still in place and
have been amended, and the improving economy has made it more likely that eligible businesses
can complete the investments and job increases required to claim credits; thus, the amount of
credits claimed by eligible businesses has continued to grow. This article reviews the tax credits
that are now being claimed, summarizes the recent history of business taxes in Michigan that led
to the award and continuation of these tax credits, discusses reasons for the volatility in the
amounts being claimed, and describes possible options for limiting the impact of these tax credits
on GF/GP revenue.
Public Act 24 of 1995 created the Michigan Economic Growth Authority (MEGA) tax credit program
to attract, retain, create, and increase job and capital investment in Michigan. The Michigan
Economic Growth Authority tax credits are refundable tax credits, which means that if the credit
amount is greater than the tax owed, the State will pay the cash difference to the company as a
refund, whether or not the company has any tax liability. At its inception, the program authorized
the award of credits against the Single Business Tax (SBT) to approved companies in targeted
industries that met criteria for job creation and investment.
The business tax structure in Michigan has changed dramatically since the MEGA credit program
was first enacted. The Single Business Tax was replaced effective January 1, 2008, by the MBT.
The Michigan Business Tax raised an amount of revenue similar to the SBT revenue and allowed
previously issued tax credits to continue to be claimed. Under the MBT, new MEGA credits also
continued to be approved by the MEGA board through the end of 2011.
Effective January 1, 2012, the MBT was repealed (for most taxpayers) and replaced with the
Corporate Income Tax (CIT). The Corporate Income Tax generates substantially less revenue from
business taxpayers than either the SBT or MBT raised. Under the MBT, businesses (including
corporations, partnerships, S-Corporations, sole proprietorships and limited liability companies)
were taxed at a rate of 4.95% on business income and 0.8% on gross receipts, although a 21.99%
surcharge effectively made the rates 6.04% on business income and 0.98% on gross receipts.
Under the CIT, only corporations are taxed and the rate is 6.0% of corporate income. The Corporate
Income Tax legislation permitted MEGA credit holders to choose to switch to the CIT and forego
the MEGA credits or to continue to file under the MBT Act and claim credits, giving companies the
option to continue to benefit from refundable credits for which they were eligible. Approximately
200 taxpayers continue to file MBT returns in order to claim MEGA credits and other certificated
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
credits. Because of the value of these credits, it is likely that these businesses will continue to do
so until they have redeemed all of the MEGA tax credit certificates for which they are eligible.
The 2011 legislation that effectively eliminated the MBT for most taxpayers also prohibited the
issuance of new tax credit awards after January 1, 2012. Additional legislation created a new
incentive program beginning in FY 2011-12 that functioned by issuing grants and loans instead of
tax credits. However, because some MEGA awards may be claimed for as long as 20 years,
companies are expected to continue to be eligible for credits through 2032. Furthermore, FY 203132 will not be the last fiscal year that payments on these credits will be made and the MBT Act will
not officially be repealed until all credits have been redeemed.
Credits were issued by the MEGA board from 1996 through 2011. Claims of credits by companies
started in 1996. Based on the potential credits that have been awarded, claims of credits can
continue through 2032. Even though new credits cannot be issued, the Michigan Strategic Fund
board can amend previously issued credits, which can either increase or decrease the refund
Michigan Business Tax Credits
The 2011 legislation preserved a variety of different types of credits under the MBT. In addition to
credits issued in the MEGA program, certificated credits that may be claimed include the Early
Stage Venture Capital credit, brownfield redevelopment credits, credits for photovoltaic technology,
anchor company payroll credits, Federal government employment credits, anchor company taxable
value credits, polycrystalline silicon manufacturing credits, credits for high-power energy batteries,
hybrid technology research and development credits, media production credits, media
infrastructure credits, historic preservation credits, renaissance zone credits, NASCAR Speedway
credits, and farmland preservation credits. For most of these credits, the credit awards were
approved by the Michigan Economic Growth Authority board, which was located within the
Michigan Strategic Fund, and staffed by the Michigan Economic Development Corporation since
Executive Order 1999-1. The MEGA board was dissolved by Executive Order 2012-9, which moved
all of the responsibilities of the MEGA board to the MSF board. No new credits have been issued
by the MSF board since the end of 2011, although credit agreements have been amended.
Generally, MEGA credits involve some sort of quid pro quo arrangement in which the taxpayer is
required to accomplish certain goals in exchange for the credits. While awards can be for as long
as 20 years, distinct criteria generally are specified for each individual year during that period and
the first year of the award period may be several years after the formal award agreement is
approved. The criteria vary by the nature of the credit or program, but often include provisions
regarding creating or maintaining a certain number of jobs and/or making investments in plants and
equipment of at least a specified level, whether in terms of developing new facilities or rehabilitating
old facilities. Taxpayers may fail to qualify for a credit in one year but then later qualify for the credit,
while others may never qualify for the credit. The nature of the agreements, in which the taxpayer
is promised some sort of tax compensation in exchange for pursuing specified economic activities,
has resulted in the development of policies to preserve the credits even as the tax structure has
In the debate over the value of economic development incentives, an issue that often arises is
whether an incentive is generating new economic activity or merely subsidizing activities that
otherwise would have occurred. Evaluating this aspect of incentives is very difficult for even a single
Page 2 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
year, let alone when done for awards that may have been made almost two decades ago. An
incentive may make no difference or all of the difference in a project, by raising the return on a
project to a level at which the project can proceed. The following example illustrates this point:
Assume a taxpayer is considering a business investment and requires a 5.0% return on the
investment to pursue it. Also assume that the State offers an incentive that will improve the rate of
return on the project by 2.0%. Three scenarios can be considered based on three different states
of the economy. Assuming the taxpayer’s forecast of the market is correct, the following three cases
describe the potential outcome if, absent the incentive, the taxpayer will receive a return of:
a) 1.0%
b) 7.0%
c) 4.0%
In scenario a), the economy will return 1.0% on the investment and the tax incentive will improve
that return to 3.0%. The taxpayer will not pursue the investment because even with the incentive,
the project will fail to generate sufficient returns. In this case, the incentive made no difference to
the business decision and ultimately would not cost the State any revenue.
In scenario b), the economy will return 7.0% to the taxpayer and the incentive will boost that return
to 9.0%. The taxpayer will pursue the investment and, because of the incentive, will receive a return
of 9.0% rather than 7.0%. In this case, the incentive did not change taxpayer activity but did cost
the State revenue, which simply made the firm’s activities more profitable than they otherwise would
have been.
In scenario c), the economy will return 4.0% on the investment and the taxpayer would not pursue
the investment without the incentive. However, the incentive raises the return on the project to
6.0%, now making it profitable for the taxpayer to proceed. In this case, the incentive will reduce
State revenue, but will also generate economic activity that would not otherwise occur.
An important caveat to mention with economic development incentives is that there also may be
cases in which the incentive does not affect whether or not the taxpayer pursues the investment
but affects where the taxpayer pursues the investment. It is not difficult to locate media articles
describing states or local units that effectively bid against each other in order to attract a business
investment, or to find businesses that attempt to pit governments against each other in such
bidding. In these circumstances, a condition such as scenario b) might exist, but if one state is
offering an incentive that improves the rate of return by 2.0% and another state offers an incentive
that improves the return by 4.0%, the business is going to pursue the activity regardless of whether
an incentive is offered by any state, but will more than likely pursue the investment in the second
state in order to maximize its return.
Mechanics of the MEGA Credit Process
To qualify for and receive a MEGA credit, businesses are required to go through a number of steps,
listed in Figure 1. First, a business must undergo an application process and receive approval of a
credit agreement by the MEGA board. Second, an approved company must complete the required
investment and job creation. Third, in order to receive the financial benefit of the credit, the business
must apply for a credit certificate. Fourth, after review of the application, the MSF/MEDC issues a
credit certificate. Fifth, the company then submits the certificate, with an MBT return, to the
Department of Treasury. If the company has already submitted a return for that tax year, the
Page 3 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
company will submit an amended return. The Department of Treasury may have audit issues that
must be resolved before it issues any refund. Finally, once approved by Treasury, the business
receives the credit. Businesses have flexibility on when they can redeem the credit certificates. In
some cases, the tax returns are due before credit certificates have been received and the business
must file an amended tax return. Businesses also can amend multiple tax returns in the same year.
With reviews and audits possible at each stage, the time frame can be several years from when a
business first applies for the credit to when it receives the payment, explaining why payments for
redeemed tax credits could continue well beyond FY 2031-32.
As of November 2014, the MEDC estimate of the amount of MEGA credits that were awarded for
the years 2015 through 2032 but not yet redeemed totaled $6.5 billion, up $1.6 billion from an
estimated $4.9 billion in March 2011, as shown in Figure 2. The increased value of awards reflects
new awards made during 2011 and amendments to agreements that were made before 2011.
Additionally, the MEDC has made changes in certain calculations used to estimate future credit
According to the MEDC, the $1.6 billion change in the estimated value of MEGA awards from March
2011 to November 2014 represents approximately $73.0 million in new awards made during 2011,
approximately $391.0 million in increased awards attributable to amendments to previous awards,
and approximately $1.1 billion from the revised calculations made to estimate the value of the
awards. The majority of these revisions affect job retention credits, and the value of those credits
depends heavily on the compensation (wages, health care costs, etc.) paid to retained employees.
Apparently, earlier estimates not only assumed an average compensation rate on retained jobs
that was too low, but also assumed no growth in compensation rates over the 20-year period of the
awards. While the MEDC has updated the projected costs to reflect compensation costs submitted
under recent claims, the projections continue to assume no growth in future years from those
revised levels.
As a result, the data illustrated in Table 1 and Figure 2 likely understate the future value of both the
awards and the projected claims. It is unknown what portion of the award amounts reflect these job
retention credits, but if 50% of the amounts shown represent job retention credits and compensation
costs rise 5.0% per year, the total value of the awards is approximately $1.7 billion more than
shown in Table 1, and the projected cost of the credits is approximately $1.4 billion higher. If the
retention credits are 70% of the total and compensation costs average 8.0% growth, the value of
the awards is approximately $4.2 billion higher than shown in the table, and the value of projected
claims is approximately $3.5 billion higher.
Furthermore, predicting the number and amount of credits that will be redeemed is difficult, and
generally depends much more on economic factors specific to the taxpayer than on general
economic conditions forecasted by the Consensus Revenue Estimating Conference. Previously,
estimates assumed that approximately 35.0% of awards would ultimately be claimed, while more
recent estimates have been adjusted to reflect taxpayer claims over the last few years and predict
that, on average, approximately 75.0% of the award amounts will be redeemed. The combination
of timing issues in the credit process, amendments to credit agreements and calculations, and
changes in redemption rates makes it difficult to predict the amount of redeemed tax credits that
will be paid in a single budget year.
Page 4 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
Figure 1
MEGA Credit Process
Business applies for a credit award
(only available before January 1, 2012)
An agreement is reached regarding
terms of the incentive
(only available before January 1, 2012)
MSF board approves the award,
which may be for
as many as 20 years
(only available prior to January 1, 2012)
Business pursues the required investments
Business applies for a credit certificate, which
verifies compliance with the agreement
MEDC verifies compliance with the award
MEDC issues a credit certificate
that the taxpayer may submit with
its tax return
Business submits a tax return claiming
the credit. If the taxpayer has
previously submitted a return, an
amended return is submitted
Treasury reviews the tax return
Treasury issues any
refunds due as a result of
the credit
Page 5 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
Figure 2
MEGA Credits: Authorization and Projected Use
Since 2011, Both Authorizations and Expected Use Have Increased
Total Credits Authorized as of March 2011
Total Credits Authorized as of November 2014
Projected Claims as of March 2011
Projected Claims as of November 2014
Source: Michigan Strategic Fund
Table 1
Approved MEGA Awards and Projected Credit Values – 2015-2032
(Dollar Amounts in Millions)
Credit Value
Note: Projected credit values represent MSF/MEDC projections and differ in both
magnitude and content from MBT estimates made as part of the Consensus
Revenue Estimating process. See text for details.
Source: Michigan Strategic Fund/Michigan Economic Development Corporation,
November 2014.
Page 6 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
Michigan Business Tax Credits and the Impact on State Revenue
The January 2015 Consensus Revenue Estimating Conference (CREC) adopted a revenue
forecast for the General Fund in FY 2015-16 that was $532.1 million less than forecasted in May
2014. Net MBT revenue for FY 2015-16 was estimated at a negative $807.4 million, which is $350.9
million lower than what was predicted during the May 2014 CREC. While the estimated impact of
MEGA awards is expected to decline in the future as credits continue to be redeemed, net negative
MBT is expected to be a significant drain on General Fund revenue for at least another decade.
Table 1 displays approved credits and projected redemptions for 2015 through 2032. These figures
represent award amounts and the associated projected use for each year based on estimates of
when and by how much a business meets the specified criteria. As indicated earlier, timing issues
significantly affect when the credits will actually be paid and it is likely that credits will continue to
be claimed well past the 2032 horizon shown in the table. Beyond the timing issues, net MBT
revenue is likely to differ substantially from the projected credit amounts because some businesses
will exhibit tax liabilities that offset the projected credit amounts, firms may file tax returns that are
later amended, and there are MBT revenue issues not related to MEGA credits. (For example,
despite the repeal of the SBT Act after tax year 2007, the State still processes millions of dollars in
payments, refunds, and penalties from the SBT.)
Table 2 illustrates the magnitude of the timing issues that can affect the differences between a
given year’s projected award amounts and when revenue is affected. The majority of refunds paid
during FY 2013-14 reflected credits claimed for return years that began in either 2011 or 2012,
although almost 5.0% of the refunds were paid for return year 2008. Return year 2013, the most
recently completed full year for returns that would have been received during FY 2013-14,
represented approximately 12.0% of the refunds paid during FY 2013-14. If the comparison
includes the portion of refunds received but not yet paid that are attributable to return year 2013,
the share actually declines to 9.0%. As a result, while Table 1 illustrates awards for future years,
not only is there a delay between the award year and the year in which the refunds are paid, but
multiple years of awards can occur within a single fiscal year.
Table 2
FY 2013-14 Michigan Business Tax Refunds by Return Year
(Dollar Amounts in Millions)
Dollar Amount
Share of Total
Refunds Paid During FY 2013-14, by Return Year
Total Refunds Paid ……………………………………………………….
Accrual for Claims Received by Treasury But Not Yet Paid ..
Refunds Already Booked to Prior Years …………………………..
Net MBT Refunds with Accruals ………………………………….
Note: Return year means all returns beginning in that calendar year. A firm with a tax year running
from August 2009 to July 2010 would be included in return year 2009. N/A = Not Applicable.
Source: Michigan Department of Treasury
Page 7 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
As discussed earlier, the SBT and the MBT generated similar revenue totals and the CIT generates
substantially less than either the SBT or the MBT. The reasoning behind keeping certificated credit
holders under the MBT concerned the magnitude of the credits a business would receive relative
to its tax liability. For example, if a taxpayer usually experienced an MBT liability of $10.0 million
and received a credit award of approximately $5.0 million, the perception was that it would not be
in the State’s interest to allow the taxpayer to continue to claim the $5.0 million credit if the taxpayer
were now filing under a new law under which the tax liability would be something lower, for example,
$4.0 million. Although the State would be forgoing $5.0 million in both cases, under the MBT the
State would still receive $5.0 million while under the CIT the State would issue a $1.0 million refund.
The problem for State revenue is that the logic used to justify keeping taxpayers with certificated
credits under the MBT is difficult to extrapolate to the State when taxpayers are viewed as an
aggregate. In FY 2010-11, the State paid $334.7 million in MBT refunds, a portion of which was
refunds for what would later become certificated credits. However, those refunds were offset by
more than $2.4 billion in MBT revenue, leaving the State with net positive MBT revenue of just
under $2.1 billion. In comparison, in FY 2013-14, the State paid $803.1 million in MBT refunds that
was offset by $79.8 million of MBT revenue and $906.4 million in CIT revenue. When combined
with refunds paid under the SBT, net business tax revenue under the CIT, MBT, and SBT totaled
$137.6 million in FY 2013-14. The decline in net business tax revenue since the $2.1 billion
generated in FY 2010-11, the last full year of MBT revenue, reflects the approximately $1.6 billion
tax cut from moving to the CIT as well as increases in MBT credits.
Not only have MBT refunds increased due to changes in the State’s incentives but the credits are
offset by a much smaller revenue stream. In FY 2015-16, the net business tax revenue from the
CIT, MBT, and SBT is projected to total $159.3 million, with $976.7 million in CIT revenue largely
being offset by $807.4 million in negative net MBT revenue. These credits reduce General Fund
revenue and represent a significant portion of the General Fund available in any given year. Based
on FY 2013-14 revenue, MBT credits reduced General Fund revenue by $807.3 million, or
approximately 9.0%.
Under the current forecast, certificated credits under the MBT are predicted to equal 7.7% of
General Fund revenue in FY 2014-15, and 8.8% in FY 2015-16, as shown in Figure 3. As a result,
significant swings in the value of MBT credits claimed in any given year can have a significant
impact on General Fund revenue. As indicated above, certificated credits include both MEGA
credits and a number of other credits; however, the Michigan Strategic Fund’s estimate of MEGA
credit claims indicates that MEGA credits represent a significant component of the credits that will
reduce General Fund revenue, as Figure 4 illustrates.
Page 8 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
Figure 3
Certificated Credits: Impact on General Fund Revenue
Estimated Certificated Credits
Total MBT Refunds
FY 2010-11
FY 2012-13
FY 2014-15
FY 2016-17
FY 2009-10
FY 2011-12
FY 2013-14
FY 2015-16
Source: Michigan Department of Treasury and January 2015 Consensus Revenue Estimates
Figure 4
MEGA Credits: Impact on General Fund Revenue
Total Credits Authorized as of March 2011
Total Credits Authorized as of November 2014
Projected Claims as of March 2011
Projected Claims as of November 2014
FY 2014-15
FY 2015-16
FY 2016-17
Source: Michigan Strategic Fund and January 2015 Consensus Revenue Estimates
Page 9 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
Making Revenue and Credits More Predictable
There are written agreements between the Michigan Strategic Fund and businesses regarding the
payment of credits. However, there may be ways to limit both the volatility and magnitude of
certificated credits in a given year, as well as ways to prevent the State’s total exposure to revenue
losses from increasing. The following discussion is not meant to represent a comprehensive list of
options, or to suggest that any of these options has been investigated with respect to its economic,
legal, or political ramifications. The options mentioned in the following paragraphs are provided as
a reference point for the types of actions that could accomplish specific goals related to State
First, the State could alter the manner in which credits are paid. For example, the State could
convert the credits from refundable to nonrefundable and/or allow them to be carried forward to
offset liabilities in future tax years. Several certificated credits were originally nonrefundable credits.
If the credits were no longer refundable but carried forward, their dollar value would be eroded by
inflation and most affected taxpayers would need to continue filing the MBT well past FY 2031-32.
However, eliminating refundability would reduce both the magnitude of any changes in net MBT
revenue and the degree to which total net MBT revenue would be negative. Based on limited data
from tax year 2012, it appears that such a change would reduce the impact of the credits by roughly
75.0% each tax year, although it would significantly increase the number of fiscal years that would
be affected by the credits.
Another option to alter the manner in which credits are paid could be to limit total payments in a
given year. Many of the credits included in the list of certificated credits have at various times been
subject to annual limits when claimed while other credits were subject to annual limits when
awarded. Credits during a year paid could be limited to a specific sum, such as $300.0 million, and
once the State had paid credits totaling that amount, any additional refunds would earn interest and
be paid in future fiscal years and/or carried forward to offset future tax liabilities. Similarly, the State
could limit a taxpayer to receiving payment for only one tax year’s worth of credits during any one
fiscal year.
Second, the State could exert greater control over the credit process, specifically with respect to
changes in agreements or other administrative calculations. Much as the State has gained greater
control and discretion over economic incentives by shifting the programs from ones based on tax
credits to ones based on appropriated expenditures, the State could limit the authority for altering
agreements or require the incremental costs of such changes to be paid from current appropriations
used for current incentives. The Legislature could even require that outstanding agreements be
frozen under their current terms and prohibit amendments.
Third, the State could use or build a reserve to mitigate the impact of swings in credits. Historically,
transfers have been made from the Budget Stabilization Fund to provide revenue for a variety of
purposes, such as making court-mandated payments and offsetting declining revenue from
recessions. Large swings in MBT credits simply represent a specific way in which the budget can
be subjected to unpredictable circumstances and stabilization funds generally exist to insulate the
budget from such swings. Similarly, just as the Legislature has exhibited concerns about unfunded
liabilities in State-sponsored retirement systems, the State could embark on a project to “prefund”
outstanding MBT credits.
Page 10 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768
State Notes
Winter 2015
The Michigan Business Tax continues to have a significant impact on State revenue despite being
“repealed” more than three years ago. Furthermore, credits authorized under the MBT are likely to
have a significant effect on State revenue for at least another two decades. Despite knowing the
number of outstanding credits that have been awarded through 2032, the total value of these
awards, the magnitude of payments, and when the credits will be paid are relatively unknown and
incapable of being forecasted with any meaningful accuracy. Not only have MBT refunds increased
due to changes in the State’s incentives but the credits are offset by a much smaller revenue
stream. Under the current forecast, certificated credits under the MBT are predicted to equal 7.7%
of General Fund revenue in FY 2014-15, and 8.8% in FY 2015-16. As a result, large swings in the
value of MBT credits claimed in any given year can have a significant impact on General Fund
revenue. Until steps are taken to limit the impact of outstanding economic incentive awards, or until
the credits have been exhausted, MBT credits will continue to both reduce General Fund revenue
and increase its volatility.
Page 11 of 11
Ellen Jeffries, Director – Lansing, Michigan – (517) 373-2768

Purchase answer to see full

error: Content is protected !!