NEWS

Program lets Michigan employers keep taxes withheld from workers

Paul Egan

Detroit Free Press

LANSING -- Fifteen Michigan companies would be able to keep up to $250 million in state taxes they withhold from employees' paychecks rather than turn it over to the Michigan Treasury Department under bills approved by the Senate on Tuesday with bipartisan support.

The three-bill package was one of two business incentive plans to pass the Senate Tuesday. Another package the Senate approved, portrayed as a "shining star of urban renewal" and pushed by Detroit businessman Dan Gilbert and others, would provide incentives to assist with "transformational" projects on contaminated brownfield sites.

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Both plans now move to the state House, which also is controlled by Republicans.

Steve Arwood, CEO of the Michigan Economic Development Corp., said that the $250-million "withholding abatement" program represents the first state incentive program designed to attract major employers, creating 250 to 500 or more high-wage jobs, since Gov. Rick Snyder successfully pushed for elimination of the MEGA tax abatement credits.

Unlike those credits, which created huge budget problems for the state in the last two years as major employers cashed them in amid an improving economy, the public will know the identities of the companies that get to keep between 1% and 100% of employee state income tax they withhold, for up to 10 years, Arwood told the Free Press.

When Snyder pushed for the elimination of the Michigan Business Tax, which was replaced with a 6% corporate income tax that applies only to "C" corporations, which issue stock, part of the rationale was creating a business climate with a low tax rate and getting rid of tax incentives like the MEGA program.

"The competition doesn't stop, both globally and across state borders," Arwood said. "This is nowhere near the size of the MEGA program. It's sized right, it's very transparent and it's effectively capped."

The program is designed so that no more than 15 agreements can be signed at any one time, accounting for no more than $250 million in forgone revenue. Arwood said, as a simplified way of illustrating the aggregate nature of the cap, that if one 10-year agreement allowed an employer to keep $25 million a year in employee withholding tax for 10 years, that agreement in itself would cap the program until that agreement expired, Arwood said.

But the bill is unclear on that, and the Senate Fiscal Agency analysis on the bill package says it would reduce general fund and School Aid Fund revenue by a maximum of $250 million per year, with $190.5 million lost to the general fund and $59.5 million lost to the School Aid Fund.

David Zin, chief economist at the Senate Fiscal Agency, said the agency interpreted the bill to reference a $250-million annual cap, but the language is ambiguous. He also pointed out that if all the agreements were one year in duration and totaled $250 million, there could be an annual revenue impact of $250 million, even under Arwood's interpretation.

In unanimous 7-0 votes Tuesday, the Senate Development and International Investment Committee approved Senate Bills 1153, 1154 and 1155. Republican Senators Ken Horn, Wayne Schmidt, Jack Brandenburg, Jim Stamas and Judy Emmons were joined by Democrats Steven Bieda, who sponsored one of the bills, and Rebekah Warren.

The bills were quickly taken up by the full Senate, where they passed by votes of 30-7 and 29-8. They now move to the state House.

To qualify, businesses would have to propose creating at least 500 jobs with wages equal to or better than the average wage in their county, or at least 250 jobs with wages that are 125% or better than the average county wage. Only withholding tax from the new jobs would be covered by the program.

Participating businesses would pay 5% of the withholding tax they keep to the Michigan Strategic Fund to cover administrative expenses.

Arwood said Michigan has had an incentive program in the past that allowed employers to keep withholding tax, but not since the 1980s.

Good Jobs First, a Washington, D.C.-based nonprofit organization that tracks corporate subsidies to promote accountability in economic development, said in a 2012 report that workers at more than 2,700 companies in 16 states paid close to $700 million in income tax directly to their employers through similar programs.

The group recommended such programs be abolished, or that employers participating in such programs be required to print notices on employees' pay stubs.

James Hohman, assistant director of fiscal policy at the free-enterprise Mackinac Center for Public Policy, said lawmakers should be skeptical of adding such programs.

"Michigan already has a handful of business subsidies that sponsor large firms, in addition to the billions being paid off for its legacy programs," Hohman said in an e-mail. "They are ineffective at growing the economy, and they are a waste of taxpayer dollars."

Stamas, R-Midland, said: "Michigan has made progress in the last five years," but "there are still more tools that we can put in the tool box."

In other tax incentive developments:

Michigan businesses could receive incentives for creating jobs for residents of other states — or even Canada — under legislation that was approved Tuesday by a Senate committee, but later failed in the full Senate.

Senate Bill 1085, sponsored by Sen. Dale Zorn, R-Ida, applies to counties such as Monroe or Berrien, which border on other states, or Wayne and St. Clair, which border on another country.

The bill was narrowly voted down, 19-18, in the full Senate later Tuesday. At least 20 votes are needed to pass a bill in the Senate. A reconsideration vote is expected during the ongoing lame duck session.

Under the Michigan Business Development Program, businesses are eligible for grants, loans and other incentives, based on the number of jobs they create.

But currently, the workers must live in Michigan for the jobs to be counted. Zorn's bill changes that requirement for border counties, allowing the employer to count workers who work in Michigan but go home to a neighboring state or Ontario at the end of the day.

Contact Paul Egan: 517-372-8660 or pegan@freepress.com. Follow him on Twitter @paulegan4. Staff writer Kathleen Gray contributed to this report.