Michigan resumes spending taxpayer money on retaining jobs

The State of Michigan is back in the business of spending taxpayer money to preserve jobs — and this time, there is no economic recession.

The state’s decision to shell out $120 million last month to Dow Inc. to get the chemical giant to remain firmly planted in Midland represents a U-turn from the publicly stated purpose of a cash-for-jobs fund Gov. Gretchen Whitmer and the Legislature created in 2021 in response to being embarrassed by Ford Motor Co. making a multibillion-dollar investment in electric vehicle manufacturing in Kentucky and Tennessee.

Michigan needs to compete with Southern states, and that means paying the big bucks for new investment in an evolving auto industry, the Democratic governor and lawmakers in a Republican-controlled Legislature voted less than three years ago.

The $120 million the Whitmer administration just committed to giving Dow in order to secure $785 million in capital spending for modernizing its Midland-area facilities and retain 5,000 jobs in mid-Michigan is being done under the legal guise of protecting a critical industry.

If that sounds familiar, it really is a “Back to the Future” moment for state government.

Fifteen years ago, in the wake of the Great Recession bankruptcies of General Motors and Chrysler, then-Democratic Gov. Jennifer Granholm cut a deal with GM, Ford and Chrysler that gave those automakers hundreds of millions of dollars annually to keep their headquarters and research and development operations planted in southeast Michigan.

Granholm took Michigan Economic Growth Authority (MEGA) tax credits that were used since the Engler administration for incentivizing new job creation and turned them into a recurring tax entitlement program that doesn’t expire until 2029 — and has deprived the state of about $600 million annually to spend on roads, public education and other functions of government. The subsidies also were an incentive for the automakers to stop closing plants and shifting assembly line jobs to Mexico or Canada.

Dow and other manufacturers also got a MEGA deal, effectively creating a special tax code for Michigan’s biggest employers in the automotive and chemical manufacturing sectors.

What Dow gave back

But under this new subsidy deal, Dow is handing in an estimated $20 million in remaining MEGA tax credits five years early — and that might actually make this deal a little better for the state’s bottom line.

With MEGA tax credits, the companies were able to claim for themselves the 4.25% state income tax their eligible employees paid the state, whether they were a $15-an-hour janitor or Dow CEO Jim Fitterling’s $1.69 million base salary.

Under this deal, for the first time in 15 years, the State of Michigan starts keeping income taxes again from Fitterling, the janitor and every six-figure engineer who lives in Midland and surrounding areas. Dow says the median annual salary of its Midland-area workforce is $100,000 per worker.

Also, by forgoing its MEGA credits, Dow is exiting the Michigan Business Tax code — a complicated stew of taxation based on both earnings and sales that most businesses hated, save for those with MEGA tax credits to offset their state tax bills, perhaps entirely.

Dow will now be subject to the flat 6% corporate income tax that a Republican-controlled Legislature passed in 2011, when it repealed the MBT, according to the Michigan Economic Development Corp.

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Hypothetically, if Dow had $500 million in annual taxable payroll for its 5,000 employees in Midland, it would have been eligible for about $21 million in MEGA tax credits — a check straight from the state treasury — based on the income taxes its employees paid.

It’s not clear how much income tax Dow or its employees will now be paying to support the operations of state government. That sort of data about taxpayers, big or small, is shielded by state law.

But this is significant change to have one of Michigan’s corporate giants and its employees fully back on the tax rolls, even though it came with a $120 million check.

And for Dow, the maker of silicones, plastics and other industrial products, this state subsidy deal comes at what seems like a critical juncture in the company’s future amid global economic pressures and a struggle to retain talent as its baby boomer engineers are retiring en masse .

Dow saw its sales nosedive nearly 22% last year and its annual profits plunged from $4.6 billion in 2022 to $660 million in 2023, according to the company’s annual report.

‘Unfavorable economics’

For a company that has brought so much generational wealth to Midland, its facilities are aging and it has to adapt to the demands of its prospective workforce in order to get them to work there, said former state Sen. Ken Horn, who is now executive vice president at the Great Lakes Bay Regional Alliance, an organization focused on retaining jobs and people in the Midland, Bay City and Saginaw region.

“That research facility in Midland is old as I am, and I just signed up for Medicare,” said Horn, a Republican from Frankenmuth, referring to the 65 years old eligibility age. “You can call it ‘job retention’ if you want. But I would call it ‘attraction of top talent.'”

With a global workforce of nearly 36,000, Dow has 100 facilities in 31 countries. The company told state officials it considered making this $785 million investment at its facilities in Texas, Louisiana, Pennsylvania, Kentucky, Europe and Asia. The company cited Michigan’s higher energy costs as one reason it needed this subsidy to stay.

“The risk to our Michigan sites is that unfavorable economics can force production and new projects to relocate to more competitive sites,” Dow assured Sarah Young said. “This does not happen overnight, but rather over time as sites become less competitive. … However, if economically feasible, we want to make these investments in Michigan because of the technically skilled workforce that has been cultivated here over many decades.”

The existing workforce makes some critics question a company like Dow is really going to leave the state it has called home for 125 years. A 2018 study by the Kalamazoo-based WE Upjohn Institute for Employment Research found that three in four companies that got taxpayer incentives would have made a similar location or retention decision “without the incentive.”

“We’ve seen lots of research that shows that businesses look for where they want to operate to begin with and then go shopping for incentives for icing on their location cake,” said Michael LaFaive, a watchdog of state economic development programs at the Midland -based Mackinac Center for Public Policy. “And given Dow’s long history here in Michigan, it’s unlikely they would pick up.”

Weighing different subsidies

The $120 million grant for Dow will come from a fund in the state’s general checking account that’s been set aside to win economic development projects, including GM’s electric vehicle battery plant west of Lansing and Ford’s battery plant near Marshall, both of which remain under construction.

Dow won’t have immediate access to the cash, though, said Christin Armstrong, senior vice president of business development programs and execution at the Michigan Economic Development Corporation.

Under the deal, Armstrong said, Dow has to meet certain milestones as it spends $785 million to modernize its facilities at its main 2,600-acre industrial park in Midland and its chemical plant east of town in Williams Township in Bay County.

That will take five to seven years as the construction work occurs in phases, Armstrong said, and the state’s written deal with Dow has clawback provisions should the company not maintain 5,000 jobs.

“It’s still performance-based,” Armstrong said.

Granholm’s MEGA retention tax credits were not performance-based. If Dow or Ford retained the minimum number of jobs they said they would retain, they got a refund check from the Michigan Treasury Department for those employees’ income taxes.

For all of its values, MEGA has effectively become a tax credit for research and development in the auto industry, keeping GM’s Tech Center in Warren even as the company decamps from its Renaissance Center headquarters for a couple of floors in mortgage mogul Dan Gilbert’s new Hudson’s development on Woodward Avenue.

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But what happens when the MEGA credits go away in 2029? That’s a question policymakers haven’t wrestled with yet. Dow’s subsidy deal suggests there will be other job retention deals paid out of SOAR, even though that acronym for the state’s cash-for-jobs fund stands for Strategic Outreach and Attract Reserve.

When Horn was in the Legislature, he tried in vain to get lawmakers to create a new tax credit for R&D that big companies in the auto, chemical, aerospace, furniture and tech sectors could apply against their business income taxes. The concern, Horn conceded, is it could effectively wipe out $1.5 billion in annual corporate income taxes, blowing a massive hole in the general fund.

“If you don’t cap it, then you have the same problem you had with MEGA,” Horn said.

For instance, in December 2014, one still unidentified company’s $224 million tax credit refund blew a hole in the state budget and caused a deficit that fiscal year that lawmakers scrambled to patch.

Last month, Whitmer quietly signed legislation creating an R&D tax credit for employers with fewer than 250 employees, a tax incentive program that has a $100 million annual cap — the same net subsidy Dow is about to get for keeping its R&D in Midland and relinquishing its MEGA credits.

State economic planners still see a large-scale R&D tax credit as a tool they need to retain jobs in Michigan and compete with other states for new businesses.

“I think an R&D tax credit would certainly be helpful,” said Armstrong, the MEDC official.

The alternative might be more and bigger checks to retain jobs when real economic headwinds come blowing across these two pleasant peninsulas. The combined in-state workforce of GM, Ford and Stellantis total about 145,000 Michiganians — 29 times the magnitude of Dow’s presence in Midland.

Critics reasonably see this $120 million for Dow as the proverbial camel’s nose under the tent — once the state gives one company money to stay, they’ll have to give ’em all a check.

“It was never sold as a retention program,” the Mackinac Center’s LaFaive said. “The deal with Dow could break new ground with the program because there’s nothing that I have seen to suggest that they couldn’t use it to retain jobs and purportedly win new investment as well.”

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