By Rick Haglund
A 15-year-long effort to spur jobs and vitality in some of the state’s most economically depressed areas by turning them into virtual tax-free zones — and thereby forgoing about $1 billion in tax collections — is being curtailed by Gov. Rick Snyder.
Employees enter the new headquarters for the Accident Fund, a $182 million renovation and expansion of a former power plant in downtown Lansing that received tax breaks via the state's Renaissance Zone program. Accident Fund recently moved 650 employees to the site from its former HQ location a few blocks away in downtown Lansing.
Citing disappointing results in Renaissance Zones, the Snyder administration is ending some of the tax breaks in the zones and reining in a program that exploded far beyond its original parameters.
“The program was left largely to individual cities to market and over time the list of geographic zones grew, but the overall results weren’t overly impressive,” Snyder spokesman Ken Silfven said.
During the past 15 years, local units of government reported that 10,944 jobs, or only about 730 jobs a year, were created in the geographic Renaissance Zones. Another 2,000 jobs were credited for industry-specific zones. In the last 12 years of the program (2000-2011), the state has forgone $852 million in tax collections in pursuit of these jobs. At an annualized average rate of $70 million, the entire Renaissance Zone program would have led to “tax expenditures” nearing $1 billion.
And no one knows if the job claims are even accurate. The Renaissance Zone Act did not require the state to verify all job or investment data, and state officials have not audited the figures, which include a reported $3.1 billion in private investment.
(Where are the Renaissance Zones?)
“For us it is almost impossible to know how many jobs have been created in the geographic zones,” said Karla Campbell, manager of state tax incentives at the Michigan Economic Development Corp.
Originally, just nine cities and rural communities, including Benton Harbor, Flint and Detroit, were granted Renaissance Zone designations. That allowed those units of government to abate virtually all state and local taxes in geographic areas, or subzones, within their boundaries for as long as 15 years.
Two former military installations — Wurtsmith Air Force Base in Oscoda and the Detroit Arsenal Tank Plant in Warren — also were designated as Renaissance Zones.
“Today, Michigan begins the nation’s boldest experiment in the renewal of distressed communities,” then-Gov. John Engler said at the time.
“I believe that by eliminating the barriers of government, we can unleash the power of the private sector to bring good-paying jobs to Michigan. The nation will be watching this experiment, and it will see Michigan succeed,” he added.
But program mushroomed far beyond its original intent, with more than 150 geographic Renaissance Zones having been designated in 37 Michigan counties.
About 20,290 acres, or nearly 32 square miles of property, have taxes abated in geographic Renaissance Zones.
In addition, dozens of site- and industry-specific Renaissance Zones for tool-and-die shops, food processing operations, ethanol and battery plants and other businesses not required to locate in blighted geographic areas were created.
Companies in those zones have generated $1.87 billion in investment and added 2,002 jobs, according to a 2010 report to the Legislature by the MEDC.
Site- and industry-specific zones will continue as business investment incentive toosl, officials said.
“We draw a big difference between project-specific Renaissance Zones that are performance-based and the non-performance-based geographic Renaissance Zones,” said Mark Morante, senior vice president of policy, program administration and legislative affairs at the MEDC.
Snyder, who has been slashing tax incentives and special credits in the tax code, is quietly disassembling the geographic Renaissance Zone program.
In little-noticed changes in the new tax code, residents living in Renaissance Zones must resume paying abated personal income taxes next year. And “C” corporations located in the zones will be subject in 2012 to the new corporate income tax signed by Snyder this year.
Campbell said she does not know how many businesses and residents will be affected by the tax changes.
One developer building a residential, retail and commercial project in Traverse City said those changes renege on commitments the state has made with investors and could chill investment in the zones.
“It’s breaking a promise,” said Raymond Minervini II, whose company is redeveloping the abandoned Traverse City Regional Psychiatric Hospital.
(Tax breaks saved mental hospital site, developer says)
Michigan is forgoing $103 million in tax revenue from Renaissance Zones in fiscal 2011, slightly more than the $100 million in taxes the state is giving up this year through controversial film tax credits, according to the Treasury Department.
Of that, $300,000 is in personal income tax revenue and another $21.2 million is in Michigan Business Tax revenue. The largest share of tax revenue the state is forgoing in Renaissance Zones is $81.5 million in property taxes, which will continue to be abated.
The Snyder administration has decided not to expand the geographic footprints of Renaissance Zones or extend their terms as they begin to expire this year. Such expansions and extensions were routinely approved by past administrations.
It also has frozen the Tool & Die Recovery Renaissance Zone program while it evaluates whether tooling firms in the tax-free zones performed better than those outside them.
Nearly 300 tooling companies, or roughly a third of all such firms in the state, are in Tool & Die Recovery Renaissance Zones, according to Jay Baron, president of the Center for Automotive Research in Ann Arbor.
Baron was a key player in establishing consortiums of tool-and-die companies that were later designated as Renaissance Zones.
Industry-specific zones, such as those for tooling and agricultural processing companies, helped companies survive as their industries struggled over the past decade, Campbell and others said.
Baron said most of the tooling companies in the Renaissance Zones likely would have failed had they not been granted tax-free status.
But he said the companies also benefited by collaborating with each other. He estimated about half of them will remain in zone consortiums after the tax benefits expire.
“They’ve learned a lot from each other,” Baron said. “They were surprised. They thought their companies had all the secrets.”
But a 2010 study by the Anderson Economic Group on state tax incentives found Michigan would have gained 12,806 more jobs through a statewide 2 percent, across-the-board cut in tax rates than it added through Renaissance Zones through the first three years of the program.
The study, conducted for the Michigan Education Association, concluded that Renaissance Zones were one of the three most ineffective tax incentive programs in the state. The others were the film tax incentives and the Michigan Economic Growth Authority.
Some complain that the lack of tax revenue in Renaissance Zones is squeezing the already tight budgets of school districts, community colleges and libraries.
The enabling legislation required the state to reimburse local school districts, intermediate school districts, the state school aid fund and local libraries for lost tax revenue.
But the state, faced with its own budget problems, stopped making those payments this year. Schools and libraries are losing about $26 million this year because of that action, said Gretchen Couraud, executive director of the Michigan Library Association.
“There are serious cuts to service delivery that no one is talking about,” she said.
The cuts in state reimbursement to libraries range from $1.3 million for the Detroit Public Library to $72,215 for the Hart Public Library, nearly a third of that library’s budget, Couraud said.
Economic activity hasn’t exactly flourished in many of the original Renaissance Zones. Just 1,891 jobs in Detroit, 511 jobs in Saginaw and 351 jobs in Flint have been reported by those communities in their zones since 1996.
“Just creating blanket tax-free areas, we would agree, is not an effective economic development tool,” said Olga Savic-Stella, vice president of business development at the Detroit Economic Growth Corp.
Doug Rothwell, who was president of the Michigan Jobs Commission (the forerunner of the MEDC) at the time of the Renaissance Zones’ creation, said he gives the zones a mixed review.
“I think the mistake a lot of communities made was using Renaissance Zones in their worst areas,” said Rothwell, who now is president of the advocacy group Business Leaders for Michigan. “There were too many issues involved in bringing those areas back.”
One example he cited was Saginaw’s designation of much of its central business district, including a Jacobson’s department store, as a Renaissance Zone. Eliminating taxes failed to save the store from closing, and much of the city’s downtown area remains depressed.
State officials said the 10 geographic Renaissance Zones in Grand Rapids generally have experienced greater success by strategically targeting troubled, but not completely abandoned, areas.
About $413 million in business and residential investment, and 1,630 jobs have been created in those zones since 1997, said Kara Wood, the city’s economic development director.
In addition, “hundreds” of residents are living in condominiums in downtown Renaissance Zones, she said.
The tax-free zones “attracted people to live in the center city,” Wood said. “They’ve driven redevelopment of properties that wouldn’t otherwise have been developed.”
Wood said 170 residential and business taxpayers in the Grand Rapids Renaissance Zones would be affected by the loss of tax exemptions, but she’s not sure how they will react to the re-imposition of tax payments.
Campbell of the MEDC said that, statewide, Renaissance Zones have not attracted enough investment and jobs to erase large swaths of blight in troubled cities and rural communities.
“If an area is too distressed, it can be very difficult to attract development,” she said. Renaissance Zones “might not be the right tool.”
Selected tax expenditures FY2011
Personal property credit $137.3 million
MEGA credit $104.2 million
Renaissance Zone credit $103 million
Film credit $100 million
Brownfield credit $73.2 million
Source: Executive budget on tax credits, deductions and exemptions
Renaissance Zone credit breakdown FY11
Property taxes $81.5 million
Business taxes $21.2 million
State personal income taxes $300,000
Source: Executive budget on tax credits, deductions and exemptions
Tax exemptions in Renaissance Zone
City income tax
City utility users’ excise tax
Neighborhood Enterprise Zone tax
Commercial forests tax
Personal income tax
Commercial property facilities tax
Michigan Business Tax
Enterprise zone facilities tax
Technology park facilities tax
Source: Citizens Research Council of Michigan
Editor’s note: Doug Rothwell is a member of the Center for Michigan Board of Directors.
8 Comments
I struggle to understand why this is so bad?
It seems like the only downside is the State is not collecting taxes, yet people are getting jobs. What are they doing with the money? Shipping it out of the country so none of it is spent in Michigan? I doubt that very much. There has likely been a net gain in spending in the state it isn’t going to the coffers in Lansing.
The Ren Zones were an experiment testing the theory that ‘if lower taxes attract business, no taxes should attract the most business of all.’ It seems that in our zeal to radically cut taxes, this should provide a lesson. When public services and public safety are jeopardized by the lack of public resources, business will not locate. Period. We are clearly reaching that point throughout Michigan, and it may be time to reconsider the strategy in its larger context as well as with the Ren Zones.
We as a state or city, have used the enterprize zones to intice or encourage businesses to locate where we as governmental units want them to locate. NOT WHERE THEY WOULD LIKE TO LOCATE!!!!!! Does this make for a good relationship with those who want to invest in our state or local areas? I don’t believe it does. This simply is a bad practice when we have plenty of space for new businesses to locate.
Businesses took their jobs and went overseas long ago. And why not when the policies in the Federal government reward this kind of action. They even gave a tax break to bring the profits earned back to this country thinking that the companies would use this money to hire people. The companies have squeezed more productivity out of employees with less benefits and pay so why should they hire anyone else. With no unions around to protect workers the employers can do anything they want with pay and benefits. So the companies used these tax breaks to acquire new businesses, buy back shares of their corporations to gain more control of their operations, and hoard the cash. When America wakes up and realizes that conservative policies is a fancy cover up word for greed they may decide to throw out all of the people who sold them down the road by ensuring that their wages remain stagnant and now they are attacking entitlements. Entitlements? I have paid in to this so called entitlement program since I was 16 years old and filed my first income tax return. Why would a company want to come back to America when they can get third world labor for pennies on the dollar and they can pollute all they want because there are little regulations protecting these other environments. Tax breaks are helping the rich get richer while Michigan disinvests in it’s roads, infrastructure, education, people, etc. Companies, even if they did come back to America, would want a place that valued it’s people and showed it by investing in parks, recreation, education, roads, infrastructure, etc. Someone here is finding out that all of these tax breaks means less money to pay for services in Michigan and not the jobs that they were designed to produce. Left a cushy job and nice post governorship for the person who created it.
Ask anyone who has lived in Grand Rapids over the last 20 years about the Renaissance Zones and you will hear that they have been a rousing success. In addition to the benefits citizens will continue to receive as they frequent conveniently located businesses in areas which would be seldom visited eyesores but for the catalyst of Renaissance Zones, the community (and the State Treasury) reap the ongoing dividends from the added taxes generated as the exempted property is added back to the tax rolls at a much higher value due to the improvements made. Note should be made that the addition of jobs during a period when MI was shedding hundreds of thousands of jobs is an accomplishment that should not be discounted.
As a resident of Grand Rapids who lives in a condo complex built because of incentives like the Renaissance Zones and Brownfield Credits, I can attest to the amazing success they have had in our city.
Some of our nicest downtown complexes, such as Union Square, American Seating, Boardwalk, and Icon on Bond were all built with the assistance of these credits. These buildings have attracted more residents to live in the downtown district, and specifically the type of residents that help revitalize their local communities and spend money in the local economy.
While this specific program is ending, I hope that similar programs or incentives can replace them, perhaps learning from the successes and failures of this program, to continue assisting in the revitalization of struggling downtown areas like those of northwest Grand Rapids. I can guarantee that the area west of the Grand River between Bridge and Leonard would look a LOT different if these programs had not existed.
I am one of the guys interviewed regarding this topic. At great risk and expense, we and many others have been actively investing in the rehabilitation of a former State asylum. Of the 63 acres we acquired in 2002, their were 1.5 public employees, no taxes paid and several hundred thousand s.f. of blighted and contaminated buildings. Based upon the Ren Zone tax abatement agreement approved by the State of Michigan in 2002, we and dozens of others undertook the project (at significant risk and cost) to reuse it as a place for businesses and homes, spending some $60 million in private investment and counting. Bit by bit, it is working. It’s not just about jobs, which are over 300, but preserving history, cleaning up (State) contamination, building a neighborhood and in-filling a city rather than sprawling. We as redevelopers have investments at risk, while our city, county and State enjoy the benefit of our efforts.
The Renaissance Zone has worked here, and I am sure in many other places. Just because it may be implemented poorly in other locations, does not mean it is a bad program that should be stripped down before its end date. Our continuing redevelopment, a project the State itself has awarded for numerous accolades, may be jeopardized because the State is reneging on an agreement.
I sure hope Gov. Snyder takes a hard look at the Renaissance Zone tax breaks. We need to be looking hard at everything the state government does and see if we are really getting our money’s worth. It appears, from a job creation standpoint, the program has been a bust. Now if you are looking at it as a way to revitalize distressed areas, there have been some successes, including here in Grand Rapids. That can be a valid outcome of the program, but then it needs to be structured differently and funding changed. But this program, and many others should not escape scrutiny. I can’t say I like everything Gov. Snyder has done. But he seems to be willing to look at things less politically and see if things are truly working the way they are intended and willing to change when they are not.