One of the greatest challenges facing the state budget for the foreseeable future is the redemption of MEGA tax credits. For Fiscal Year 2016, the total value of redeemed credits is expected to exceed $500 million.
The Michigan Economic Growth Authority (MEGA) was established in 1995 as a response to interstate competition for jobs and business investment in Michigan. Companies were eligible for credits if they agreed to meet specific requirements to create jobs, pay certain wages, and contribute to growth in Michigan. Once these requirements were met, the companies could redeem the credits.
During the peak of the recession, “Global Retention Credits” were added to encourage businesses that were downsizing to “choose Michigan” so that recovery would occur within the state. The total value of those credits is now estimated at approximately $9 billion through the year 2032.
In 2012, we eliminated the Michigan Business Tax (MBT) and nearly all MEGA credits, however, taxpayers that were issued a credit before January 1, 2012 were able to retain their credit. Credits that continue to be issued are factored into the budget at the time they are issued, which was not done previously.
As the economy has recovered, some of the companies issued these credits have begun hitting their job creation targets. Once these targets were reached, they were able to redeem the credits.
Estimating the value of MEGA credits has proven to be very difficult. Short term estimates are based on the number of jobs created or retained and the wages paid to those employees. Long term estimates are even more difficult to predict due to the length of the agreements and the many factors that must be considered, including wage growth, market conditions, economic cycles, and the financial position of the business.
The governor and legislature are currently exploring ways to better predict when these credits will be redeemed or to put conditions on their redemption, such as providing advance notice.