Archive for December, 2009

MICHIGAN ECONOMIC DEVELOPMENT – WHICH STATE TO EMULATE?

December 26, 2009

EVERYONE RECOGNIZES THAT MICHIGAN’S ECONOMIC DEVELOPMENT PLATFORM MUST CHANGE….IT CAN’T STAY THE SAME….THERE IS A NEED FOR A NEW STATE STRATEGY TO STIMULATE JOBS AND ATTRACT INVESTMENT.

BUT WHERE TO WE GO FOR INSPIRATION – WHICH STATES DO WE LOOK TO FOR GUIDANCE?

Will SB 1018 prompt discussion of the impact of Right-to-Work upon job creation?

Ok – let’s try to answer these questions. 

There is a lot of information available that can lead us to an answer.  In my analysis, I’ll focus on information covered in other blog entries from the Small Business & Entrepreneurial Council and American Legislative Exchange Council. Between these two indices, they address about 50 competitive economic factors important to small and large businesses. These indices should allow us to gauge Michigan’s overall economic competitiveness in relation to all other states.

Lets also look at in-migration data from United Van Lines and whether the percentage change of unemployment is above or below the national average for the period between November 2008 and 2009, where we experienced the greatest recessionary job losses. One would believe that states with superior competitiveness would attract population (in-migration) and suffer less job loss during height of the recession job lay-off period.

In the table above we show the top 10 states ranked by the two leading indices indicating favorable state business competitive advantages for small and larger businesses. Column three displays the top states having household in-migration. Column four lists whether the states listed in columns 1, 2 and 3 are right-to-work states. Lastly, column 5 indicates whether the percentage change in unemployment between November 2008 and 2009 was above or below the national average.

What the analysis discloses –

South Dakota and Nevada, indicated in “red”, are favorable to business, are right-to-work states and have experienced in-migration and have suffered less of an unemployment impact during the past year. 

Arizona,Texas and Virginia, indicated in “blue” while less favorable to business, are right-to-work states having suffered less of an unemployment impact during the past year, with Arizona being an in-migration state.

Who should Michigan emulate? 

So to answer the question – which states should Michigan emulate – the answer is pretty clear.

This simple analysis indicates five states having superior economic competitiveness when compared to Michigan – South Dakota, Nevada, Arizona, Texas and Virginia.

They are rated as having a more favorable business climate have experienced population in-migration and suffered less unemployment impact than other states.

Clearly – these states should be viewed as sources of inspiration for the renewal of Michigan’s Economic Development Platform.

Michigan Renaissance Zones – Right-to-Work to be offered?

Last week  (December 10th) SB 1018 was introduced by Senator Nancy Casssin being right-to-work legislation for Michigan’s Renaissance Zones.

The bill now assigned to the Senate Committee on Commerce and Tourism brings another dimension to the Michigan Economic Development Platform one which from this analysis appears to confer significant advantages to state economic competitiveness.

  

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MICHIGAN ECONOMIC DEVELOPMENT – TAXES DO MATTER

December 21, 2009

2010 TAX FOUNDATION BEST STATES REPORT

The Tax Foundation 2010 State Business Tax Climate Index ranks Michigan’s business tax climate 17 overall (up from 21 in 2009), ahead of almost all Midwest states except Indiana.  GOOD NEWS – however, closer study revels Michigan’s noncompetitiveness.

As every economic developer knows, taxes matter to business.  This is especially true for economic developers who compete for business investment especially with Indiana and Illinois communities perceived to have tax advantages over Michigan.

We all hear the cry,“it’s more expensive and harder to do business in Michigan.”  The 2010 Tax Foundation data may lend truth to this statement.

Let’s look at individual rankings, especially for the three complaints we hear most as economic developers compared to our Midwest competition – business taxes, unemployment insurance and property taxes. Michigan ranks 48 in corporate taxes, 45 in unemployment taxes and 33 in property taxes giving  credence to the three major complaints that we routinely hear about in efforts to create jobs in Michigan.

This is an unpleasant reality. 

 State

Overall Rank

Corporate Tax Index Rank

Individual Income Tax Index Rank

Sales Tax Index Rank

Unemployment Insurance Tax Index Rank

 Property Tax Index Rank

Michigan 

17

48

15

9

45

33

Illinois

30

27

10

41

16

39

Indiana

12

21

11

20

11

12

Ohio

47

38

46

37

10

49

Wisconsin

42

29

43

19

23

25

There is considerable evidence published by academics and various “think-tanks” offering strong arguments that “taxes do matter” influencing business decision-making and population growth and migration.

(See:  RICH STATES POOR STATES 09  where authors Arthur Laffer, Stephen Moore and Jonathan Williams provide an in-depth analysis of policies, some of which foster economic growth and prosperity in states like Utah, Arizona and Texas, others of which cause economic malaise in states like California, New York and Michigan.)

Overall, Michigan compares favorably in the Tax Foundation Index  – “even getting better from a year ago.”

However, near bottom index rankings for corporate income taxes, unemployment insurance and property taxes surely focus attention where other Midwestern states have distinct competitive advantages.

The Tax Foundation report states that “many states offer lucrative incentives and subsidies under the banner of job creation and economic development, but the truth is, if a state cannot attract employers without these types of packages it is often because tax laws have created an unfavorable environment“.

To mask Michigan’s unfavorable noncompetativeness we have enacted property tax abatements, provide tax credits for new employment for “specially chosen” new businesses that locate in Michigan. 

But lets face the hard realities. Picking and choosing which new businesses get financial incentives isn’t good policy. It leaves out many existing business, especially small young businesses that Michigan is “counting-on” to revive the state’s economy (see blog entry 2/3’s OF ALL JOBS ARE CREATED BY YOUNG SMALL BUSINESSES).

Even more troublesome is the effectiveness and the need for these programs now being called into question with serious criticism levied again them by research sponsored by the Michigan Education Association, Citizen Research Council and the Mackinaw Center.

While Michigan’s sales tax rank is good for the consumer, likewise for individual income taxes, businesses taxes add to the cost of products made in Michigan.

We all know these higher businesses costs are added to the sales price of goods and services by businesses, in reality becoming a phantom tax paid each time we buy something in Michigan that is produced by a Michigan business.

The reality is that taxes do matter both to business and residents.  

The Land Policy Institute at Michigan State University in its recently released report “The Economic Impacts of County Population Changes in Michigan” states the “need to give strong consideration to important population retention and attraction strategies.”

Tax policy changes that equalizes competitive disadvantages or adds to Michigan’s competitive advantages would be a good beginning.

 

MICHIGAN TIF’S – CAN THEY FILL THE MICHIGAN ECONOMIC DEVELOPMENT TOOL KIT?

December 17, 2009

Michigan’s economic development platform is based on TIF’s, the notion that increased taxes payed by businesses locating in a specific area will be used to pay for infrastructure and other economic development incentives needed to assist their location in the designated area.

It’s a tried and proven incentive offered by all but a few states.  A bit unusual is that Michigan offers a TIF for almost everything – from inland lake weed control to public supplied street, water and sewer infrastructure.  

Have an economic development need – “TIF it” seems to be the mantra of economic development in Michigan.

But a growing number of economic development practitioners are starting to question this approach.  

First, there is a growing public resistance to “channeling” general fund tax revenues away from their intended use, moving county, college and the local unit of government general fund  tax revenues to fund specific authority needs.  Counties and colleges don’t want to target use of their funds to a specific area within the county in lieu of county or district-wide use of these funds.  Likewise, when a  local unit of government moves general use funds beneficial to all, for use in a specific geographic area, it sometimes is resisted in the court of public opinion.

Second, there is some “cold hard economic realities”  facing Michigan that questions whether TIF will continue to work, a question faced by several TIF’s who have already discovered that  projected tax increment revenue is insufficient to pay for the debt incurred for infrastructure improvements.

TIF”s work when new property development takes place and when property values increase.    

Here lies a dilemma – if the Chicago Fed says that Michigan’s auto production capacity is now at 38% utilization and under the most optimistic economic recovery we can expect no more than 83% utilization, what does the impact of this excess capacity mean for new construction and increasing values of existing buildings (see blog post – MICHIGAN AUTOMOTIVE JOB LOSS NOW EXCEEDS 50%).

The law of supply and demand would say that 1) we will see little new building construction untill this supply is used and 2) the value of existing vacant buildings will decrease, due to over-supply.

The cold hard economic realities is that TIF financing cannot be relied upon – our ability to say that we will have new buildings constructed and taxable values of existing buildings will increase is in serious jeopardy.

We have experienced this already, in many cases TIF district tax values are decreasing and holding on to a stable value is becoming more difficult. 

This raises the question – Can we rely on future increases in taxes to pay for infrastructure needed to locate new development?

Northern Indiana experienced this in the 80’s Rust Belt recession era downsizing the steel industry by some 5,000,000 square feet of building space in a 5-7 year period.  It took time to “downsize” the supply of building space with building values declining to almost nothing.

Michigan’s building overcapacity will likely drive down taxable values and lessen TIF revenue.

The story here is whether Michigan can continue to rely upon phantom future tax payments as a platform for its economic development program.

BEST MIDWEST STATES FOR ENTREPRENEURSHIP

December 12, 2009

SMALL BUSINESS SURVIVAL INDEX 2009

If small young businesses are to provide employment successfully ending the current recession, states with “friendly” entrepreneurial policies will be more successful in job creation and economic recovery.  How well do the Midwest states rank in entrepreneurial policy?   The Small Business Survival Index provides some information!

 

Both the Kaufmann Foundation and the Small Business Administration have shown the important role of small young businesses in creating jobs in the aftermath of a recession; claiming that 50% or more of the jobs created coming out of a recession originate from small young businesses. 

It seems logical that economic developers will take notice and focus recovery economic development strategy on the formation of, and growth of, small young businesses. 

However, federal, state and local policy influence “the cost of doing business”.  It stands to reason that states being “more friendly” will encourage new business formation and increase jobs at a faster rate that “unfriendly” states. 

The Small Business Survival Index provides comparative information to determine how friendly Midwest states are to entrepreneurship.

 

Small Business Survival Index

Midwest State Rankings

# 11    Ohio

# 15    Indiana

# 23   Michigan

# 24   Illinois

# 30   Wisconsin

 

 

Great reading for those wishing to gain a better understanding of how to assist entrepreneurship economic development.

MICHIGAN AUTOMOTIVE JOB LOSS NOW EXCEEDS 50%

December 10, 2009

CHICAGO FED – MICHIGAN AUTO JOB LOSSSpecial CFL cover

Chicago Fed says “the number of automotive jobs Michigan has lost now exceeds the number of Michigan workers still employed in the sector.”

From 1999 to 2009, Michigan’s motor vehicle and parts manufacturing employment declined 72%, more than any other automotive dependent state.

While some auto sector recovery is anticipated, this recovery will not replace the total number of automotive jobs of the “good-old” days.

Today, 38% of Michigan’s auto assembly plant capacity is in use.  Only 84% of the capacity will be used in a most optimist auto recovery scenario.

This raises a number of questions?  How can workers be retrained for new employment opportunities?  What are the new businesses that will create new jobs?  Where are the businesses that will provide these jobs?  What do we do with excess auto manufacturing plant capacity?

What programs are needed and what is the role of locally sponsored economic development programs?

Does this auto workforce have a set of skills that can be transferred to other jobs – what I have termed workforce skill set mobility.

An example of workforce skill set mobility occurred in a recent interview with a Mid-Michigan job shop welding business.  “We’re hiring carpenters. I can teach someone to weld the metal but I need people who understand dimensions and  fractions to layout the work pieces.”  The carpenter’s skill set being transferable to a job shop welding position.

My opinion is that economic developers will be focusing on the notion that some areas have a distinct competitive advantage due to the number of workers and availability of workforce skill sets offering this to the new economy business that will need these skill sets.