Michigan is doing economic development backward.

Like most other states, Michigan has, for decades, offered massive tax incentives and corporate subsidies in the hopes of spurring job growth. The problem is that the actual number of jobs created has fallen far short of the amount promised.

Michigan House Republicans are working on economic development legislation that flips it so that companies off all sizes get rewarded in real time for creating real jobs.

The Republican plan does that by letting companies that hire new employees keep half of their state income tax withholdings. So instead of an employee’s full 4.25% state income tax going to the government, companies that hire new employees ultimately get to keep 2.125% of each new employee’s salary – a discount on labor which reduces the overall cost of adding more employees.

This mechanism ensures that a company only benefits if it creates and sustains new, good-paying jobs. Company would be eligible to capture a portion of state income taxes for 10 years.

The “Real Jobs for Michigan” two-bill package is sponsored by state Reps. Mike Hoadley and Mark Tisdel. Hoadley is chair of the House Committee on Economic Competitiveness, Tisdel is chair of the House Finance Committee.

“This legislation rewards actual performance, because the only way a company can capture part of the employee’s income tax withholding is if the job actually exists,” said Tisdel, R-Rochester Hills.

House Republicans agreed to work on economic development bills with the governor as part of the deal to get the state budget done.

To qualify for the reward, a company would have to hire a new, full-time employee at a salary of at least 150% of the area’s median hourly wage. “Full-time” counts as at least 35 hours per week.

The number of “new jobs” created is based on the aggregate headcount, meaning total number of additional jobs a company has on the books compared to when they applied. That prevents a company from gaming the system, as has happened in the past, by hiring new workers while laying off others.

Unlike older systems with a high threshold of new jobs created needed to qualify, this plan includes incentives for small businesses; even a company that hires a single new employee is eligible.

“This reward system kicks in starting with the very first new job created,” said Hoadley, R-Au Gres. “That’s another way this plan is different from past efforts – small businesses get to participate. This incentive is available to anyone who creates a job.”

The legislation includes a $50 million cap on the amount of tax breaks available under this plan; spread over three tiers:

• $10 million is available for companies smaller than 100 employees
• $15 million is available for companies with 100 to 999 employees
• $25 million is available for companies with 1,000 or more employees

“If we hit the cap and have to raise it, that would be a great problem to have, because it means the businesses will have created between 30,000 and 40,000 new jobs,” Tisdel said. 

“Labor is one of the most expensive components to running a business,” Hoadley said. “This will help by giving businesses a discount on that cost. And the more they hire, the more they benefit, which is good for the business and good for people looking for jobs.”

Ending the MEGA credits

The legislation also gets rid of the last vestiges of the mostly defunct Michigan Business Tax, which was largely repealed under Gov. Snyder in 2011, by ending the MEGA credits.

Any corporation that still has a credit to claim will still receive the full amount if they keep 95% of the jobs they already have in place, but the credit will be spread out in equal payments over 10 years.

“We’re not getting rid of the MEGA credits,” Tisdel said. “If you have a MEGA credit that was granted and you still have a remaining balance, you can continue to claim that over the next 10 years, assuming you maintain 95% of the full-time employees you had in place on September 30 of this year.”

House Bills 5292 and 5293 were referred to the finance committee.