By the Business Facilities Staff
From the May/June 2014 issue
BF: The Michigan Business Development program offers cash incentives in increments up to $10 million. Who is eligible to receive these grants?
MF: The program is open to virtually all business expansions with the exception of retail and retention projects. We give preference to businesses that need assistance for deal-closing or those second-stage companies that need gap financing. The support can be provided as a grant, loan, or other economic assistance, and in all cases is performance based. In making these awards, we consider a variety of factors: out of state competition, net-positive return to Michigan, near-term job creation, level of wages, level of company investment, shovel-readiness of a project, business diversification potential, re-use of existing facilities, employer benefits, links to Michigan suppliers, and whether the project is located in distressed or targeted communities when determining support for a project.
BF: Can you give us some examples of how these cash incentives have spurred new investments in MI?
MF: Several expansions over the past year demonstrate how we are leveraging these incentives.
Niowave, in Lansing, designs, builds, tests and operates superconducting linear accelerators and associated cryogenic refrigerators in their own facility. They are commercializing technology that comes from a spinoff from the FRIB, the Facility for Rare Isotope Beams, at Michigan State University. We awarded a performance-based grant of $3 million to support the $79-million investment that is projected to create 120 new jobs.
SpartanNash, in Byron Center, is headquarters of the nation’s 5th-largest grocery distributor (resulting from the merger of Spartan Stores and Nash Finch). This was a major victory for the Grand Rapids area (where Spartan Stores are located), resulting in as many as 300 new jobs and retention of 620 existing jobs. Newell Rubbermaid’s plans for a new center came to a choice between Chicago and Kalamazoo. We were happy to provide a $2-million performance grant to support the creation of 100 new jobs in Kalamazoo.
BF: Why are cash incentives more effective than tax credits?
MF: For a growing company, cash incentives are more effective because they are tailored for each individual deal with flexible milestones based on the specific project need. The cash is provided in a more near-term format, typically over 2 to 3 years instead of the 7- to 20-year period of tax credits. Cash disbursements are made under the program at the time that a milestone is met, which allows for much easier access to capital as opposed to a system that is tied to a company tax filing.
From our internal budgeting and forecasting standpoint, the cash incentives are more effective in that the incentive is paid and accounted for at the time of appropriation, providing more clarity and certainty to businesses that receive the incentive.
BF: Michigan’s Personal Property Tax is being phased out to spur investments in capital equipment. Do the early results show these investments are being made?
MF: It is too early to attribute meaningful results to the phase out of the Personal Property Tax but it is improving the perception of Michigan as a good place to grow a business.
We are hearing from businesses that they are pleased with the state’s transition to a more simple and efficient tax environment, and that it improves their perception of the business climate in Michigan. In particular, our voice of the customer data shows a significant improvement in the perception of the business tax climate over the last eight months. Administrative costs for complying with cumbersome regulations don’t add value to business growth and the elimination of the PPT, together with the transition to the CIT, delivers dramatic simplification for Michigan businesses.
BF: The Small Business Credit Initiative helps companies get bank loans to expand. Is there any risk in having the state co-sign business loans?
MF: It is not correct to say the state is co-signing business loans. We leverage a defined amount of money, largely federal funds, to facilitate loans to businesses where there are gaps in the market. What we are doing is a new application of a well-proven government function. The Small Business Administration, has for decades demonstrated that there are good, credible companies and opportunities that produce jobs and investments that the private sector is unable or unwilling to facilitate without some public assumption of risk.
The SSBCI program clearly assumes default risk associated with the underlying loan. This being said, those loans have been vetted through regulated commercial banks whose risk management frameworks are today far more conservative than in the past. Our decision to enter the commercial credit markets with the SSBCI program and its state funded predecessor was strategic.
Michigan is a national leader in this space and we use a very sophisticated approach when we support a credit. Our cost/benefit analysis is that if we can define, measure and assume credit risk to create jobs and facilitate private investment with an expectation that most or all of those funds will come back, then the cost to taxpayers is negligible.
To date, the program has produced commitments to create more than 6,600 new jobs, nearly all in “Base Job” industries. The credit quality of those companies has overwhelmingly been “stable to improving.” As a result, we currently earn more than $300 per job from the program that we plow back to do more deals.
BF: The Centers of Innovation Program attracts research facilities that help spawn tech start-ups. Has it had any recent successes?
MF: The Centers of Innovation was instrumental in attracting SRI International (formerly known as “Stanford Research Institute”) to set up a clinical trial facility in the Michigan Life Science Innovation Center in Plymouth.
BF: Venture Michigan is investing almost $300 million to bring new business to the state. Who is eligible?
MF: This is one of a number of fund of funds that MEDC has supported to provide funding for entrepreneurial tech ventures. Over all, MEDC has supported 30 venture capital firms, which have gone on to raise ten times as much into their funds. Their investment in Michigan’s early stage technology companies has shown a 7:1 leverage. This has meant an increase in tech companies in the state (350 new tech firms last year) and their ability to grow and raise capital here. Michigan also receives $1.6 billion in federal research funds, Our state funds create an environment where technologies don’t have to leave the state to be funded; they can stay in Michigan and flourish here.
For more articles on tax incentives, click this link.
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