Michigan SOAR Funding for Economic Stimulus: Even Though the Train Has Left the Station, It's Not Too Late to Change Tracks

Chair Stamas, Majority Vice Chair Bumstead, Minority Vice Chair Hertel, and members of the Senate Committee on Appropriations:

My name is Michael Farren, and my research at the Mercatus Center at George Mason University focuses on evaluating government efforts to foster economic development. I am grateful for the invitation to comment on Michigan’s attempts to stimulate economic growth, especially the use of corporate subsidies such as those enabled by Legislative Transfer Request (LTR) 2022-1.

The key takeaways of my testimony are as follows:

• House Bill 4082 (HB 4082), with its requirement that the Senate and House appropriations committees approve subsidy spending requests, is an ingenious solution to the “blank check” problem commonly seen with economic development subsidies.
• $1.1 billion in subsidies have already been approved for the General Motors (GM) and Ultium Cells manufacturing plants for which LTR 2022-1 would provide an additional $666 million.
• The purpose of HB 4082 was to provide legislators with the ability to reduce or deny subsidies for such projects, and policymakers should carefully weigh that option in this case.

Legislative Transfer Request 2022-1

LTR 2022-1 is necessitated by the December 2021 enactment of House Bill 4082, which prohibits the State Administrative Board from transferring any funds appropriated by the legislature for one purpose to a state department, board, commission, officer, or institution for another purpose. The effect of this additional check on administrative spending is that the $1 billion the legislature has appropriated for the Strategic Outreach and Attraction Reserve (SOAR) Fund cannot be used by the Michigan Strategic Fund (MSF) to offer economic development subsidies through the Critical Industry Program (CIP) or the Michigan Strategic Site Readiness Program (MSSRP) without direct approval from the Senate and House appropriations committees.

HB 4082 is among the cleverest statutes regarding economic development subsidies that I have recently seen. State legislatures across the country have faced a repeating problem wherein they are asked to write what amounts to a blank check—approving billions in taxpayer funding for “transformative projects” without knowing who the recipient is or what the subsidized project would be. But Michigan has set an example worth emulating in other states, because HB 4082 provides elected representatives the ability to specifically consider each proposed use of previously appropriated funds. This double-check ensures that appropriating legislations’ original intent is maintained and allows consideration of whether a better use of appropriated funds has since emerged.

Summary of Proposed Subsidies for GM and Ultium Cells

LTR 2022-1 would transfer $666 million from the $1 billion appropriated for the SOAR Fund to CIP and MSSRP to subsidize the construction of a new GM electric vehicle manufacturing facility and an Ultium Cells battery cell manufacturing facility. This is likely the exact sort of project that Michigan legislators had in mind when they approved the relevant pieces of legislation in December 2021.

However, policymakers might get sticker shock if they realize that the total subsidy for the project is $1.8 billion, not the $824 million that was previously announced. The increase is in large part due to the Lansing Board of Water and Light’s approval of a $937 million subsidy, which was achieved by reducing the electricity rate that Ultium will pay.

It seems that the originally agreed upon subsidy amounts have suffered from scope creep. What the committee is being asked to approve today is not a $666 million subsidy for GM and Ultium, but an additional $666 million on top of the $1.13 billion already approved for this project.

Options Available to Michigan Legislators

This committee should ask itself two main questions as it considers LTR 2022-1:

• Is it fair to ask taxpayers to contribute another $666 million to this project, given that the price tag is already 37 percent greater than the publicly announced $824 million?

• What effect will the additional $666 million have? If those subsidies were reduced—or even denied—what effect would that have on the corporations’ decision of where to locate the facilities?

Alas, economics can help to answer only the second question. However, there is good reason to believe reducing the SOAR funding for GM and Ultium is unlikely to sway their decision of where to locate the factories, meaning that legislators can drive a harder bargain in order to save their constituents some money.

It is particularly important to identify who would benefit from the SOAR funding up for approval. More than 90 percent of the $666 million of requested SOAR funding would go to GM, not Ultium. GM already operates a manufacturing plant on the site in question and has ample room to expand operations, meaning that the subsidy is highly unlikely to change GM’s decision of where to locate its new plant. Furthermore, GM will enjoy a downstream benefit from Ultium’s subsidies because the co-location of the facilities will reduce the cost of shipping the battery cells destined for GM’s electric vehicles.

It is possible that the subsidies are a bigger motivator in Ultium’s location decision because it does not already have existing operations on the site in question, but the $66.1 million in infrastructure development that SOAR funding would provide is unlikely to sway Ultium’s final decision when it already has approval for subsidies worth $1.1 billion.

Furthermore, the MSF and the Michigan Economic Development Corporation (MEDC) apparently failed to even negotiate with GM and Ultium as to the size of the subsidies. The MSF and MEDC’s own request to the Michigan legislature for SOAR funding notes only the amount that GM and Ultium requested, not whether the initial request was challenged and negotiated to a lower amount to protect Michigan taxpayers from overpaying. This is important, because a large enough overpayment would swamp any potential benefits of the project, leading to a net negative economic impact.

It is important that legislators recognize that the appropriations authority they clawed back with HB 4802 gives them the ability to reject MSF and MEDC’s request outright or to reduce the subsidy amounts provided, thereby preserving the capacity to fund additional projects in the future.

Thank you for the opportunity to address the committee today. I am happy to answer any questions you may have.

Attachment

Michael D. Farren, “Helping Kansas Get the Best out of a Bad Deal: Megasubsidies for a Mystery Company” (Testimony before the Kansas House Commerce, Labor, and Economic Development Committee, Mercatus Center at George Mason University, Arlington, VA, January 31, 2022)