Tax credits are keeping Michael Finney up at night. Or the lack of them, to be more specific.

The CEO of economic development organization Ann Arbor SPARK is worried that the imminent expiration of Michigan’s economic development tax credits will hurt ongoing efforts to bring in new companies and to encourage existing firms to expand in the Ann Arbor region.

A tussle in Lansing over the state’s economic development strategy poses an immediate problem for Finney, who said  two companies would launch Ann Arbor expansions if they receive tax credits from the Michigan Economic Growth Authority board.

Problem is: The MEGA board, part of the Michigan Economic Development Corp., will distribute its final tax credits this month. The board has reached its 2009 calendar-year limit of 400 credits.

“Businesses don’t wait for the calendar,” Finney said. “When they have an opportunity to move forward, they move forward. So we could potentially lose some if we don’t get this resolved within the next few weeks.”

Finney said one of the companies considering an  expansion is an alternative energy research-and-development company, and the other is an information technology firm. One of the companies is considering competing sites in Texas and California, he said.

Michigan legislators are considering a proposal to expand the cap on tax credits to allow additional incentives. But some are concerned that the state shouldn’t readily hand out incentives in light of chronic budget deficits.

State Sen. Nancy Cassis, R-Novi, chairs the Senate Finance Committee, which is considering a bill to sign off on additional credits. Cassis was traveling this past week and could not be reached for comment.

Tax credits take off

Michigan has taken a decidedly more aggressive approach to tax incentives since the MEGA program started in 1995. The state distributed 15 credits worth $89.9 million in tax relief in 1996, according to a study published in 2005 by the Mackinac Center for Public Policy think tank.

That grew to 41 credits worth $253.3 million in 2004. The state has distributed 10 times as many tax credits in the first seven months of 2009 alone.

Ann Arbor might be the state capital for tax credits. A few highlights:

• Google in 2006 received tax incentives worth up to $38 million over 20 years in exchange for hiring 1,000 workers by 2011 at a sales center in downtown Ann Arbor. Google is one-quarter of the way to its Ann Arbor hiring goal with just two years to go.
  
• Technology security firm Barracuda Networks received an 8-year, $1.4 million tax credit in 2008 to hire 185 workers over five years at an expanded Ann Arbor operation on Depot Street. The firm already has increased its staff from about a dozen employees to 70 in Ann Arbor.
• Sakti3, a University of Michigan spinoff battery company based in Ann Arbor, received a $2.3 million tax credit in March 2008 in exchange for a promise to hire 112 workers over the next few years. Sakti3 has sinced secured an additional $15 million in private capital and struck a high-profile research deal with General Motors to accelerate battery technologies.

MEDC CEO Greg Main said this year’s MEGA tax credits have enticed companies to announce Michigan expansions accounting for 33,000 new jobs over the next few years.

But critics say that figure is bogus.

Michael LaFaive, director of fiscal policy for the Midland-based Mackinac Center, said the MEGA tax credits have displayed no intrinsic value since their inception in 1995.

“They’re still pretending that this program creates net new jobs,” he said. “What they print in their press release and what happens are almost always two different things.”

Main said MEDC lawyers prohibit the release of state statistics detailing exactly how many jobs have been created by state tax credits. But proposed legislation that would extend the tax credits cap may also allow the MEDC to release specific jobs data, he said.

Still, he argued that the tax credits are an essential tool to boosting Michigan’s economy.

“I get a little frustrated when I see some of the comments that are made, because I think that this is a very good program,” Main said. “It has led to a lot of investment in Michigan that we wouldn’t have otherwise have had. Are there cases where companies don’t do what they say they’re going to do? Sure there are. But in that case we don’t pay anything out.”

Main said critics of the MEGA tax credit strategy don’t understand that the state isn’t doling out dollars until the company meets certain hiring goals. Companies receive tax relief in stages as they hire workers.

“The reality is the amount of the credit is always tied to the number of jobs that are created and the value of the income taxes that will be generated by those employees,” Main said. “If there is no job created, then there is no benefit paid out because there is no tax revenue. It is a self-funded, pay-for-performance program.”

Finney said Michigan has to maintain its tax credits program to keep up with its competitors nationwide.

“I just think the opportunity to not do tax credits has long passed,” he said. “It does, in fact, in many instances create the difference between a business locating and expanding in our region, and I trust the businesses when they say to me that it’s going to make the difference.”

One of the latest companies to receive a MEGA tax credit was Plymouth-based MMI Engineering Solutions, formerly known as Molded Materials, which is moving to Saline this fall with plans to create 29 jobs. (See related story.)

Tom Elkington, principal of MMMI, said the tax incentives convinced his firm to launch its $2.9 million expansion in Michigan, not another state.

“Michigan is not the least expensive state to do business,” he said. “That certainly turned the tide.”

But LaFaive questioned whether companies are telling the truth about their expansion plans.

“They can’t prove the companies weren’t going to come here anyway,” he said. “It would be better if you gave every business in Michigan a tax cut and not the favored few.”

You can e-mail AnnArbor.com business reporter Nathan Bomey or call him at (734) 623-2587. You can also follow him on Twitter.

Photo of Michael Finney by Robert Ramey.