Frustration over Michigan’s inability to reverse the unemployment rate’s meteoric rise in recent months is morphing into a fierce debate about the effectiveness of the state’s economic development strategy.

Ann Arbor is caught in the crossfire of the debate.

The Ann Arbor region’s top selling points - proximity to the University of Michigan, an innovative workforce, high quality of life - are reason enough to attract investment from expanding companies.

But the state’s controversial business tax strategy threatens to undermine Ann Arbor’s role as the ignition key for Michigan’s economic revival.

Witness the debate over tax credits distributed by the Michigan Economic Development Corp.’s Michigan Economic Growth Authority board.

Michigan is effectively out of MEGA tax credits for 2009 - but at least two companies have been counting on tax credits before approving expansions in our region, Ann Arbor SPARK CEO Michael Finney told me.

Finney said SPARK officials have lobbied various state legislators to authorize an extension of the tax credits - including Sen. Liz Brater, D-AnnArbor; Sen. Randy Richardville, R-Monroe; and Sen. Nancy Cassis, R-Novi, chair of the Senate Finance Committee.

Whether the tax credits are truly effective in spurring investment in Michigan is debatable. A high-profile report released by the Mackinac Center in 2005 asserted that the MEGA credits are not effective in attracting long-term economic benefits.

Instead, Michael LaFaive, director of fiscal policy for the Mackinac Center and co-author of the report, told me the state should eliminate the Michigan Business Tax, the much-maligned replacement of the Single Business Tax.

“I would argue that if you eliminated the Michigan Business Tax and replaced it with nothing but spending cuts - which is plausible, it can be done - you would have to beat back businesses at our borders,” LaFaive said.

It’s hard to argue, however, that tax credits are altogether fruitless. In recent months, the state has doled out $700 million in tax credits approved specifically for the startup battery industry. Those tax credits helped four Michigan battery operations secure more than $1 billion in grants from the U.S. Department of Energy to accelerate their expansion plans.

Officials in other states, including Missouri and Massachusetts, are lamenting the loss of these battery facilities, which plan to hire thousands of workers in Michigan.

Tax policy, albeit admittedly crucial to Michigan’s economic revival, is but one aspect of our turnaround.

An emphasis on developing innovative companies and replicating Ann Arbor’s entrepreneurial culture throughout the state is just as crucial.

You can e-mail AnnArbor.com's Nathan Bomey or follow him on Twitter.