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Michigan battle to keep Kmart is threatened

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Sunday, November 14, 2004

Michigan battle to keep Kmart is threatened

A U.S. court ruling that halts tax breaks may derail efforts to close the deal.

By R.J. King / The Detroit News

TROY -- A deal between Michigan development officials and Kmart Holding Corp. to keep the discount retailer's headquarters in the state fell through last week after Kmart officials raised questions about whether the tax incentive agreement could withstand possible legal challenges.

The Michigan Economic Growth Authority, which oversees single business tax credits, was preparing to meet Tuesday in Lansing to finalize a $45 million tax incentive package for Kmart, according to people familiar with the talks. But Kmart officials backed out at the 11th hour, citing an Ohio appeals court ruling in September.

A three-judge panel of the 6th U.S. Circuit Court of Appeals in Cincinnati deemed unconstitutional an Ohio program that gave DaimlerChrysler AG $280 million in tax credits to build its Toledo Jeep Liberty plant.

Since the court has jurisdiction in Michigan, the ruling could affect the state's ability to use tax incentives to retain companies or attract business investment, legal experts said.

"It certainly opens up the possibility that taxpayers and others could challenge state tax incentive programs," said Ruben Acosta, a Detroit lawyer who works with businesses to identify incentive programs.

Officials in Ohio, Michigan, Kentucky and Tennessee have asked the full 12-judge appellate court to overturn the ruling.

Kmart officials said they wouldn't accept the single business tax credits offered by the state unless they could be sure a similar legal challenge wouldn't nullify the deal, said the people familiar with the negotiations.

Michael Shore, communications chief for the Michigan Economic Development Corp., which oversees tax incentive programs to retain and attract businesses, declined to comment on the status of the talks with Kmart but said the agency is reviewing the ramifications of the Ohio ruling.

"We are looking at ways to assure companies that apply for tax incentives that the deals will go through," Shore said. "Our attorneys don't believe the appellate decision will hold for the long term, but at the same time we are looking at alternatives that can withstand any potential legal challenge."

The 104-year-old retail giant born in Detroit has been scouting locations for a new headquarters, concentrating on several cities in Michigan and the metro Atlanta area. Kmart can no longer fill its headquarters campus on Big Beaver in Troy, which was built for some 5,000 workers. Steady downsizing has left Kmart with about 2,000 employees.

Michigan has offered $45 million in tax breaks over 10 years if Kmart agrees to keep its headquarters and 1,500 jobs in state, while Georgia is offering about $17 million in incentives, according to documents obtained from both states through Freedom of Information Act requests.

Had the agreement with Michigan gone through last week, Kmart still would have had to choose a location within Michigan. Troy, Pontiac, Royal Oak, Detroit, Ann Arbor and Grand Rapids have all expressed an interest in Kmart.

Gov. Jennifer Granholm has been outspoken about the possible implications of the Ohio ruling.

In a recent guest column in The News, she wrote that some scholars contend the Ohio ruling is not enforceable elsewhere. "But let's be clear: The ruling would undermine all of our efforts to bring ... new corporate investment to Michigan."

Kmart spokesman Steve Pagnani declined comment.

Tax credits give states a way to attract and retain jobs. But critics say the taxpayer dollars lost to corporate coffers could be used to lower taxes for all residents or businesses in a state.

Michigan officials say the programs have helped attract 450,000 jobs since 1995. The MEDC and its affiliates have approved close to $300 million in tax breaks to about 240 companies since 1995.

The uncertainly surrounding the Ohio legal ruling could make Georgia more attractive to Kmart. E-mails between Georgia development officials reviewed by The News show Georgia officials believe Atlanta can offer a better business climate for Kmart.

"In general, we seem to have an advantage on wages, unemployment insurance, workers' compensation, education levels and airport access," Brenda Robbins, senior project manager for Georgia Power's community and economic development, wrote in an Aug. 31 e-mail to John Gilman, vice president of the Metro Atlanta Chamber of Commerce.

You can reach R.J. King at (313) 222-2504 or [email protected]

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