Insurers Cry Foul Over Tax Proposal

February 4, 2005
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LANSING — While greeted with relative favor by the state’s manufacturing sector, Gov. Jennifer Granholm’s proposal to reshape Michigan’s business tax structure received criticism from industries that would pick up a larger share of the tax burden.

Leading the charge are insurers who would have to pay a new 2 percent tax on insurance premiums. They claim the premium tax — which would not apply to health insurance premiums — would only lead to higher costs for business insurance coverage.

“Whatever tax breaks are given other sectors of the economy are going to be borne by us and the insurance-buying public,” said Dyck Van Koevering, general counsel for the industry trade group Insurance Institute of Michigan.

IIM claims the industry already pays its fair share under the Single Business Tax, accounting for 11 percent of collections.

“We are already carrying more than our fair share of the load, and yet they think it’s OK to increase it?” Van Koevering said.

In proposing the new tax, Granholm said it would place Michigan in “the middle of the pack” nationally for states that levy a premiums tax and that the state’s present taxation on insurers is the fourth lowest in the nation.

The administration counters claims from insurers that the premiums tax would lead to higher insurance rates by arguing market competition will keep costs in check.

“Currently, out-of-state insurance companies pay higher tax rates, yet continue to offer competitive rates with those in Michigan who pay significantly less. Insurers who want to compete in the future will keep rates competitive or risk losing customers,” states an information packet the governor’s office put out with the reform proposal.

The governor’s tax-reform proposal would significantly revamp the formula used to assess the state’s Single Business Tax. Granholm said the proposal would provide tax relief for 77 percent of the businesses in Michigan and more equitably spread the tax burden across economic sectors.

The changes would weigh the SBT more to sales and profits and less on payroll and property and reduce the SBT rate from 1.9 percent to 1.2 percent and from 2 percent to 1.2 percent for small businesses that qualify to pay the alternative profits tax. The package would create a new 35 percent personal property tax credit for manufacturers and for research and development.

The proposal also would eliminate what Granholm calls several “special tax preferences” within the SBT and implement other changes. Among them is a change affecting leases for commercial real estate.

The plan would allow local assessors to adjust the taxable valuation for office space when the occupancy rate rises, even if the valuation increases at a rate higher than inflation.

Under the present system, set by a state Supreme Court ruling in 2002, office-building owners can have their taxable valuation lowered if their occupancy rate falls. Local assessors are then limited in how much they can increase the taxable value as a building’s occupancy rate rebounds.

While the Michigan Association of Realtors sees “a great deal that’s laudable” in the reform proposal, such as the SBT restructuring, it worries about the effects of changing the formula for assessing office space. Rob Campau, vice president of public policy and legal affairs for the association, believes the change, if implemented, could lead to higher rental rates for commercial office space.

“We don’t think it’s a loophole and we don’t think it’s a good policy idea,” Campau said. “A big part of commercial real estate is predictability and tax liability. It’s unfair to jack up their tax assessments because they essentially rent even one more square foot of space.”

Much of the criticism that’s been voiced toward Granholm’s proposal, which the governor says is revenue neutral, has been directed at the shift in the tax burden between sectors.

While welcoming the SBT restructuring and relief it would bring to many businesses, the Michigan Chamber of Commerce prefers to see an overall reduction in the business tax burden.

Taking the approach that “we’re all in this together,” the 6,300-member Michigan Chamber worries that Granholm is “robbing Peter to pay Paul” and that “simply re-arranging the deck chairs on the Titanic is not necessarily productive,” said Tricia Kinley, the chamber’s director of tax policy and economic development.

“There are things that are attractive in there and there are things that create very large problems for some of our members across the state,” Kinley said. “There are going to have to be compromises along the way.”

Her thoughts echo those of many in Lansing who are reserving final judgment and continue to carefully analyze Granholm’s proposal and prepare for the pending debate when the legislation is formally introduced. They expect changes to occur as the GOP-controlled Legislature takes it up and crafts a final reform package.

“It’s a long way from being done,” Campau said. “There’s going to be plenty of activity the next few months.”    

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