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Biz Tax: Most 'Better Off'
LANSING — The Michigan Business Tax proposed to replace the much-maligned Single Business Tax is still not a done deal, but the framework unveiled by the state government is getting a nod of approval from some major business sectors in West Michigan.
“I would expect large manufacturers to be better off than they were under the SBT, and generally small business, as well,” said Paul Watrobe, a state and local tax specialist with the Grand Rapids office of accounting firm Plante & Moran, PLLC.
On the other hand, insurance companies and other financial institutions such as banks, real estate construction companies, service companies and mining companies may end up paying more, noted Watrobe.
On June 13, Gov. Jennifer Granholm and leaders from both the House and Senate announced a conceptual agreement for the Michigan Business Tax (MBT) to replace the Single Business Tax (SBT), which expires Dec. 31. The MBT is intended to be “revenue neutral” for the state, meaning it is supposed to generate approximately the same $1.9 billion in revenue currently generated under the SBT. If it does generate more, there are caps in place that would limit the amounts raised.
Granholm said the proposed new business tax structure provides tax relief for more than seven out of 10 Michigan businesses and provides tax cuts to both small businesses and Michigan’s major manufacturers.
Under the MBT, here are the taxes that would be imposed in place of the SBT, if the Legislature approves it as outlined, according to an analysis by Plante & Moran:
**A margin tax on gross receipts, imposed at a rate less than 0.8 percent. The tax base will be computed by subtracting inventory purchases from sales — only purchases of inventory. As such, service businesses aren’t permitted to deduct the cost of labor in determining their tax base.
**A corporate income tax, imposed at a rate of less than 5 percent. The tax will apply to all persons conducting business activities, including individuals, partnerships, S corporations and C corporations.
**Capital stock tax for banks. The rate of tax was not disclosed. Under the previous Senate Plan, the rate was 0.225 percent of net capital, and under the House Plan, the rate was 0.44 percent of net capital.
**Increase insurance premiums tax to 1.25 percent, plus credits.
The MBT proposal also would provide personal property tax relief for business. Here is Plante & Moran’s take on the proposals:
**Industrial personal property taxes would be reduced by approximately 65 percent. Industrial personal property includes all machinery and equipment, furniture and fixtures, and dies on industrial real property. Industrial real property includes property used in manufacturing or processing; certain property used for utility sites and property used for removal or processing of gravel, stone or mineral ores.
**Commercial personal property taxes would be reduced by approximately 23 percent. Commercial personal property includes all equipment, furniture and fixtures on commercial real property as well as outdoor advertising signs and billboards. Commercial real property includes property used for commercial purposes, whether wholesale, retail or service.
**Telephone credit corresponding to commercial personal property.
The proposed MBT caps investment and compensation credits at 65 percent of liability. However, the credit rates weren’t disclosed. Under the previous House Plan, the investment credit was equal to 3.3 percent of depreciable assets acquired and located in Michigan. The compensation credit was equal to 0.56 percent of all compensation paid to Michigan employees. Under the House plan, compensation did not include guaranteed payments made by partnerships to its partners. For federal income tax purposes, partners in a partnership aren’t considered employees, according to Plante & Moran.
The R&D credit would be capped at 75 percent of liability. The credit rate was not disclosed. Under the previous House Plan, the rate was 4 percent of Michigan research and development expenses.
There would be an ME-2 Entrepreneurial credit.
For small businesses, according to Plante & Moran, qualifying firms would pay a 1.8 percent tax on adjusted business income. It would increase officer compensation disqualifiers ($160,000-$180,000). It would increase gross receipts threshold phase-out to $18 million to $20 million. It would increase aggregate business income disqualifier to $1.3 million. It would allow flow-through entities to access the compensation credit.
Bob Moodt, manager of state taxes at Herman Miller Inc., said the proposed tax structure “is a very positive move on the part of the state. It’s going to encourage economic development and not only attract business to the state, but also help retain existing business.
"It sort of evens the personal property tax playing field with other Great Lakes states, which have already eliminated it," he added.
If Michigan factories are paying less in taxes, who will be paying more?
"Primarily the out-of-state businesses," said Moodt.
He said many companies are organized to minimize the taxes they would pay when operating in other states, so many of the states are going to a business tax method used by the federal government to calculate taxes.
"Michigan was kind of late" in adopting that change, he noted.
According to Jared Rodriguez of the Grand Rapids Area Chamber of Commerce, the gist of the MBT proposal "is to export much of the tax burden to out-of-state companies, and reward companies that invest here."
One change that would be felt by business in Michigan would be the tax on insurance companies. According to Rodriguez, the plan as outlined by the governor would increase the gross receipts tax on insurance companies from 1.07 percent to 1.25 percent.
But overall, said Rodriguez, "at first blush, (the proposed MBT structure is) something we will be able to live with."
Randy Amyuni, a vice president at the Campbell Group, one of Michigan's largest independent insurance agencies, said tax increases on insurance companies are passed on to the clients. While he was not familiar with all details of the proposed MBT, he guessed that the cost passed on to the business clients he works with would be "relatively minor."
The Small Business Administration of Michigan likes the MBT as outlined by Granholm on June 13.
"We believe it will result in an overall tax cut for most small businesses. It's a good solution that needs to be enacted now to end the uncertainty that small business owners have about the shape of the business tax structure" in Michigan, said Todd Anderson, SBAM vice president of government relations.
Lack of a replacement for the SBT put a damper on companies and investors trying to decide if they should locate in Michigan.
"We are delighted as economic developers that we seem to be inching our way toward a resolution," said Birgit Klohs, president of The Right Place, the regional economic development organization based in Grand Rapids.
While she said there are "clearly some very good things about it," the proposed MBT still presents somewhat of a problem to people trying to pitch Michigan as the place for business.
She noted that the SBT was the only state business tax structure of its kind, which made it difficult to compare our taxes to those of other states.
"The SBT was a doggone hard thing to explain," she said. And the proposed new MBT appears to be "another tax (structure) that is equally unusual" among all the states.