Michigan Business Tax Takes Its First Bite
GRAND RAPIDS — Michigan businesses recently made their first quarter tax payments under the new Michigan Business Tax, which led to a Republican-sponsored "town hall meeting" at GVSU on April 25 "to discuss the negative impact of the new Michigan Business Tax," according to the meeting announcement on Michigan House Republicans letterhead.
While it was roundly condemned by those in attendance, analyzing the actual impact of the new tax law is an exercise in separating fact from friction.
When first introduced, the MBT was touted as "revenue neutral," meaning it would generate the same amount of money — no more, no less — for the Michigan government as did the Single Business Tax.
"Right now, what I've been told by House Fiscal — and that's the nonpartisan (agency) in the Treasury — is it will be revenue neutral," said House Speaker Pro Tempore Michael Sak, D-Grand Rapids.
But according to Rep. David Agema, R-Grandville, one of the Republicans at the meeting in Grand Rapids, the MBT is "not at all" revenue neutral. He said he spoke recently with a state employee, whom he declined to identify, who said MBT revenue "is going to be about $3 billion — much higher than the SBT."
Jay Wortley, senior economist at the Michigan Senate Fiscal Agency, said the MBT is not revenue neutral — but comparing the MBT to the SBT is like comparing apples to oranges.
"When first enacted, (the MBT) was designed to be revenue neutral," said Wortley. "But then, later on, a (22 percent) surcharge was added to it, to help with the budget situation" Michigan experienced last year.
Wortley said it is a little hard to compare the MBT in its current form to the SBT. The MBT, he said, was just one part of a package of business tax reforms. Another change at the time, which was not part of the MBT, was a reduction in personal property taxes paid by some businesses.
Some of those personal property tax revenues had gone into the school aid fund. To make up for that loss of funding for schools, the Legislature greatly expanded the base of businesses that were subject to a state use tax on services — but the resulting howls of protest from both businesses and consumers caused repeal of that law last fall before it even went into effect.
The SBT revenue had gone into the state general fund, not the school aid fund. Now the MBT is being used to generate revenue for the school aid fund to make up the loss in personal property tax revenue.
Wortley said the SBT is now calculated to have brought in $1.816 billion in its last full fiscal year, which ended Sept. 30, 2007.
The MBT took effect Jan. 1, and state officials are estimating that in the 10 months when the 2008 fiscal year ends Sept. 30, it will bring in $1.884 billion. Excluding the amount earmarked for school aid, the remainder is $1.543 billion, according to Wortley.
In its first full fiscal year — Oct. 1, 2008, through Sept. 30, 2009 — the MBT is expected to raise $2.911 billion, said Wortley. Of that, about $729 million will go to school aid, which leaves $2.181 billion for the general fund.
Wortley also noted that the Michigan business tax rates have been cut over recent years. In 1999, SBT revenue peaked at about $2.4 billion.
One thing all agree on is that the MBT reshuffled the business tax burden.
Large manufacturers in Michigan are paying a smaller share, "and, certainly, the small business credit is real good" for companies with gross receipts under $20 million, said Edward S. Kisscorni, one of the most experienced business tax experts in Michigan and director of state and local taxation in the Grand Rapids accounting firm of Echelbarger, Himebaugh, Tamm & Co.
But as heard at the town hall meeting, many businesses feel they are being hurt by the MBT, which Agema said was not thoroughly thought out. He said he has received calls about business tax bills increasing this year anywhere from 200 to 700 percent.
Business is demanding to get rid of the MBT, especially the surcharge, said Agema. "There is no incentive for business to want to grow in Michigan, to come to Michigan."
Sak said he also has received complaints about the MBT, adding, "I’m working on four fixes to address these issues at the present time."
One example, Sak said, is the tax on gross receipts, which means distributors and vendors selling tobacco would have to pay an MBT on the portion of money they take in that they will later have to turn over to the state government, in the form of the tobacco tax.
Another example Sak gave are auto dealers who collect the fees for Michigan motor vehicle registration and license plates and are then taxed on that revenue as part of their gross receipts.
Kisscorni said revising the MBT for those retail situations "opens up a Pandora's box" because manufacturers and other business tax payers could point out they also collect some revenues they later have to pass on to other government departments in the form of taxes.
"Almost everyone agrees that’s really a tax on tax — but where do you stop?" asked Kisscorni.
He said if he had the power to change the MBT, he would eliminate the 30 or so special credits that benefit certain industries — and in a few cases, specific companies.
"The big problem is in the credit area. It's just really out of hand, and the tax rate could be substantially less if we didn't have these special carve-outs and/or special credits," said Kisscorni.
For example, Section 208.1447 of the MBT law provides a credit equal to 1 percent of a company's annual payroll in Michigan, not to exceed $8.5 million. But this credit is only for companies that operate "at least 17,000,000 square feet of enclosed retail space and 2,000,000 square feet of enclosed warehouse space" in Michigan. The qualifying retailer must also have more than 35 percent of its annual sales revenue from sales of fresh, frozen or processed food; prescriptions and OTC medications, health and beauty care products, cosmetics, pet products, carbonated beverages, beer, wine and liquor. The company must also have its headquarters in Michigan.
Although no companies are identified by name in the MBT credits, Kisscorni said that among tax people, it is widely assumed that only one company meets the criteria for Section 208.1447: Meijer Inc.
There is a similar credit, Section 208.1449, for companies with at least 2.5 million square feet of enclosed retail space, 1.4 million square feet of enclosed warehouse, with headquarters in Michigan, and retailing the same products listed in 208.1447, with a maximum credit of $300,000. Two companies appear to qualify: Meijer Inc. and Spartan Stores. But the law precludes Meijer from taking both credits — so Section 208.1449 is known among tax experts as the Spartan Store credit.
Section 208.1409 are credits worth more than $3.5 million from 2008 through 2012 for "infield renovation, grandstand and infrastructure upgrades," plus security costs, for a "motorsports entertainment complex" that has at least 70,000 fixed seats for race patrons and "at least two days of motorsports events each calendar year which shall be comparable to NASCAR Nextel cup events." Apparently only one business qualifies: Michigan International Speedway near Jackson, which is now spending $10 million on enhancements, including grandstand replacement.
There are credits limited to $5,000 for companies that make charitable contributions to public broadcasting stations, public libraries, colleges and universities, the Michigan College Foundation and the Michigan housing and community development fund. But there is another credit that Kisscorni calls "the major donor credit" for any company that contributes more than $50,000 to a nonprofit zoo or museum. That credit is equal to 50 percent of the amount over $50,000, with a credit limit of $100,000.
One crucial element of the MBT that has been a focal point of complaints is its complexity, which Kisscorni said is "much more complicated than the SBT."
"It's going to be much more expensive for the taxpayers," because of the additional time accounting firms will need to spend on their clients' state business taxes, he said.