State business tax repeal sparks debates concerns over impact
LANSING — Republican lawmakers and the governor have made repeal of the oft-criticized Michigan Business Tax one of their top priorities. Despite agreement across party lines that state business taxes are in dire need of change, sharp differences exist about how to do so.
Gov. Rick Snyder has proposed outright repeal of the tax, replacing it with a flat 6 percent tax on corporations. Snyder’s approval echoed a bill introduced by Sen. Dave Hildenbrand, R-Lowell, that would eliminate the existing MBT.
Hildenbrand said the MBT needs to be repealed because it doesn’t meet the criteria for a good business tax. An ideal tax, he suggested, needs to be simple, at a low rate, and must treat all businesses fairly. By contrast, the complexity of the MBT creates too many difficulties.
“The MBT has been a huge hurdle for us to strengthen our state,” he said.
Estimates place taxes lost by repeal at around $2.2 billion per year, which raises concerns about compensating for the decline in revenues. A replacement would mitigate some of this cost, but Hildenbrand said he wasn’t prepared to endorse Snyder’s 6 percent proposal. He said changes to the budget under the new administration could greatly reduce the amount of revenue the state needs to take in, but stressed the uncertainty of the budgeting process.
“If it looks like we need more revenue, we will look at the various proposals then,” he said.
But Judy Putnam, communications director for the Michigan League for Human Services, said her organization is concerned with cutting business taxes when the state can’t pay for existing services. “We’re hoping that Gov. Snyder will recognize that people are caught up in all of these difficult changes.”
The state shouldn’t cut services to vulnerable working families, just for the sake of a balanced budget while also cutting taxes for businesses, she said.
Michigan has a projected $1.8 billion deficit for the upcoming fiscal year.
However, Tricia Kinley, senior director of tax and regulatory reform at the Michigan Chamber of Commerce, welcomed Republican moves as a step toward a fair tax system. She said she is encouraged by the early focus on revising the business tax structure.
“Our members are willing to pay taxes, because they use services,” but the current business tax burden, approximately $2.2 billion, is too heavy and its members want a “fair tax” level, Kinley said.
While the chamber supports repeal, Kinley said it stopped short of endorsing Snyder’s proposed flat 6 percent corporate tax because “we haven’t seen anything on paper.”
In the House, Rep. Kenneth Horn, R-Frankenmuth, introduced a bill that would change the MBT without repealing it. Horn emphasized House Republicans’ desire to make Michigan’s business tax “modest and understandable,” but recognized that the costs of some proposals haven’t been worked out.
Horn’s proposal would remove many tax credits in the MBT, eliminate the gross receipts tax and increase the base business income tax from 4.5 percent to 6 percent.
A separate bill by Rep. Kurt Heise, R-Plymouth Township, would eliminate a controversial MBT surcharge on some businesses, retroactive to when it was implemented in 2008. Under his proposal, the state would refund an estimated $1.5 billion.
Republicans, Horn said, are “going to try and simplify it without being too invasive.”
“We’re not going to do this hastily,” he said. “We’re going to do this one right.”
Democrats, led by Rep. Mark Meadows of East Lansing, have proposed their own package, agreeing in principle that the existing tax is onerous and the surcharge needs to go. The difficulty, Meadows said, is finding a “measured way to promote business expansion,” while recognizing “changes from a goods-based to a service-based” economy.
Meadows said Republicans are “asking for a lot of faith” in proposing business tax cuts without a clear method of paying for them, and called some measures, such as Heise’s retroactive repeal of the surcharge, “not fiscally responsible.”
As an alternative, Meadows proposes changing the way the MBT works without drastically altering its structure. Meadows would remove the surcharge and cut the gross receipts tax in half. To make up for lost revenue, he would reduce tax exemptions, expand sales tax to most services — but cut the rate from 6 to 5 percent — and cut some tax breaks to corporations.
Sen. Bruce Caswell, R-Hillsdale, said that although the MBT has some good points, the law is convoluted, makes Michigan uncompetitive in attracting business and undermines efforts to revive the state economy. Companies must be able to easily compare the cost of doing business, he said, noting the differences between Michigan’s business tax structure and those of Illinois and Indiana.
And the chamber, Kinley said, hopes any replacement for the MBT will “make Michigan’s business tax climate more competitive.”