New tax plan could carry a price tag for retailers

April 9, 2011
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The tax cut Gov. Rick Snyder has proposed for state businesses may come at a cost to retailers if state lawmakers pass his plan as he recommended.

The governor’s proposal, which his budget office said creates $1.8 billion in “significant tax relief,” does away with the Michigan Business Tax and only levies C corporations. S corporations, partnerships and sole proprietorships will be exempt from his tax. The individuals behind those firms will pay personal income taxes. But some of those firms that make up the non-business taxed businesses could lose sales revenue from the way Snyder has proposed to pay for the tax cut.

The governor’s plan would tax public pensions for the first time and remove the exemption for private pensions. It also would eliminate the Earned Income Tax Credit that low-income workers can take on their state tax returns. The Michigan EITC is worth 20 percent of the federal version of that credit to those filers; the credit reportedly costs the state $350 million a year. Erasing that credit could take nearly that entire amount out of the state’s consumer economy, as most of it gets spent.

“Those are folks who in many cases use every extra dollar to buy necessities. In some cases, EITC recipients will use it to reduce credit card debt if they have it, and that would be a very sensible thing for them to do. But I think, still, a substantial fraction of it is going to be spent, and the retailers who sell stuff that is bought by EITC recipients will notice that,” said Charles Ballard, an economics professor at Michigan State University.

“There have been studies about how EITC folks spend the money. One thing that they do is get their cars fixed. A lot of these folks are not driving a Cadillac. They’re driving an older vehicle that has problems, and since it’s an Earned Income Tax Credit, you only get it if you work,” said Ballard, who added they needed a working car to get to work to earn the credit.

The Anderson Economic Group, a research firm based in East Lansing with an office in Chicago, reported in 2009 that the EITC in 2006 raised the income of the median recipient by 13 percent to 19 percent, which gave the state’s economy more disposable income. In the same report, AEG said the EITC average benefit in 2009 was expected to be $420 per household, and every dollar of EITC credit was worth $1.67 to the Michigan economy. If the math is right, then eliminating the $350 million EITC could take up to $580 million in spending out of the state’s economy and retailers would be the biggest revenue losers.

Taxing pensions has been estimated by the governor’s budget office at giving the state $900 million in new revenue to cover the business tax cut. But that amount could be removed from the state’s consumer economy because it won’t be spent at stores. So certain businesses in the state could lose more than a collective $1 billion in sales revenue from receiving a business tax cut.

“The tax cut was nice for your business, but fewer customers are a problem, so I think that’s good to point out. So often the discussion is very simplistic, with just an emphasis on one effect. That often means if you’re going to do that, then you have to do this. And if you’re going to do this, then that sort of partly offsets that,” said Ballard of the tax shuffling and budget cutting going on in Lansing.

Ballard added that some C corporations may not necessarily see a reduction in their taxes from the governor’s plan, as Snyder has proposed a 6 percent tax rate on profits for Cs.

“The folks that gain the most from (the plan) is a law firm, if it’s organized as a partnership, and some family-owned businesses that are organized as proprietorships. It does set up a distortion of economic activity because it’s taxing one kind of business but it’s not taxing another,” he said.

Ballard said when all the proposed tax additions and eliminations are added together, they still don’t quite pay for the governor’s $1.8 billion cut. Add the $1.5 billion deficit in the general fund that Snyder inherited to the business tax cut he proposed, and there is more than $3 billion the state budget has to cover and replace. And that is where the spending reductions come into play.

“Those are mostly in K-12 education. The number that you hear is $470 per pupil, but as I understand it, that is sort of the minimum,” said Ballard. “In certain districts, it’s only $470 per pupil; in other districts, it’s substantially more than that depending upon particulars.

“Then the other one, of course, is a huge cut to higher education: a 15 precent reduction in our funding. So those are some of the big features,” Ballard added.

“Education is most important in my view, and to reduce our investments in education, I think, is a bad move for economic development for the longer haul. Also, what we’re probably going to end up with is laid-off teachers, and that has an adverse effect on the economy.

“On the other hand, as the governor would point out, he believes that reducing taxes on businesses would have a stimulative effect on the economy and it probably will. It’s just when you net out the pluses and the minuses, it’s just a very mixed picture,” he said.

Ballard spoke at the ICSC event at DeVos Place in late February. He said then that he was concerned about the “disinvestment” in public education by the state for the better part of a decade. Although he isn’t an economic developer, he does speak with those who try to keep businesses here and draw new ones to Michigan. Ballard said they have told him that other factors, not just taxes, play a vital role.

“You know, the chamber of commerce sort of rhetoric is, the only thing that matters is tax cuts. But I’ve talked to a lot of people, some of whom are involved in local economic development efforts, who take a more nuanced approach, which, I think, is appropriate,” Ballard said.

“Sure, lower taxes are fine, but if that means you’ve got crummy schools or that means your roads and bridges are crumbling, that may not be a good overall strategy. I mean, what you want is a comprehensive strategy, and sometimes investing in something, even though you spend more money now, might mean a better outcome later.”

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