Focus, Economic Development, and Government

It’s not the apocalypse yet, just a tax cut

But will Michigan’s second big business tax reduction in two years lead to more investment?

January 11, 2013
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It's not the apocalypse yet, just a tax cut
It's not the end of the world as we know it, but observers are wondering if Michigan's second big business tax reduction will prompt more investment in the Wolverine State. © iStockphoto.com/ udra
A blogger for a non-partisan, nonprofit national research organization that has monitored tax policy at the federal, state and local levels since 1937 thought Judgment Day might be just around the corner after most Michigan Republican legislators agreed to phase out the personal-property tax for industrial and commercial businesses.

“Today might not be the end of the world, but I have long said that one sign of the Apocalypse would be if Michigan repealed its destructive business taxes,” wrote Joseph Henchman on the Tax Foundation’s Tax Policy Blog the day after the PPT legislation was approved.

Henchman noted the PPT, which when it’s finalized will reduce business taxes by another $600,000 annually, will join the $1.8 billion business tax cut that became effective a year ago. So, down the road, businesses will receive a potential cumulative tax reduction of $2.4 billion in a state that produces an annual gross product of $385 billion.

“Michigan has now tackled what (Gov. Rick) Snyder called ‘the second dumbest tax in the United States’ (after the MBT) by signing a series of bills to repeal the state’s personal property taxes,” said Henchman.

The PPT is targeted to go away in stages. First, all new business personal property valued at $40,000 or less will be exempt from the tax beginning next Jan. 1. Second, all new business personal property, as well as all personal property bought between 2013 and 2015 and purchases that are at least 10 years old, will be exempted starting Jan. 1, 2016.

The Tax Foundation, which many consider to be the authoritative voice on this issue, then rated the state’s business tax climate as 13th in the nation for 2013, while noting that neighboring Indiana was 11th, Ohio 39th and Wisconsin 43rd in its latest ranking of the 50 states on their tax policies. Just a few years back, Michigan teetered in the mid-20s on the tax scales.

Forbes, however, saw Michigan in a different light. The magazine ranked the state last year as 47th of 50 on a list of best states for business, a ranking that questions whether Michigan is even close to being ripe for private investments that a business-friendly tax scheme would suggest.

Forbes based Michigan as the nation’s fourth worst state for business on six factors, none of which broke into the top 20. Forbes gave the state its highest mark for its regulatory environment, placing it at No. 21. Next was No. 24 for quality of life. The remaining grades were in the ranking’s bottom half: 38th in business costs, 40th in growth prospects, 48th in economic climate and 50th — dead last — for labor supply.

“Forbes rankings are usually given a lot of respect in the business world and, in this survey, Michigan fails as number 47,” wrote Marie Hallberg of MichiganPolicy.com.

As Hallberg noted, Utah was first in the ranking, with Forbes citing its pro-business regulatory environment, lowered corporate tax rate and expanding economy.

“According to Forbes, states like Utah that encourage this healthy economic climate with a good quality of life, educated labor force and lowered energy costs will be able to move ahead of other states very easily. But according to Forbes, Michigan needs to substantially lower these business costs and regulations to be able to compete with other states for business,” wrote Hallberg.

There were other surveys where Michigan fared better. The Small Business Entrepreneurship Council’s Small Business Survival Index ranked Michigan 26th nationwide, and that was before the tax changes. Cable channel CNBC listed the state at No. 32, also in 2010.

The take Hallberg came up with on these surveys and others is that “it seems that Michigan is not the worst state to foster a business, but not necessarily the best either. For all the negativity that seems to be grabbing hold of Michigan right now in regards to the economy, these surveys helped to show how Michigan is not as doomed as once thought,” she wrote.

Lou Glazer of MichiganFuture.org looks at business-climate rankings differently than most. He has noticed that the top-rated states aren’t necessarily high-prosperity states. In Glazer’s opinion, better measurements are a state’s per-capita income figure and educational-attainment percentage, which he considers to be key standard-of-living indicators, rather than a national ranking on its business climate.

“The average ranking in per-capita income for the 10 states with the best business-climate ranking is 21.8, for the 10 worst (it’s) 15.7. Given that the 10 worst business-climate states, on average, are slightly more likely to have a higher standard of living than the 10 best, it is real hard to make a case that being ranked as a top business-climate state is a reliable path to a higher standard of living for Michiganders,” wrote Glaser.

“And, at the very least, it calls into question whether the lowering-business-cost agenda — that has been the almost exclusive priority of Lansing policymakers the last two years — is the right agenda for returning Michigan to a high-prosperity state.”

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