Is new business tax just talk

March 21, 2011
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Gov. Rick Snyder said his proposed business tax would save Michigan companies $1.8 billion annually and would replace the Michigan Business Tax, which raised the ire of local business groups to a higher level than its predecessor, the Single Business Tax.

Yet, as a group, business owners have remained rather quiet about the governor’s plan since he unveiled it more than a month ago.

“They haven’t said much about it because they don’t understand all the proposals. The Michigan Business Tax is incomprehensible by somebody who is not an accountant. So they don’t understand the MBT. They know they want simplicity and they like the idea of simplicity. They want to see some progress, so show me. I hate to say this but to a lot of us right now, this just feels like talk,” said Paul A. Hense, president of accounting firm Hense & Associates and past chairman of both the Small Business Association of Michigan and the National Small Business Association.

Snyder has proposed to pay for the business-tax break by reducing exemptions on the personal income tax, eliminating the Earned Income Tax Credit, lowering the homestead property-tax credit range, and taxing pensions that seniors receive. Hense said seniors have been much more vocal about the changes than business owners, and he doesn’t agree with the argument retirees have made.

“I think I ought to pay taxes on my pension. Because if I don’t pay taxes on my pension, then you have to raise taxes on the kids, and the kids are who we need to stay here and work. So the people that you’re hearing from are the school teachers, the seniors, the college professors. I don’t hear a lot from the business community because I’m not sure they feel that strongly yet that it’s really going to happen,” said Hense, who writes a monthly column for the Business Journal.

“I think I read that eight Republicans have come out against taxing pensions. Then you wonder, when the business bills get in, who’s going to bail?” he asked.

“So it’s going to be interesting to see how this washes out. So much of it now is not real specific.”

The tax structure the governor has proposed calls for “C” corporations to pay a corporate tax rate of 6 percent, but it exempts other types of businesses, such as partnerships, sole-proprietorships, limited liability companies and “S” corporations.

Snyder reasons that exempted business owners already pay taxes on their personal returns so making them also pay a business tax amounts to double taxation. He has estimated that more than 95,000 companies will not have to file a state business-tax return under his plan.

“One is its simplicity. By going to a flat income tax, he is doing away with that double taxation,” said Hense, who added that he has been “double taxed” because his firm is an “S” corporation.

“I shouldn’t have to pay any more in taxes than anybody else in the state because that’s not fair. But I think the simplicity is huge,” he said.

“But I don’t think it’s going to come out that simple. I think most of us believe by the time the lobbyists get done, it could get all complex and muddled again.”

Hense explained that the Michigan Business Tax, which Snyder wants to eliminate at the end of this year, was too complicated with the gross-receipts portion and the surtax. He also pointed out the MBT didn’t have the same financial impact for every business. As proof, he said the Michigan Raceway in Jackson is a business that has been exempt from it.

“Special deals were always made. And just to go to a simple, knowable, understandable, predictable tax gives businesses the capacity to plan a little better,” said Hense.

Another element Hense likes about the governor’s proposal is the scaling back of the film-industry tax credit, where a production company is given an MBT credit worth up to 42 percent of its movie-making expenses and a film studio is given up to 25 percent of its investment for locating in Michigan. Snyder said the film credit will cost the state $105 million in rebates from 2012 through 2014, and he has proposed to cap that refund at $25 million a year.

“I believe the ability to give people tax breaks leads to corruption, but not in a mafia sense — corruption in the sense that I’ll get this deal for you but you make sure you support my campaign.

“If I come here to start a manufacturing business and you come here to make a movie, why should you get a break I don’t get? That doesn’t make any sense,” said Hense, who has served on the SBAM board for 20 years and the NSBA board for 15 and is still a board member with it.

Hense added that the other credits such as those for brownfield redevelopment weren’t as nonsensical as the film credit, saying it was a good thing to clean up contaminated areas for reuse. But he still felt those credits also should go away.

“You’re still giving somebody something. You’re still incentivizing them differently than everybody else. Maybe this is naïve on my part, but each deal should stand on its own. It’s a thing that you look at that’s got to be done. But on the other hand, it goes against the principle of not giving special deals to people,” he said. “Where do you start and where do you stop (giving out credits)?”

According to the governor’s figures, the state is on the hook for $2.03 billion in Michigan Economic Growth Authority, battery, film and brownfield tax credits over the next four years, starting with the 2012 fiscal year through FY 2015. Snyder pointed out that’s $2 billion less in revenue going to the state.

The governor is betting his tax plan will result in more economic activity and more jobs for Michigan workers. Hense said the new system will help to increase business investment in the state. But he also sees other problems that need to be addressed, and those dilemmas can’t be legislated away.

“We have clients looking for quality employees. Even with our unemployment rate at where it’s at, it’s still difficult to find good employees. There has to be an attitude change in the state: that the best way to make a living is by working for somebody and not just living on the dole,” he said.

“And there has to be an attitude change about doing good work, being a good worker, being somebody that will be there and learn how to do something and be a quality person. We’re hearing horror stories coming out of our educational system. I don’t remember the (exact) statistic but it’s something like 50 percent of the kids that graduate from high school in Detroit can’t read. Well, that’s going to be a bigger detriment to Michigan’s future than the tax system is going to be. Even if the tax system is excellent for business, if you can’t find any people to do the work, you can’t start a business here.”

When the Business Journal spoke with Hense, state lawmakers hadn’t yet begun talking in earnest about altering the governor’s business-tax proposal. But a few days later they did, as Hense felt they would. He offered some advice to them and to anyone else who wants the plan watered down.

“If you don’t have business, you’ve got nothing,” said Hense. “A school teacher can say, ‘So you’re going to cut business taxes while you’re cutting my benefits. That’s not right. Why does business get that benefit?’ Well, the reason business gets that benefit is because there is nothing for school teachers and government employees unless we have business. If we don’t have business here, then there is no money for them to get.

“This may sound draconian coming from a business owner, but you’ve got to take care of business first because without business, you don’t have anything else.”

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