Business tax deja vu
On Jan. 1, 1976, the state replaced seven existing taxes, including its corporate income tax, with something called the Single Business Tax. The corporate tax was eliminated because lawmakers wanted to reduce what they saw as dramatic fluctuations in revenue directly related to the state’s up- and-down business cycle, which was heavily dependent on the automobile industry.
The SBT was enacted to “level the playing field,” meaning all businesses would be taxed and not just those that had a profitable year. The hope behind the SBT was to guarantee the state a stable source of revenue year after year. But the SBT was put on death row on Dec. 31, 2007, and replaced a year later with the Michigan Business Tax, which proved to be more of an irritant for business owners than the SBT ever was.
Starting next Jan. 1, the state will come full circle when Michigan returns to a flat corporate income tax. Lansing will levy a 6 percent tax on profits, but only on the state’s largest businesses, leaving other business owners, such as those in S corporations and partnerships, to make good with the Treasury Department on their individual returns.
“I think the biggest impact in the business reform, in my opinion, may be the corporate income tax only being levied on C corporations starting in 2012,” said William Roth, a tax expert and partner at BDO in Grand Rapids and a regular columnist on tax matters for the Business Journal.
“The LLCs and S corporation business owners will no longer have a double tax for state purposes. As you know, LLC owners and S corporation shareholders pay federal and state income tax on their share of the earnings of the business at the individual income tax return level. In the past, with the SBT and MBT, they paid at the entity level and again on their individual tax return. This resulted in a double tax,” said Roth.
The new corporate tax doesn’t offer credits, except for the small business credit that allows qualified small businesses to pay an alternate tax that would be equal to 1.8 percent of their adjusted business income.
“The change in many of the business credits will certainly impact the C corporation businesses,” said Roth. “Most of the business income from LLCs and S corporations was already being taxed, so I wouldn’t think the detail in the fiscal analysis will show much additional revenue from the flow-through business entities.”
According to the House Fiscal Agency, the new corporate tax is expected to give the state $812 million in revenue in its first full year, a figure that falls far short of the $2 billion the MBT would have raised. The agency’s analysis estimated that the state’s corporate tax would result in a tax cut of $1.67 billion for all businesses in its first year. To help pay for the reduction in business taxes, state residents will pay more.
The House Fiscal Agency estimated that individuals will pay an additional $1.47 billion in taxes in the plan’s first year. The state’s new personal tax plan eliminates many of the credits, exemptions and deductions taxpayers have counted on for a long time, including the credits for city income taxes and contributions to the state’s public universities, libraries, museums and public broadcast stations.
These changes mean that although non-C-corporation business owners won’t pay business taxes, they most likely will pay more on their personal returns. “Yes, reducing the credits and changing some of the exemption limits will impact the net benefit of some of the changes,” said Roth.
But as Roth pointed out, much of the increase in state individual tax returns will come from a change in the pension exemption for retirees, which will affect those born in 1946 and later to varying degrees, and from a loss of the homestead property tax credit for households that have “total resources” over $50,000. Then the credit will be phased out for households that have between $41,000 and $50,000 in total resources.
Overall, the House Fiscal Agency calculated the changes would result in the state receiving $192 million less in tax revenue in the plan’s first year.
“The Michigan Business Tax was a disaster. It was not only unfair, it was a dumb tax,” said Gov. Rick Snyder, who proposed the new plan in January and signed it into law May 25. “This is going to make us competitive; this will create jobs. And that’s exciting.”
But one element of the MBT will still be around after Jan. 1: the Financial Institutions Tax. The FIT was included in the MBT in 2008 as a substitute for income and gross-receipts taxes. Banks, bank holding companies and some thrifts will continue to pay a franchise tax of 0.235 percent on their net capital next year. The House Fiscal Agency estimated the FIT would produce $44 million in tax revenue for the state in 2012.
The state Treasury estimated that roughly 41,000 businesses will pay the new corporate tax starting next year. About 130,000 businesses paid the MBT.
How Michigan’s business tax stacks up
How Michigan’s business tax stacks up
The new Michigan corporate tax rate will be lower come Jan. 1 than the rates that some other states already offer in their comparable tax plans. Here is a comparison of the state’s new rate with eight other states.
*Actual rate depends on profit margin.
Source: The Tax Foundation, January 2011.