Promising to cut business taxes much easier than actually doing it
Although the vast majority of voters don’t pay it directly, the Michigan Business Tax has been a major issue in this year’s state election campaigns.
Even many Democrats agree with Republicans that the MBT is too complex, too costly and must be replaced. Some would eliminate it without a replacement.
They say, without many specifics to back them up, that the tax is a jobs killer that drives businesses out of Michigan.
Political candidates and many business owners are particularly upset with the MBT’s 22 percent surcharge that they view as an onerous tax atop a tax.
But the latest data from a group of corporate tax executives suggest anger toward the MBT is misdirected.
The biggest tax burdens on businesses in Michigan are property and sales taxes, according to the Washington, D.C.-based Council on State Taxation.
COST, as the organization is known, isn’t a group of closeted policy wonks. It’s made up of tax lawyers, accountants and administrators at mostly large U.S. corporations — the folks with firsthand knowledge of how much businesses actually pay in taxes.
Accounting firm Ernst & Young LLP prepared the group’s annual study on state and local taxation.
This year’s report, based on 2009 tax data, found that property and sales taxes comprised 70.7 percent of total business tax payments by Michigan companies.
Just 11.7 percent of taxes paid by Michigan businesses came from gross receipts and corporate income taxes captured by the MBT. The rest of the business tax burden is in unemployment, licensing and other miscellaneous taxes.
That was generally the case for most states. While state and local business taxes for all states fell 3.5 percent last year, mainly because of the recession, property taxes on businesses increased 2.7 percent.
COST also calculated the growth in business tax revenue on a state-by-state basis between 2005 and 2009. Michigan recorded the third-smallest increase in the nation behind Connecticut and Idaho, respectively.
Michigan’s overall businesses taxes as a percentage of gross state product also don’t portray a state that is widely out of sync with competitors.
State and local business taxes represent 5 percent of gross state product, slightly above the national average of 4.7 percent. Most states fell within a range of 4 to 5 percent.
COST also looked at the tax-benefit ratio of government services paid by businesses taxes. By that measure, it can be argued that Michigan businesses are taxed fairly.
Businesses received $1 in government services for every dollar they paid in taxes last year, the study found. That calculation assumes 50 percent of education spending in the state benefits businesses.
If the MBT is a relatively small portion of total business taxes, why are so many people so upset about it?
One reason could be that many unprofitable businesses are still paying the MBT because it taxes gross receipts, said Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo.
“Companies don’t like the idea of paying taxes when they aren’t making a profit,” Bartik said.
Those running for governor and the Legislature also can rail against the MBT, but they can’t do much about the larger property tax burden because local units of government levy most property taxes.
But after all the campaigning is done, the new governor and lawmakers will find themselves wrestling with a projected $1.6 billion deficit in the general fund budget for the 2011-2012 fiscal year.
They’ll likely discover that promising to cut business taxes is much easier than actually doing it.
E-mail Rick Haglund at haglund.rick@gmail.com.
Comments
Ned Simpson
Wed, Oct 20, 2010 : 3:46 p.m.
I want to thank Rick Haglund for writing an article about the issue, not competing candidates' vacuous statements in the he-said-she-said or the not-true-is-so-isnt-so articles and posting I generally see. From the discussion, clearly its possible to talk about a problem rather than blame and demonize one another. Lets hope that after the election folks will roll up their sleves and fix the problem, not focus on fixing the blame. Thanks Rick
Mick52
Mon, Oct 11, 2010 : 7:05 p.m.
Good comment Gsorter, it explains this well. I have heard this before, that businesses get taxed and then the employees are taxed. It seems to be contrary to the story. My concern is in cutting any tax without something in place to make up the immediate loss of revenue, which will impede services. There is no easy solution here.
gsorter
Fri, Oct 8, 2010 : 2:27 p.m.
Here is my personal story as to why the MBT should be scrapped. Our company is an S corporation, like many small business. We are a service company with high revenues, and small margins. Since the MBT taxes us on revenue, we pay over 10% of our profit to the MBT. PLUS, since Michigan also has an income tax, we then pay tax again on the personal side (K1 income) for those very SAME profits. Bottom line, we pay 15% to the state. Add in the federal and property tax, and we are well over 50%. Now, if we were to move to a state such as Washington or Texas, which have much lower taxes, suddenly Michigan doesn't look very competitive. Service I.T type companies can almost move anywhere in the country now. That is why we must change to be competitive
johnnya2
Fri, Oct 8, 2010 : 1:34 p.m.
"Snyder's 6% flat business income tax, for example, would put many COST members out of work." Rick Snyder's plans always put people out of work. I guess you are seeing the light on him? Or are unemployed COST members ok to be out of work?
Speechless
Fri, Oct 8, 2010 : 1:24 p.m.
Reforming the MBT, including removal of the surcharge, would be fine — so long as it takes place in the context of a total overhaul for Michigan's system of taxation. The more urgent need is for a graduated state income tax, along with the closing of various tax loopholes which do not create real benefit for the state or for its residents in financial need. Once this is accomplished, then we can dump the surcharge and look into simplifying the MBT. In regard to MBT simplification, a comment by John Q in a recent, related piece on this topic warrants additional emphasis here: "... As to the various exemptions that make the business tax complicated, every one of those was added because some special interest in the business community wanted it. Most of the problems with the Michigan tax code are the fault of the business community pushing their own self-interests over maintaining a simplified tax system...." In regard to possibly eliminating the MBT, John Q provided this background: "... There's a reason the state has 3 different major tax revenue sources. It provides a more balanced revenue stream that's less subject to massive fluctuations as the economy goes up and down. That's what makes Snyder's push for a return to the corporate income tax so troubling. The SBT was created after the state was subjected to wild revenue swings under the old corporate income tax...." [ Excerpted from: www.annarbor.com/business-review/michigans-business-taxes-must-be-reexamined-interest-groups-say/ ]
StrongFire
Fri, Oct 8, 2010 : 10:32 a.m.
If there is ever going to be a time to change the Michigan business tax structure, now is the time. In this economy, governments have had to cut back its services in response to decreased revenues. Change the structure now while the revenues are down. It's going to be much easier to find substitutes now than when the economy recovers. Personally, I would like to see the personal property tax go away. It is antiquated and a bureaucratic nightmare for municipalities and businesses.
Technojunkie
Thu, Oct 7, 2010 : 8:15 a.m.
"COST, as the organization is known, isnt a group of closeted policy wonks. Its made up of tax lawyers, accountants and administrators at mostly large U.S. corporations..." In other words, people who are paid to process the massively complex MBT. Snyder's 6% flat business income tax, for example, would put many COST members out of work. That would free up money to pay productive workers, the ones the Democrats claim to represent.