Rick Snyder proposes big cuts to business taxes, elimination of credits for film, high-tech industries
This story has been updated several times with additional information.
Michigan Gov. Rick Snyder this morning proposed that the state enact a wholesale reconfiguration of its business tax structure, cutting overall tax rates, making the process simpler and completely eliminating most of the tax credits that benefit specific industries.
Under Snyder's official budget proposal, the state would eliminate the controversial Michigan Business Tax and replace it with a flat 6 percent corporate income tax, which would equal a $1.8 billion tax cut. That's a proposal he's been discussing since the early days of his gubernatorial campaign.
Some 95,000 companies — mostly small business owners who pay taxes through their personal income tax return — would no longer have to pay business taxes under this proposal.
Snyder also would cut most of the tax credits the state offers to individual industries, including the film industry credits, advanced battery credits, the controversial Michigan Economic Growth Authority (MEGA) credits for high-tech companies, the brownfield redevelopment credits and tax-free renaissance zones. Snyder emphasized that companies that have already received tax credits would get to keep them.
Snyder said existing credits would be cut but that he would turn around and include $75 million in total incentives to be distributed by the Michigan Economic Development Corp., including $25 million for the film industry.
To offset lower overall business tax receipts, Snyder is proposing a wide range of spending cuts that would hit higher education, K-12 education and municipal governments. In addition, Snyder wants to eliminate most individual income tax exemptions, including the exemption that protects senior citizens from paying taxes on their pension income.
Snyder described the reconfigured tax structure as necessary for creating jobs, eliminating a projected $1.4 billion deficit and achieving a sustainable state budget. He also hinted that he plans to pursue reform of the personal property tax, which requires companies to pay taxes on the equipment used to do their business, such as computers and manufacturing machines. It's a "fundamentally unfair situation and it needs to be addressed," Snyder said.
"The day of kicking the can down the road is ending," Snyder said in Lansing, according to streaming video of his presentation to a legislative committee.
The budget proposal is sure to kick off a firestorm of debate over Michigan's fiscal health among legislators, interest groups and voters. Snyder wants the state Legislature to pass the budget by May 31.
Snyder's plan would replace the lost income from the business tax reform with a litany of changes, including $1.7 billion in new revenue from changes to individual income taxes.
Under the plan, the state's individual income rate would decline from 4.35 percent in 2010-11 to 4.25 percent in 2011-12, as previously scheduled.
But the income tax rate would be extended to all pension income, which is currently exempted from taxes. Social security income would not be taxed.
The plan would also phase out the personal income tax exemptions for single filer earning more than $75,000 or joint filers earning more than $150,000. It would also eliminate the Earned Income Tax Credit for lower-income taxpayers and reduce the homestead property tax credit.
The proposals drew swift condemnation from Democratic legislators.
“Governor Snyder’s idea of shared sacrifice seems to mean that working families will do most of the sacrificing while companies continue to reap the rewards,” State Sen. Minority Leader Gretchen Whitmer, D-East Lansing, said in a statement. “He is balancing this budget on the backs of our kids, working families, and our seniors. Contrary to his rhetoric about ‘moving all of Michigan forward’, this budget picks out who he’s willing to leave behind.”
Senior citizen advocates also derided the proposal, saying it would hurt seniors who are living on a fixed budget.
"AARP intends to fight this budget proposal on behalf of its 1.4 million members," AARP Michigan spokesman Mark Hornbeck told AnnArbor.com. "Basically what our members get out of it is a huge tax increase and reduced services in exchange for a business tax cut, which we don’t see as a fair or balanced plan."
Hornbeck acknowledged that Michigan is "an exception to the rule" — most states do tax pensions — but said the group is altogether disappointed with the governor's proposals.
"If you’re going to reform taxes, you need to do a balanced job. You can’t just single out seniors for huge tax increase and not share the burden among all groups, including businesses out there," he said.
Snyder said he understands the significance of the tax changes and that his administration conducted a "thoughtful analysis" to determine what changes to make.
"This was a very difficult exercise," Snyder said. "From a personal perspective, these were tough calls to make. Many of us are going to have to sacrifice in the short term. But I can tell you with confidence, with conviction, by making these sacrifices, we can all win in the long term."
Snyder, a multi-millionaire and former Ann Arbor venture capitalist, said he would take a salary of $1.
His budget proposal would essentially remake the MEDC, which has historically focused much of its attention on distributing tax incentives to growing companies in alternative energy, advanced manufacturing, life sciences and other industries.
The elimination of the MEDC incentives has drawn support from business groups like the conservative Michigan Chamber of Commerce.
"Governor Snyder has identified out-of-control state spending and a job- killing business tax as substantial barriers to job growth and he has proposed bold changes to make Michigan more competitive," Michigan Chamber CEO Rich Studley said in a statement. "Governor Snyder has set the tone that we must take responsibility for a legacy of debt and his budget and tax initiatives are devised as long-term solutions."
But other groups, including the film industry and manufacturers, have expressed concern about Snyder's proposed cuts.
MEDC CEO Michael Finney said in an interview that the budget proposal would lead to a simpler tax structure that would boost the economy.
"As proposed, it solves our state’s structural budget problem," Finney said. "That’s good news for the overall economic prosperity of our state."
Over the years, many companies with Ann Arbor area offices have benefited from the high-tech MEGA tax incentives Snyder proposes to eliminate. They include companies like Google, Barracuda Networks, Arbor Networks, MyBuys, AVL Powertrain, ForeSee Results and Sakti3.
But critics have said the MEGA incentives are too costly and that the companies that receive them often don't add the number of jobs they promised.
For example, Google got MEGA tax credits in 2006 after promising to create 1,000 jobs in Ann Arbor by 2011. Today, the company has only 250, though the company said last month that it plans to continue adding employees this year.
During former Gov. Jennifer Granholm's eight-year administration, the MEGA board distributed more than $3.5 billion in tax incentives to more than 500 companies, according to a list of tax credits MEDC provided to AnnArbor.com in September.
Studies by the Anderson Economic Group and the Mackinac Center for Public Policy concluded that the MEGA program has been a waste of government resources, while a competing study by the Upjohn Institute said the tax incentives are worthwhile.
"We are eliminating all those credits," Snyder said today. "We will honor past credits, but it is time for simple, fair and efficient on the business side."
Proponents of the MEGA tax incentives pointed out that companies that received the credits only got tax relief if they actually hired the workers they promised to hire. The state does not cut a check for companies when they make their original hiring promise.
Meanwhile, the state spent about $100 million in 2009-10 on its film industry incentive, which provides a cash rebate of up to 42 percent of a production company's spending in Michigan. As a result of film productions, the state got an influx of $10.3 million in additional taxes, according to a Senate Fiscal Agency study in September. Film companies directly hired 355.5 full-time workers in 2009, activity that resulted in a total of 1,542.2 overall full-time jobs in Michigan, the agency estimated.
Although the film incentives result in a net loss in tax revenue, advocates argue that the job creation and the film industry's attractiveness to young people made the incentives worthwhile.
Finney said the film credits are not sustainable in their current form. He said a set pool of $25 million for film incentives was more appropriate.
"It is an effort to manage it more reasonably than we have right now, where there’s an open checkbook with no cap on it. Hopefully it will allow the industry to grow here in the state," Finney said.