Businesses like tax change but will it create jobs in Michigan as the burden shifts to individuals
Rex Larsen | The Grand Rapids Press
Inside 26 pages of a recent government report, one finds the true scale of Gov. Rick Snyder's business tax shift.
Next year, it will be half that much, a July 1 analysis by the Senate Fiscal Agency found. And the year after that, business tax receipts will fall to an estimated $343 million - an 83 percent drop from this year - as the full scope of the recent tax overhaul takes effect. That's less than taxes gained from cigarette and alcohol sales.
To be sure, the amount is driven down by $500 million in development incentives approved before Snyder even took office. Those credits will eventually expire over a number of years.
But the estimates illustrate the size of an overhaul Snyder and the Republican-controlled Legislature accomplished in less than five months.
It ends the Michigan Business Tax (MBT), criticized by some as a jobs killer almost since the day it was enacted in 2007. Starting next year the tax on corporate receipts and profits will be replaced with a flat 6 percent income tax only large corporations with shareholders will pay.
Nearly 100,000 businesses will no longer owe any state business taxes, a $1.6 billion cut the first full year even with the new corporate levy.
But a fundamental question remains. Will this create jobs?
Many small business owners say yes.
“This unleashes us,” said restaurant owner Tommy Brann, whose family operates nine restaurants, most in the Grand Rapids area but also Muskegon, Portage, Northville and Macomb.
Ending the MBT will save $46,000 a year, Brann said, money that likely will result in adding to the company’s 700 full and part-time workers.
“It’s a new atmosphere of confidence by a governor who appreciates job creators,” he said. “Michigan’s right back in the ballgame for us.”
Former state treasurer Robert Kleine is doubtful businesses will pour the extra cash into hiring. He noted a raft of tax benefits for individuals are being eliminated or reduced.
“This (business tax) money is less likely to end up back in the economy than the funds from the tax breaks for individuals that have been eliminated,” said Kleine, who served under former Gov. Jennifer Granholm.
Even some business leaders are skeptical.
“It might catch the attention of other businesses around the country and move us up a lot in the rankings of state business taxes, but I don’t think it will have that big of an impact” on job growth, said Charles Hadden, president of the 3,000-member Michigan Manufacturers Association.
How Michigan ranks
If Michigan’s new corporate-specific tax were in effect now, the state would rise to 13th in overall business tax climate and to 22nd in corporate taxes, the foundation said. Partnerships, sole proprietorships, “S” corporations and limited-liability corporations are exempt.
Still, rankings are relative.
“We’re in the middle on this,” Hadden said. “Half my members will pay less, 25 percent will pay about the same and 25 percent will be paying more — a lot more.”
Michigan automakers, which are leading a manufacturing-fueled economic recovery in the state, offer a mixed assessment of the tax overhaul’s potential impact.
General Motors Co. said it will see a “slight increase” in state business tax liability — it wouldn’t say how much more — but supports the move to a flat corporate income tax.
“A clear, straightforward corporate tax structure should help make the state a place where more companies want to invest and grow,” GM spokesman Jim Cain said.
Ford Motor Co. spokeswoman Marcey Evans said the automaker is analyzing the impact of the corporate income tax, but said Ford probably will pay more than before.
A bigger issue for Ford is the state’s personal property tax, which Evans called “the largest and most uncompetitive tax burden we and other manufacturers face in Michigan.”
Ford and other businesses pay widely varying local property taxes on machinery, furniture, tools and other equipment.
Those taxes could become an even bigger burden under the new corporate income tax. That’s because a 35 percent MBT credit on personal property taxes will be eliminated in the new tax structure.
There are signs those taxes may be next up for review.
The Snyder administration wants to take “a serious look” at the personal property tax later this year, spokesman Ken Silfven said.
“Whether that results in a call for a reduction or an outright elimination of the tax remains to be seen,” Silfven said. “There is no proposal at this time.”
Hadden said his members also want the personal property tax eliminated, calling the tax “the biggest detriment to investment in the state.”
But he said it will be difficult to end or even reduce because the tax provides about $1 billion a year for local governments, which are struggling to balance budgets in the face of declining real property tax revenues.
“It’s a big rock to push uphill,” Hadden said.
'A little bit more hiring'
Still, supporters of the corporate income tax say it will put Michigan on a stronger economic footing.
“I’m optimistic this will be a meaningful element in the recovery of the state,” said Mark Murray, president of Walker-based retail giant Meijer Inc.
Murray said Meijer will pay more under the new tax, although he wouldn’t divulge figures. The biggest benefit, he said, will be to small business owners who paid the MBT and also were taxed on business distributions to them on their personal income tax returns. “In a pretty direct sense, they are being double taxed,” he said.
Eliminating the MBT could give many small business owners as much as a 4 percent boost in their companies’ return on revenue, Murray said.
“People will make some more investments and do a little bit more hiring,” Murray said. A “little bit more hiring” could add up.
Snyder himself urged Small Business Association of Michigan members on June 23 to shout their successes, two days after signing the budget into law.
“Even if it’s one job, be proud of it,” Snyder said. “If you take 12,000 entities and you say one job, that’s a lot of jobs. And then you start saying it’s two jobs or three jobs.” Another issue with the MBT is its complexity. Businesses have long complained the tax was so convoluted even their accountants had trouble understanding it.
David Rhoa, president of Lake Michigan Mailers Inc., a document management company in Kalamazoo, said preparing MBT returns requires 80 hours a year of employee time.
The simplified corporate income tax “sends a message to businesses that this is a state that has a stable, predictable tax structure,” Rhoa said.
Lake Michigan Mailers, which has 56 employees, plans to hire two more full-time workers and a part-timer later this year. Rhoa attributed the hiring to improving business conditions and the anticipation of a better tax climate in the state next year.
The shift to individuals
While most business lobbying groups are cheering the business tax cut, one research organization says it might not do much to boost the overall economy.
In a new analysis of Snyder’s spending plan, the nonpartisan Citizens Research Council of Michigan said the economic benefit from the tax cut will be tempered by a $1.4 billion tax hike on individuals in its first full year.
Most of the additional revenue will come from a new tax on pensions and reductions in both the earned income tax credit for low-income families and the homestead property tax credit.
“The higher income tax collections will reduce disposal income for Michigan taxpayers,” the Citizens Research Council report said. “Lower disposable income will result in reduced consumption, a net negative for economic growth.”
Some argue that larger forces dictate Michigan’s fortunes.
“The economic realities of the past decade suggest that ... the link between business tax relief and Michigan’s economic activity is tenuous,” said Gary Olson, former Senate Fiscal Agency director and now a Public Sector Consultants analyst. His comments last March came as a poll showed public skepticism the savings wouldn’t be plowed into profits.
Snyder has repeatedly declined to predict how many jobs will be created by the business tax cut. But he called the new tax structure “a defining moment in Michigan’s turnaround” upon signing it into law on May 25.
“The current tax system is riddled with inequities that are hostile to job growth,” Snyder said. “Eliminating these longstanding barriers will level the playing field for taxpayers, encourage entrepreneurship and spur more investment in Michigan.”
Email Rick Haglund at firstname.lastname@example.org.