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Posted on Sun, Jul 24, 2011 : 8:58 a.m.

Q&A with former State Treasurer Robert Kleine: Tax shift to individuals will hurt economy

By Peter Luke

Related stories:
-- Businesses like tax change but will it create jobs in Michigan as the burden shifts to individuals
-- Q&A with Lt. Gov. Brian Calley: New tax structure will make Michigan more competitive

Robert Kleine, who served as state treasurer under Gov. Jennifer Granholm, thinks the positive impact of the business tax cuts will be offset by the accompanying $1.4 billion increase in individual taxes.

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Kleine, a former vice president and senior economist at Public Sector Consultants, recently sat down with Lansing Bureau reporter Peter Luke to discuss the impact of the tax changes on Michigan. (Responses have been edited for length.)

Q. Gov. Snyder says the MBT was a dumb tax that killed jobs. Was it and did it?

A. First, the MBT has been in effect for less than three years so its impact is difficult to evaluate.

Second, the one state recession ended in 2007 and since that time the Michigan economy has performed about as expected relative to the U.S. economy, which suggests the MBT has not had a negative effect on the economy.

Third, the MBT is far from perfect but a corporate income tax is even worse. It is discriminatory, unstable and easy to manipulate. The Single Business Tax was a better tax than the MBT or the corporate income tax. (The SBT was eliminated in 2007, leading to the MBT.)

Q. The Citizens Research Council’s new review of the budget and tax changes says reducing business taxes will produce positive economic growth that will be offset, at least in part, by the negative economic growth that accompanies higher income taxes. Agree or disagree. And why?


Former State Treasurer Robert Kleine

I generally agree. The $1.4 billion increase in individual taxes as well as the budget cuts will take money out of the economy, reducing demand for goods and services. This is likely to more than offset the positive impact of the business tax cut. Much of the relief is going to market-based firms such as professional businesses and retailers that are much less sensitive to taxes than firms that can serve their customers from anywhere, such as manufacturers. The tax relief for manufacturers, the firms most sensitive to taxes, only amounts to about $275 million, 18% of the total relief.

These tax changes were based more on ideology and were enacted without any serious analysis of how many new jobs would be created.

Q. As for the administration’s tax argument, why should a business owner pay an effective tax rate on income that’s double the rate everyone else pays?

A. First, non-corporate businesses have been paying a business tax since 1975 with little discernible negative impact on the economy.

Second, both individuals and businesses receive separate benefits from public services and therefore both should pay taxes. About 95,000 businesses will no longer pay a state business tax. Many of these businesses will be in direct competition with businesses that have to pay the 6% corporate income tax.

Third, under the MBT firms with gross receipts of $20 million or less pay only a 1.8% business income tax (if payments to owners and officers is $180,000 or less), mitigating the double taxation issue for most small businesses.

If you accept the double taxation argument one way to address the issue would be to exempt the first $250,000 of business income rather than eliminating taxes for non-corporate firms.

Q. Business owners say cash flow is everything for a company struggling to grow in this state. If the tax savings will be used to help finance that growth, isn’t that a good thing?

A. It is a good thing if it happens. But business will not hire and invest unless there is a demand for their product and as stated above demand will be reduced by the tax increases and budget cuts. Also, U.S. corporate profits are at an all-time high and business hiring is very tepid.

Q. What do you think firms will do with the extra cash?

A. Some will be invested but much of the tax relief will just add to business profits which will likely result in higher payouts to shareholders, officers and owners. Non-corporate businesses will receive about $750 million in tax relief and much will be paid out to already well-to-do owners and partners. Is it really a good idea to cut the taxes of lawyers, lobbyists, consultants and accountants and other well-off professionals while cutting education and raising taxes on low- and middle-income taxpayers?

This money is less likely to end up back in the economy than the funds from the tax breaks for individuals that have been eliminated.

Q. In terms of Michigan’s ability to attract big projects from big companies, will the new 6 percent tax rate on corporations that file a federal corporate return - as opposed to the MBT - make the state more competitive?

A. Possibly, but several thousand firms will pay more under the new tax than the MBT. Highly profitable firms are likely to pay more under the corporate income tax than the MBT. For example, in the information technology sector there are a subset of firms whose taxes will increase by about 600% under the new tax.

Michigan added about 700,000 jobs in the 1990s, and the unemployment rate dropped below the national average, with a 2.3% SBT in place (about the same amount of revenue as collected under the MBT, with the surcharge). In 1999, the SBT was 0.8% of private sector GDP and in 2010 the MBT was only 0.5% of private sector GDP.

Michigan’s economic problems have everything to do with the auto industry and nothing to do with taxes.

Q. In this plan, at least the Republicans are paying for their tax cuts with tax increases elsewhere in the personal income tax code. That’s a break from past policy in which taxes were cut irregardless of the budget consequences. That’s progress, isn’t it?

A. I guess that is one way to look at it, but a large share of the tax cuts for business is being paid for with cuts in education spending and revenue sharing and tax increases on low-income families and seniors, those who can least afford it.

Q. How will we know whether the tax plan has succeeded or failed?

A. We may never know for sure. Michigan employment began increasing last October. One way to make a stab at the impact is to measure our progress in private-sector employment growth relative to the U.S., compared to how we did over the last 35 years.

One final comment. I think you have to consider whether there were better options. One option would be to tax all business income at a 3.5% rate, which would raise the same amount of money as a 6% corporate income tax and have a more positive impact on the economy.

Another option would be a 4% business income tax combined with a 0.1% gross receipts tax. This would raise about $500 million more than a corporate income tax, still provide $1 billion in business tax relief, be more stable, arguably have a more positive impact on the economy, and negate the need for cuts in education and some of the tax increases on individuals.

Another better option than Gov. Snyder’s plan would have been to phase out the gross receipts component of the MBT over two years, leaving a 6% business income tax in place. This would provide about $1 billion in tax relief in year two, be much easier to administer, and combined with higher-than-forecast revenue collections, negate the need for the sharp cuts in education, revenue sharing and other programs.


Peter Eckstein

Mon, Jul 25, 2011 : 6:40 p.m.

Robert Kleine is a respected economist who has served in both Republican and Democratic administrations, and everything he says makes sense. The tax cuts for S-corps will largely favor businesses that have no place else to go--try serving hamburgers to residents in Grand Rapids from your tax haven in Mississippi. While there was never much justification for taxing retirement income at lower rates than earned income, the Snyder tax increases will in many cases hurt those who can't afford it--and many of the budget cuts will be disastrous for local governments, education, and the needy.


Mon, Jul 25, 2011 : 12:46 p.m.

Les Gov, Mike: You are unjustified blaming former Governor Granholm and former state treasurer Robert Kleine for the follies and misjudgements of the auto executives, the bankers and Wall Street investment houses. Obviously, you do not understand the origins of our financial crisis. Trying anything new to advance Michigan's economy and increase employment will not work if consumer spending does not increase demand for goods and services. Consumer spending comes mostly from the middle class which will see reduced disposable income because of government austerity and increased taxes. Have you noticed that Rick Snyder has not been trumpeting new employment numbers? Michigan had 450,000 unemployed when the Republicans took over state government seven months ago. What is that figure now?

Basic Bob

Sun, Jul 24, 2011 : 5:03 p.m.

@Richard Lake, Those of us who pay taxes are ultimately responsible, and we feel punished already. If you paid taxes you might get it.


Sun, Jul 24, 2011 : 2:51 p.m.

Interviewing the guy who ran the state off a cliff financially? Really? I'm seeing improvement in the economy for the first time in five years. Let's get more people back to work, increase the tax base and then argue about the best way to tax everyone. The previous 8 years didn't work out so well for most of us. The definition of insanity is doing the same thing over and over and expecting different results.

Les Gov

Sun, Jul 24, 2011 : 2:23 p.m.

Yes Richard see leave just like Granholm did. Granholm is so proud of her accomplishments for the State of Michigan she ran off to the West coast. That's what we need another democrat that comes in, leaves a mess, and runs away. At least Synder is trying something. Given the condition that Robert Kleine left the state in he seems like the last person who's opinion should matter.

Richard Lake

Sun, Jul 24, 2011 : 1:56 p.m.

So I, a retired guy, will pay higher taxes so that business owners can use my $$$ to take vacations I can not afford? I should leave the state now, spend my retirement money in a state that does not treat me like this, but I will try to stay until those who are responsible are punished. The Following 18 Politician Are Facing Recall: Governor Rick Snyder (R) <a href="" rel='nofollow'></a> <a href="" rel='nofollow'></a> Michigan Senate Majority Leader Randy Richardville (R - Monroe) <a href="" rel='nofollow'></a> State Senator Darwin Booher (R - Evart) <a href="" rel='nofollow'></a> State Senator Judy Emmons (R - Sheridan) State Senator Mike Green (R - Mayville) State Senator Mark Jansen (R - Gaines Township) State Senator Jim Marleau (R - Lake Orion) State Senator Mike Nofs (R - Battle Creek) State Senator John Proos (R - St. Joseph) State Senator Roger Kahn (R - Saginaw Township) State Senator John Pappageorge (R -Troy) Michigan House Speaker Jase Bolger (R - Marshall) State Representative Kurt Damrow (R - Port Austin) <a href="" rel='nofollow'></a> State Representative Nancy Jenkins (R - Clayton) <a href="" rel='nofollow'></a> State Representative Joel Johnson (R - Clare) <a href="" rel='nofollow'></a> State Representative Phil Potvin (R - Cadillac) State Representative Al Pscholka (R - Stevensville) State Representative Paul Scott (R-Grand Blanc) <a href="" rel='nofollow'></a> A petition is circulating also to REPEAL PUBLIC ACT 4 of 2011, &quot;The Local Government and School District Fiscal Accountability Act&quot;. <a href="" rel='nofollow'></a>


Tue, Jul 26, 2011 : 4:59 a.m.

Richard Lake, We taxpayers feel the same way about the unfair benefits your unions &quot;extorted&quot; from the taxpayers. We want you punished and paying taxes is a small, but fair, &quot;payback&quot;.


Sun, Jul 24, 2011 : 6:46 p.m.

The retired guy is complaining he can't afford a vacation? The current nominees for &quot;Head Scratcher of the Day&quot; are.....


Sun, Jul 24, 2011 : 2:58 p.m.

So you must be one of the ex-government employees with the nice un-taxed pension. More than likely someone who would say the rich need to pay their fair share. The well to do retired need to pay their fair share too instead of expecting those who will never receive a retirement plan of any kind to pay for yours. Did you work until age 65? Or were you able to &quot;buy out&quot; you retirement to collect early? How many government pensions are you receiving? The area of government pensions needs to be looked at along with social security and medicare reform IMHO. It was a pretty sweet deal for a long time and many too advantage of it. I have a friend working on his second government pension and he will collect more than he ever mad while working. How can society pay for this? How many tax paying working stiffs does it take just to pay your pension?