Q&A with Lt. Gov. Brian Calley: New tax structure will make Michigan more competitive
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Lt. Gov. Brian Calley says Michigan's new business tax structure will be among the simplest in the nation, placing fairness ahead of social planning, and making Michigan more competitive.
Q. Why will the new business tax be better for the economy in ways the old one wasn’t?
A. Employers, meaning those who pay business taxes, nearly unanimously believe the Corporate Income Tax (CIT) is superior to and makes Michigan more competitive than it was with the Michigan Business Tax (MBT). Since the decision to add jobs has many subjective elements, the opinion of the decision makers is critical.
The CIT is arguably the simplest business tax code in the nation. The MBT was among the most complicated and burdensome in the nation. The cost of compliance with the CIT will be far lower than it was with the MBT.
The CIT also eliminates the double taxation of “pass through entities” which are mostly small businesses. The MBT and the SBT before it taxed the income of small businesses twice - once on the business tax and again on the individual income tax.
The CIT is substantially smaller than the MBT, making Michigan much more competitive than before.
Q. You’ve cited the unfairness of double taxing business owners - once through the Michigan Business Tax and secondly through the personal income tax. But doesn’t the business separately benefit from state services and if so, why shouldn’t it contribute to them as well?
A. The taxation of business income on the personal income tax is the taxation of the business. That’s the whole point of exempting them from the CIT.
Furthermore, the CIT is only a small portion of what businesses pay for services in Michigan. Between fees and other taxes, Michigan businesses pay well over $10 billion beyond the CIT for the services they consume.
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?
A. The CRC review was a very transactional analysis of the tax reform package and did not consider any dynamic changes that are likely to occur.
The tax reform package is a substantial net reduction in taxes, which will create a net increase in economic activity. But this net tax cut is not as important as the dynamic impact our government, budget and tax reforms will have on the economy.
By passing the simplest business tax code in the nation, the cost of compliance will be far less than before.
Because the CIT is so competitive with the rest of the nation and the world, growing businesses located in multiple states and countries will be more likely to add jobs at their Michigan site, rather than other options they may have.
By eliminating the double taxation of small businesses, the likelihood of both their survival and growth will increase. Our only net job growth between 1998 and 2008 in Michigan came from small businesses.
None of these dynamic changes were considered in that CRC analysis.
Q. Which types of firms are likely to benefit most from the elimination of the MBT or are most likely to use the money to hire workers?
A. The vast majority of firms will benefit from the elimination of the MBT as the size and the complexity of the CIT is far less and the structure is far superior. This goes for businesses in every industry and of every size. That’s the beauty of this tax reform; it does not pick certain companies over others and it offers no special deals for those who make large political contributions or hire lobbyists.
The previous tax had high rates that were offset by a few massive credits. If you qualified for the credits you did fine. If you didn’t, then you were simply left with an excessive tax. Therefore, those businesses that had substantial credits, mostly big companies, will now pay the same as everyone else.
Additionally, this fall, our administration will propose substantial changes in the personal property tax (on machinery tools and other equipment) that will make the state even more attractive and competitive.
Q. Which types of firms are least likely to add jobs?
A. I don’t think there is any industry that will be less likely to add jobs under the CIT than they would have added under the MBT. I expect the opposite to be true pretty much across the board. It is simpler, fairer and more competitive. The previous economic development strategies employed a micro, transactional approach where the state put together individual deals to overcome a bad overall jobs environment. This tax reform gets at the root of the problem. Instead of making special deals to mitigate the bad jobs environment, we fix the bad jobs environment.
Q. The previous Republican administration often cut taxes regardless of the budget consequences. This one is largely paid for on a full-year basis. Why the change?
A. Not being present for the actions taken under previous administrations, I cannot offer any insight into their decision-making process. However, I can say that this administration will continue to insist on a maintaining a structurally sound, transparent and sustainable budget. We are not willing to avoid difficult decisions, leaving more debt and burden on the next generation.
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. According to the Edward Lowe Foundation, Michigan lost more than 278,000 jobs from large businesses between 1998 and 2008. This is in spite of the fact that Michigan put billions of dollars during that time into large project incentives. During that same period, small businesses, who do not typically qualify for such incentives, added jobs. This demonstrates how much of a spectacular failure the previous method of economic development was.
Q. How will we know whether the tax plan has succeeded or failed?
A. Business tax reform on its own is not enough for Michigan to reach its true employment potential. When coupled with personal property tax reform, regulatory reform, talent and workforce development and adequate intellectual and transportation infrastructure, we will see the results our citizens deserve.
In January we unveiled the Michigan dashboard, which is essentially a report card on Michigan and it’s government. Included within that dashboard are important economic indicators such as unemployment, gross domestic product and per capita income, all of which are benchmarked against the national averages. These are relevant indicators of the effectiveness of state policies and reforms when compared to national averages.