On March 31, Michigan Gov. Jennifer Granholm (D) vetoed a bill that would have accelerated plans to repeal the state’s Single Business Tax (SBT).
The bill, passed largely along party lines in both houses of the Michigan Legislature, would have scheduled the SBT for repeal on January 1, 2008. Under current law, the tax will go off the books in 2009.
“This legislation threatens our families, our businesses, and our economic future,” Granholm said in her veto message. “[This measure] would result in either a significant tax increase for working families or massive cuts … in education, health care, and public safety.”
The SBT is unique among state business taxes: While most states tax business profits, the SBT is a tax on gross revenue–it does not allow deductions for common business expenses. Consequently, Michigan firms find themselves paying substantial amounts of tax even if they make no profit.
‘Killing This State’
Many analysts and lawmakers blame the SBT for a large portion of Michigan’s economic troubles.
“If you want to add an employee to your payroll, it taxes your decision to expand and create jobs,” said Oakland County Executive L. Brooks Patterson in his 2006 State of the County address. “More than the global economy, the Single Business Tax is killing this state because it is killing jobs in Michigan.”
Charles Owens, Michigan state director for the National Federation of Independent Business, a small business advocacy group, agrees the tax is a job-killer.
“The problem with the Single Business Tax began when the architects … decided that the overriding goal of that policy should be the revenue needs of the state,” said Owens. “As a consequence we have a tax on payroll that punishes job creation.”
State Is Losing Jobs
The Michigan economy has underperformed in recent years. Michigan is one of only two states that lost jobs (38,000 total) between February 2005 and February 2006, according to the latest Bureau of Labor Statistics data. The only other state to lose jobs in that period was Louisiana, which was hit with a devastating Category 5 hurricane last August.
Michigan’s unemployment rate in February was the third-highest in the nation (6.6 percent), trailing only Mississippi (8.4 percent) and Alaska (7.0 percent). Michigan experienced the most sluggish growth in Gross State Product (1.2 percent) of any state between 2003 and 2004, as calculated by the Bureau of Economic Analysis.
Originally adopted to replace numerous state business taxes, the SBT now extracts the seventh-highest state corporate tax burden in the United States.
In the late 1990s, then-governor John Engler (R) managed to persuade Michigan lawmakers to repeal the SBT over 23 years, with rate reductions taking place in a series of steps until the tax was eliminated. Lawmakers upped the ante, agreeing to phase out the tax entirely by 2009.
Given the continuation of Michigan’s economic doldrums, many lawmakers (mostly Republicans) now want to repeal the tax still more quickly.
“There is risk in doing this, but the greater risk is [in] doing nothing and letting this tax continue to kill jobs and drive job providers out of the state,” said Senate president Ken Sikkema (R-Wyoming).
His thoughts were echoed by Rep. Fulton Sheen (R-Plainwell). “Michigan businesses are hurting, but we are also hurting ourselves by keeping this onerous tax on the books.”
Granholm claims to want to eliminate the SBT but says she is unwilling to raise sales or individual income taxes to make up the lost revenues. She has called on lawmakers to repeal the tax but says they must immediately choose which taxes would be raised to replace it.
“I’ve made my position clear: I will not allow the business tax burden to be put on the backs of Michigan families” said Granholm in a news release. “If the Republican leaders can accept that basic principle, we could eliminate the SBT tomorrow and replace it with a better business tax.”
Replacement Nearly Impossible
It will be virtually impossible, however, for the state to replace SBT revenues (a whopping $1.9 billion) with a corporate income tax. The Michigan Department of Treasury calculated a rate as high as 15 percent would be necessary to fully replace SBT revenue. That would be among the highest corporate income tax rates in the United States.
Many lawmakers, such as House Speaker Craig DeRoche (R-Novi), don’t want revenue concerns to get in the way of eliminating the tax.
“Workers need a better business tax code that encourages jobs and does not tax jobs,” DeRoche said in a written statement. “‘Revenue neutral’ … mean[s] the government’s needs are more important than the peoples’ needs.”
Petition Drive Arising
In the background of all this is a petition drive by Oakland County’s Patterson to force the legislature to eliminate the SBT more quickly. If supporters gather enough signatures, the petition will go to the legislature, where an affirmative vote will immediately become law, without Granholm’s signature.
Granholm is up for re-election this fall. Her Republican opponent, businessman Dick DeVos, is expected to make SBT repeal a campaign issue.
Chris Atkins ([email protected]) is staff attorney at the Tax Foundation in Washington, D.C.