Kudos to the Michigan House Democrats whose Single Business Tax (SBT) replacement plan is one of the best we have seen. The foundation of their plan is a business income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. levied at 7 percent, a net worth tax levied at just under .5 percent, and substantial cuts in the personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. . It definitely gets the fundamentals right even if there are a couple of features to quibble over.
The biggest positive is that it lays the proper foundation for Michigan’s business tax system. By moving from the SBT to a system based on taxing business income and net worth, the House Democrats have chosen to rely on basic business tax structures that are either neutral (taxing profits) or familiar (taxing net worth) to business taxpayers.
The biggest problem with most of the SBT replacement plans was either a failure to rely on mainstream business taxes or the utilization of business tax structures (like gross receipts) that would badly distort investment decision-making. In choosing to tax profits and net worth the House Democrats avoided both these pitfalls.
That’s not to say that that plan is perfect. It reportedly contains over $700 million in tax incentives that narrow the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and drive up the tax rate. The 7 percent tax rate on profits could certainly be much lower if the tax incentives were not included, and a lower rate would stimulate more investment in Michigan than tax incentives.
The plan also curiously exempts some companies from the tax based their gross receipts, reportedly raises a fair amount of revenue by taxing “out-of-state” companies, and appears to rely heavily on net worth taxation (known as a “franchise tax” in most states) in an era where many states are cutting or eliminating their net worth taxes.
But these problems are all easily fixed so long as lawmakers have the political will to do so. In its basic structure the House Democrats’ plan is sound and other Michigan lawmakers would be wise to give it serious consideration. Please click here for our evaluation of the other SBT replacement plans, and click here for our thoughts about Governor Granholm’s “service tax” plan.
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