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Fixing Michigan’s Business Tax Climate

2 min readBy: Andrew Chamberlain

Value added taxes look good in economic theory, but the experience of Michigan shows it’s tough to get them right in practice.

Michigan currently has the only state-level value-added tax in the United States. Unfortunately, the poor design of that 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. has caused the state’s corporate tax system to rank consistently among the nation’s worst in our State Business Tax Climate Index.

In this morning’s Washington Post columnist George Will note’s Michigan’s poor corporate tax climate, asking “Who Can Restart Michigan’s Engine?” From the piece:

Michigan has a problem: Its prosperity is withering as America’s automobile industry withers…

Ford’s announcement that it is cutting at least 25,000 jobs and closing 14 manufacturing plants in North America was preceded by General Motors’ announcement that it is cutting 30,000 jobs and closing 12 plants.

Soon the largest North American maker of auto parts — Delphi, based in Troy, Mich. — may ask a bankruptcy judge to shred labor contracts covering 33,000 workers. This would trigger a showdown with the United Auto Workers union.

Last year Michigan was the only state other than Mississippi and Louisiana — that is, the only state not hit by Hurricane Katrina — that had a net job loss. It has lost one in four auto manufacturing jobs since 2001.

Republicans have paid for billboards proclaiming that Michigan has lost one job for every 10 minutes Granholm has been governor. Understandably, the percentage of voters disposed to reelect Granholm is 35 percent.

Michigan’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. burden will be ranked the second-heaviest in the Tax Foundation’s forthcoming State Business Tax Climate Index. DeVos especially objects, as almost any conservative would, to heavy reliance on the Single Business Tax — basically a payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. — particularly as applied to service industries that can, and do, leave the state. (Full piece here.)

Last year we released an analysis of Michigan’s business tax climate, which outlines the case for reforming the Single Business Tax. For more on Michigan’s tax climate, check out our Michigan section.