GM and Michigan

May 26, 2005

The Value Added Tax (VAT) may look good in theory, but Michigan’s experience shows they can be tough to get right in practice. According to a GM official, quoted in the Detroit News:

Michigan has the worst business tax code of all the states where General Motors Corp. operates — and it will continue to be the nation’s costliest even if Gov. Jennifer Granholm’s manufacturer-friendly tax reform plan wins approval.

Michigan levies a Single Business Tax (SBT) on companies in the state. The SBT is a VAT which is levied on the difference between a company’s gross receipts and its costs of production. The SBT in Michigan has been highly inimical to the state’s business climate and is one of the reasons GM is struggling to compete against foreign auto-makers.

The Tax Foundation ranks the corporate tax structure in Michigan as the absolute worst in the country in its Business Climate Index. The reason is the SBT. Michigan’s own department of revenue estimates that for the state to raise an equal amount of revenue, a standard corporate income tax would need to be, on average for the past 20 years, 14.83 percent. In some years the rate would have needed to be over 50 percent (Michigan Department of Revenue). Check out the Tax Foundation’s Business Climate Index for further discussion of state business climates. Also read the Fiscal Fact on Michigan detailing the effects of the SBT and how Michigan can fix its business climate.

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