Michigan Implements Positive Corporate Tax Reform

Michigan lawmakers approved significant corporate tax reform last year that went into effect at the beginning of 2012. Previously Michigan had a dual corporate tax system called the Michigan Business Tax (MBT). Under the MBT corporate profits were taxed at a rate of 4.95 percent, and all transactions were taxed at a rate of 0.8 percent (a gross receipts tax, or GRT). In addition, there was a 21.99 percent surcharge on the total tax liability from the MBT. We had been critics of the MBT, specifically the gross receipts tax, since it was implemented in 2008. GRTs are an outdated, economically damaging tax that leads to tax pyramiding (read more here).

But in 2011, recognizing the mistake, the Governor proposed and lawmakers approved a significant package of corporate tax changes. Most importantly, they eliminated the GRT, implemented a flat 6% net income tax (a tax rate which is very close to the previous rate after accounting for the 21.99% surtax), and broadened the tax base by eliminating tax preferences. These reforms were set to come online beginning in 2012.

The Tax Foundation’s State Business Tax Climate Index measures which states have the most neutral, simplest, most business-friendly tax structures. In the most recent edition of the Index, which reflects tax law that applied on July 1, 2011, before Michigan’s reforms were implemented, Michigan ranked 18th overall (and 49th on the corporate income tax component). If Michigan’s tax reform had been in effect on July 1, 2011, the state would have ranked 12th overall (and 7th on corporate income tax component). While the state’s actual rank in the next edition will depend on changes other states may make between now and then, it is clear that this set of reforms is a major improvement for Michigan’s business tax system.

Note that we wrote about the reform when it was still in the proposal phase last year, and at that time provided an estimate of how much it would improve Michigan’s ranking on the Index. But now that the reform has been implemented in its final form we thought it would be good to update our estimate of the reform’s impact. The new estimate differs from last year’s because, as is common with tax policy proposals, it developed and became more defined over time.

Finally, it should be noted that Michigan’s reform also included some changes to the personal income tax, most of which do not come on line until 2013. These changes are not included in the estimate above.