More Negatives than Positives in Governor Granholm’s SBT Replacement Plan

November 30, 2006

Yesterday Michigan Governor Jennifer Granholm released her proposal to replace the state’s Single Business Tax (SBT) which is set to expire on January 1, 2008.

Her plan follows six others released by Professor Gary Wolfram, State Representative Fulton Sheen, the Detroit Regional Chamber of Commerce (which offered two plans), the Grand Rapids Chamber, and the State Chamber. You can access all these plans via this link.

Governor Granholm’s plan contains six major features:

• A business income tax levied at a rate of 1.875 percent (apportioned to Michigan based on a 100 percent sales factor formula)
• A gross receipts tax on Michigan-based sales levied at a rate of .125 percent
• An asset tax levied at a rate of .125 percent
• Personal property tax relief for business taxpayers
• An increase in the gross receipts tax on insurance companies
• Continuation of most major tax incentives plus creation of a new research and development (R&D) tax credit

While the overall impact of the Governor’s plan on Michigan’s competitiveness is unknown, it contains many more negative economic features than the other plans. But first, the positives:

• The business income tax base is generally neutral to business investment and will treat all businesses fairly
• At 1.875 percent, the business income tax rate would be the lowest statutory rate among states that tax business income—a distinct competitive advantage
• The plan provides a mild tax cut, estimated at $150 million by the Governor (most of the chamber plans provide overall tax cuts in the $300-500 million range)

Unfortunately, the plan has many economic negatives, including:

• Reliance on gross receipts taxes, which are inherently flawed dinosaurs of twentieth century tax policy that will lead to economically damaging tax pyramiding (the three chamber plans also rely on some form of gross receipts tax)
• Overall reliance on business taxes for SBT replacement (which will hide the true tax burden and cost of government from Michigan taxpayers)
• Singling out insurance companies for a specific tax increase (none of the other plans single out a specific industry)
• Continuation of tax base-narrowing tax incentives which distort economic investment and drive up tax rates for those without the lobbying resources to secure incentives (most of the other proposals are at least circumspect about the continuation of incentives; the Grand Rapids proposal does away with them entirely and converts them into subsidies)
• Requiring businesses to comply with three separate tax systems (business income, gross receipts, and assets) while the other plans require at most compliance with two separate systems

Time will tell how Michigan businesses react to Granholm’s plan. Early reactions suggest that many will be favorable or view it as a starting point. While it is undoubtedly helpful to have the Governor weigh in, lawmakers should be mindful of the economic consequences of many features of her plan.

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