March 30, 2006

Single Business Tax is Dragging Down Michigan’s Economy

(The following article originally appeared in the March 25, 2006 edition of the Lansing State Journal.)

Michigan’s economy is a mess, and most lawmakers agree the Single Business Tax is a big reason why. Yet Gov. Jennifer Granholm is filibustering every effort to repeal the notorious tax, and her threatened veto of a new bill would again stall progress on the state’s business tax climate.

The Michigan House of Representatives and Senate have passed a bill that would kill the SBT and give lawmakers a year to come up with replacement taxes. But Granholm insists on immediate replacement revenues.

She and her allies have floated numerous rationales for their SBT addiction: That Michigan doesn’t have high business taxes, that Michigan cannot afford tax reform, and that reform would shift the burden of taxation from businesses to individuals. None of them bear close scrutiny.

On the issue of how bad Michigan’s taxes really are, former Treasury official Robert Kleine has repeatedly defended the SBT, citing Michigan’s ranking in the middle of the pack on taxes, not at the bottom like New Jersey or New York.

This claim to mediocrity is accurate: Michigan’s combined state-local tax burden is 22nd highest, and its business tax climate ranks 26th.

But what makes Michigan fall below half the states when its personal income tax gets rave reviews? Answer: the SBT, which levies the nation’s highest effective tax rate on corporate income (over 15 percent), and extracts the 7th highest per capita corporate tax revenue. Thus, while Michigan overall has an average business tax climate, the SBT is a millstone around the state’s neck.

Next objection – Michigan cannot afford tax reform. Not long ago Granholm vetoed a bill that would have cut the SBT rate for small businesses, saying the state general fund couldn’t afford a $30 million reduction. That’s only a penny a day for each state resident, yet she found it unaffordable!

Of course, everyone knows Michigan already is losing a lot more than $30 million a year from mass layoffs and major bankruptcies. A more business-friendly tax code could help cure the disease instead of using higher public spending to apply Band-Aids.

One final, mistaken argument that members of both parties are using – SBT repeal would “shift the tax burden” from businesses to individuals.

No one should kid themselves about who ultimately pays the price of business taxes like the SBT: the people of Michigan. The first to pay are employees of Michigan businesses – people who make lower wages or perhaps even lose their jobs.

Next are those who have investments in Michigan businesses. Finally, consumers pay more at the cash register for goods made by Michigan companies. In other words, the old saying is true: corporations don’t actually pay taxes – people do.

Hopefully lawmakers can see through the smokescreens, scrap the SBT and come up with a solid replacement tax. Gov. Granholm should put away her veto threat and work constructively for the next 21 months to make that happen.

Chris Atkins is staff attorney and Jonathan Williams is an economist at the Tax Foundation in Washington, D.C.