Michigan’s Single Business Tax will be eliminated at the end this year. The government-centric conventional wisdom that prevails in Lansing holds that we must replace the SBT with a new business tax because it’s impossible to cut spending enough to make up the $1.9 billion that this tax rakes in each year.
This is essentially a variant of the "tax cuts must be paid for" mindset, which assumes that since government is already operating as efficiently as humanly possible, and since everything it does is equally vital, any revenue lost to a tax cut in one area must be made up with a tax increase someplace else. Of course neither of those assumptions is true — the Mackinac Center has frequently documented how Michigan state government does many things it shouldn’t, and wastes huge amounts by inefficiently doing the things it should.
But there’s a more fundamental issue at stake: In a place where the unemployment rate is approaching double the national average and population may be starting to fall, "tax cuts must be paid for" is not only out of touch with the real world, but reveals confusion about whether government exists to serve the people, or vice versa. It also contributes to fuzzy thinking about business taxes.
You often hear, "Businesses don’t pay taxes; they pass them on to customers." It’s true that some customers are willing to pay more when prices go up, but others are not. A firm gains nothing from those willing to pay prices that are higher due to business taxes, but loses the earnings from potential customers who are not willing. Plus, if the company sells to a national or international market, potential buyers can and do just go elsewhere.
In the aggregate, the real burden of a business tax doesn’t fall on customers, but on the owners of the company — investors and entrepreneurs. Every business subject to the tax is made less profitable by it. The result is that less is invested. Fewer businesses are created — and fewer jobs.
This is not an argument against all taxes, although every particular tax has some unique economy-dampening characteristics. But what’s unique about state business taxes is the manner in which they target a narrow and highly desirable group — persons willing to invest in the state. And don’t forget, not only do investors already pay individual income tax on all the profits they may earn; the business operation itself already pays many other taxes, such as employment taxes, property taxes and so forth.
The bottom line is that a state business tax is nothing less than a tax on investment in the state. As everyone knows, if you want less of something, you tax it more. If you want more of it, you tax it less.
If you want more investment in Michigan, and more jobs, you lower or eliminate business taxes. If you want less investment and fewer jobs, you declare that if one business tax is eliminated, it must be replaced dollar-for-dollar by another.
Some people ask, "Shouldn’t businesses pay their fair share?" That’s the wrong question. The right one in a state that’s losing jobs is, "Is it smarter to make Michigan more attractive to investors, or less?" Unless you’re confused about who’s the master and who’s the servant in the relationship between government and the people, the answer should be obvious in a state with an economy that’s sick in large part because it’s not seen as a good place to invest and do business.
Some members of Michigan’s political establishment have argued that taxes aren’t a big factor in our economic malaise. The respected Washington-based Tax Foundation recently surveyed all the academic studies based on real real-world economic evidence, and found that taxes do matter a great deal to business.
In a place where incomes and employment are declining, homes are falling in value and our future is threatened as young people are forced to move elsewhere to find jobs, Michigan residents should demand that members of our political establishment abandon their "tax cuts must be paid for" mentality, and instead get busy reforming their own spending habits and priorities.
Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.