During his recent "State of the County" speech, Oakland County Executive L. Brooks Patterson called for a petition drive and ballot initiative to eliminate the economically destructive state Single Business Tax. Patterson called the SBT a "damnable tax," and correctly cited it as an important factor in Michigan’s ailing economy.
Mackinac Center President Lawrence Reed observes: "In this one clarion call, Brooks Patterson has once again exhibited a degree of wisdom and leadership that the Lansing establishment can’t seem to muster. While Michigan burns, Lansing fiddles. If Brooks succeeds in his drive to end the SBT — an objective long advocated by the Mackinac Center — he will rejuvenate the state’s job and business climate."
Patterson is right to be concerned. Michigan has been in a "one-state recession" for several years, while every other state — except those slammed by hurricanes — has experienced impressive growth. The causes are complex, but largely come down to the fact that Michigan is burdened with destructive business taxes, excessive regulations and bad labor laws that make ours one of the least competitive business climates in the United States.
Exhibit number one is the SBT. Only a handful of states levy all three of the following: A sales tax, a personal income tax and a business tax. These states are economic growth laggards. Not only does Michigan belong to this losers club, but the SBT is almost the worst business tax in the nation. It is obscenely complex, the rate is very high and it is filled with perverse incentives (for example, employers who provide health insurance pay more tax).
When the SBT was adopted in the 1970s, one of the "virtues" touted was that it would provide steady revenue regardless of the economy’s ups and downs. In other words, good for politicians, but bad for job providers.
Ever since, attempts to ditch the SBT have crashed and burned, brought down by the state government’s insatiable appetite for spending. Gov. John Engler signed bills that supposedly would have phased the SBT out over 23 years, but everyone knew it would never happen. In 2002, at the first hint of economic slowdown, Engler and the Republican Legislature passed a bill cutting short the phase-out. As a face-saving measure they slipped into that legislation an interesting provision: Unless a vote is taken to extend it, the SBT will sunset on Jan. 1, 2010. It was thought that all sides would come together before then to find a "replacement" tax.
A year ago, recognizing the SBT’s destructiveness, and perhaps feeling the pressure of that 2010 deadline, Gov. Jennifer Granholm took a crack at rejiggering the tax. Not eliminating it, mind you, but just shifting the burden so that some businesses would pay less, while others would pay more.
The winners were in manufacturing — a sector that is shedding jobs not just here, but worldwide, as productivity growth has accelerated. The losers were in sectors where growth is more likely. This proposal died as one potential victim after another testified about how much more they would pay: Spartan Stores, Michigan International Speedway, the financial services industry, small businesses, etc.
Feeling the need to "do something," legislative Republicans and the governor compromised to provide a miniscule and temporary tax cut for the declining manufacturing sector. They called this a "$600 million tax cut," but it’s probably closer to $130 million per year (around three-tenths of 1 percent of total state spending) — and even that depends on rather Pollyannaish job expectations for employers, such as Delphi, that are likely to continue shedding personnel.
The SBT rakes in $1.85 billion per year. To put that in context, the state will spend $42 billion this year. Around $28 billion of that is raised right here, and the rest is federal money. About $13 billion is school spending, and another $6 billion is in "restricted" funds, including transportation. This leaves only $9 billion in "general fund" revenue, over which the Legislature has more discretion in spending. This is the pot SBT revenue goes into. So while it makes up only 4.4 percent of state spending, the SBT provides 20 percent of the money legislators have the most control over. This explains the apocalyptic pronouncements whenever anyone suggests eliminating the SBT and replacing it with — nothing.
Which brings us back to L. Brooks Patterson’s proposal. Mr. Patterson has not specified a replacement revenue source once the SBT is gone. There should not, and need not, be one: The Mackinac Center has identified almost $2 billion is potential savings, more than enough to fill the gap.
Essentially, Patterson proposes a burn-the-fleet, "Proposal A moment," in which the political establishment throws out the current system with no existing plan to replace it, as was done with school property taxes in 1993. This is commendable, because there is a consensus that the SBT is a bad tax that’s crippling our economy and the state cannot afford further delay.
When Gov. Granholm ran for her current office, she promised "outside-the-box" thinking. Public policy "boxes" tend to get smaller over time, until they suffocate those trapped within. Patterson proposes not just thinking outside the box, but blowing it up. With a state economy gasping for breath, there’s a lot be said for big-bang solutions.
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.