E. The SBT and the Capital/Labor Decision of the Firm

The SBT has interesting effects on the capital/labor decision of the firm. A consumption-type Value-Added Tax is neutral between consumption and investment. However, when compared with profits taxes relying on depreciation schedules (which actively discourage investment) the SBT is significantly more favorable to capital investment.

The interaction of the SBT with other business-climate factors – notably wages, Unemployment Insurance and Workers' Compensation costs – does affect the capital/labor decision of the firm. Because these components of total labor cost are significantly higher in Michigan than the U.S. average, (while capital costs are not significantly higher in Michigan than elsewhere), the full inclusion of all payroll costsin the SBT base magnifies the already-existing cost differential. [14]

This effect is overwhelmed for some firms by the Excess Compensation Deduction to the SBT. In certain cases, the Excess Compensation Deduction provides a substantial cost advantage for the hiring of new labor over the purchase of new equipment. [15] However, this deduction is not available for all firms, and overall labor costs affect more business decisions than the narrow provisions of certain deductions to theSBT. Thus, while a consumption-type VAT is technically neutral between capita! and labor, the total cost structure (including the SBT) facing Michigan business favors capital over labor. The most powerful way for Michigan to improve employment prospects (aside from encouraging economic growth) would be to lower total labor costs, not to attempt to penalize capital or subsidize labor in the tax code.