Michigan: A Taxing Place To Do Business

(Note: The following outline is based on remarks that were delivered by Lawrence W. Reed, president of the Mackinac Center for Public Policy, at a Michigan Chamber of Commerce Future Forum in Acme, Mich., on Sept. 21, 2006.)

Taxes on business make huge difference

The primary job creators in our economy are not consumers and taxpayers, broadly speaking, but are businesses. And among businesses, most of the new jobs are created by small and medium-sized firms, not large ones. In our effort to make the tax structure less burdensome to highest-profile employers, we need to be careful we don’t disadvantage all the others who create most of the jobs.

Stay Engaged

Receive our weekly emails!

Some people are arguing that Michigan’s overall tax burden is not wildly out of line with other states and that therefore we can easily afford to replace the Single Business Tax dollar-for-dollar with some new tax, but that misses the point that the taxes Michigan imposes on businesses are indeed oppressive and far above the average burden that other states impose on businesses there.

No gimmicks. Fix the fundamentals!

The notion that government can pick winners and losers should be a non-starter. It never works. It’s like a bad restaurant offering discounts to a handful of customers. If it doesn’t fix the menu for everybody, it’s headed for the tank. The Michigan Economic Development Corporation’s programs of selective, discriminatory abatements and subsidies to certain firms are a manifest failure and an expensive boondoggle. The agency is more of a PR machine for highly paid, overstaffed bureaucrats than it is any sort of job-creator. Favors for some simply disadvantage others. Whatever we do in the wake of the Legislature’s repeal of the SBT, let’s not leave such gimmicks in place. Significant, broad-based reforms are the way to go. Don’t make Michigan a bad restaurant that simply hands out discounts to a few.

Those who support the MEDC’s approach at the same time they oppose tax cuts for everybody are effectively saying, "Tax cuts work, but only if a political body gets to pass them out to some and not others."

Taxes take many forms

Our discussion of taxes is too often limited to direct taxation only. But Michigan taxes its people and businesses in many other ways. Take an extreme example to understand the point: Suppose Michigan abolished all direct taxes — state and local — on all businesses, but at the same time mandated that every business double employee pay. We’d be myopic if we thought businesses would respond, "Let’s go to Michigan. There are no taxes there!"

Michigan taxes business with its poor labor climate. We should end project labor agreements whereby municipalities collude with unions to rig the bidding on projects and freeze out non-union firms. We should also make Michigan a voluntary union state. No worker should be compelled to join or pay dues to a labor organization as a condition of employment.

Regulation is another way we tax, and in Michigan the price is heavy. Just type "regulation" or "licensure" in the search engine of www.michiganvotes.org and see the plethora of regulatory measures our full-time legislators want to impose. On top of all that, the existing regulatory regime imposed by agencies such as the Department of Natural Resources and the Department of Environmental Quality is a major deterrent to business expansion in our state. This is important because, as our senior environmental advisor and former DEQ director Russ Harding points out, these agencies are key gatekeepers. If you can’t get a permit from them, or if you have to jump through too many costly hoops to locate here, it may not even matter what the "tax climate" is.

State government’s structural deficit isn’t only on the revenue side

Let’s remember that we tax because we spend. If we do less of the latter, we can do less of the former. There is no business-climate friendly way to tax if you’re spending too much or spending unwisely. Too often, we talk and act as if the budget deficit is purely a revenue problem, as if Michigan citizens just aren’t paying enough in taxes. In fact, that view is often presented as if it’s a "moderate" and "responsible" perspective, but it’s not so much moderate and responsible as it is ignorant. Michigan spends a lot of money poorly, and that’s a problem we have to fix if we’re to really make a positive difference on the tax side of the equation.

We have a law on the books, the Prevailing Wage Act of 1965, which requires the needless spending of as much as $150 million by public schools alone, every single year, and tens of millions more by other units of government. It should be repealed without delay.

We have an entitlement mentality throughout the state, and throughout state government too. The universities, for example, by and large have come to expect that their spending should grow by far more than inflation or population every year, and that if they don’t get the money from the Legislature they’ll just get it from students. That has to change. How about a little reform? We get bang for the bucks when it comes to the hard sciences, but when it comes to teacher preparation, our universities are doing a lousy job.

Savings are possible across state government — big ones — in spite of recent spending restraint in some areas. Indeed, the Mackinac Center has identified potential spending reductions that would allow the state to replace the SBT with no new tax at all. It just takes courage.

Fix the Schools

This is another of the fundamentals. We could have the most favorable tax structure in the country, but if our schools don’t educate, people and businesses will go elsewhere. This doesn’t mean we should spend more. Quite the contrary. The Mackinac Center has shown that Michigan businesses and universities spend, conservatively, more than $600 million every year in remedial education because of failures in K-12. The real figure is probably closer to 1 billion dollars.

Schools could save hundreds of millions of dollars (many are doing so already) with more competitive contracting for support services. That includes teacher health insurance, which is dominated today by the Michigan Education Association’s pricey and unrealistic MESSA insurance that is rarely subject to true competitive bidding.

Reforming education has been the subject of many Mackinac Center commentaries and policy papers. There’s much that needs to be done, but we first have to get beyond the self-serving rhetoric from the unions that if we just spend more on our already expensive schools we’ll see better classroom outcomes.

Fix Detroit

Our state’s largest city still has a per capita tax burden far higher than the average for Michigan municipalities. It is burdened by bloated bureaucracy, corruption and cronyism, and old ways of thinking and doing things. Instead of being the engine for Michigan’s growth that it ought to be, it’s too much of a drain on both the economy and state taxes. Indianapolis, a city that works, has one-fourth the bureaucracy per citizen and spends about a third as much. Mackinac Center recommendations for fixing Detroit would go a long way to improving Michigan’s overall tax and business climate.


Lawrence W. Reed is president of 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.