Need a Penny? Take Many

Click for audio David Rhoa discusses the impact of an excise tax on businesses

On March 19, 2007, David Rhoa, president of Lake Michigan Mailers, discussed at an Issues & Ideas forum the impact a 2 percent excise tax would have on his business. His family-owned Kalamazoo company would pay four times as much in taxes with a 2 percent excise tax as it pays under the current single business tax. The clip is 20 minutes and 16 seconds long.


(Note: Here is the text of Mr. Rhoa’s comments.)

Good Afternoon!

I appreciate the opportunity to join you this afternoon to review the potential catastrophic impact that Governor Granholm’s proposed 2 percent tax on services would have on businesses in Michigan.

Allow me to provide you with a little background on my company, Lake Michigan Mailers. Lake Michigan Mailers is a family owned and managed company started by my parents in the basement of our St. Joseph, Mich. home in 1977. When we started the company, 100 percent of our customers were found in the Twin Cities of St. Joseph and Benton Harbor. Our services included a menu of admittedly low-tech labor solutions for the assembly and presorting of mail.

Today, Lake Michigan Mailers one of the largest providers of mail assembly, data management, document creation and message distribution services in western Michigan. While our market penetration in western Michigan has grown steadily over the last 30 years, we have worked hard to expand our markets beyond the Michigan boarder. Today, operating from our 24,000-square-foot, state-of-the art facility in Kalamazoo, I am proud to state that we service nearly 800 customers per day throughout Michigan and the United States.

We have made significant investment in our processing technology and infrastructure since our inception. In the last four years alone, LMM has invested more than $3 million in capital equipment. In addition, during this same period, we have invested over one-quarter of a million dollars in personnel training and skill development.

So as not to leave you with the impression that we have sacrificed employee pay and benefits for capital equipment, allow me to tell you that are people are both well paid and well benefited.

Specifically, our annual wage and benefits research shows that the wages paid to our associates, across all job descriptions and experience levels, exceeds the average wages of our competitors of similar size and scope within our nine-state region by as much as 31 percent.

In addition to an aggressive wage package, our associates enjoy benefits that include:

  • Free medical insurance

  • Free life insurance

  • A 401(k) plan that provides for a guaranteed annual company contribution based on the associate’s annual gross pay

  • Paid on-the-job training for select positions

  • Free uniforms for select position

  • Paid vacation and holidays

Okay, enough about history, let’s talk about what Gov. Granholm’s proposed new tax on services will mean to business in Michigan.

I must tell you that I adore the name they have given to this proposal: "The Two-Penny Tax." Let’s not be fooled by the moniker. If it were, in fact, a two-penny tax all of us could pay the tax with a single trip to the local convenience store and take the coins from the Skoal/Bandit dish.

I have read where the Governor’s new tax will cost the average family $67.00 per year. Based on those numbers, that is $1.29 per week. For a person who works 40 hours per week, this additional cost represents three cents in new taxes for every hour worked. If you think such a change in income will not make a difference, I would like to invite you to our facility where you can ask any of my associates if they would mind taking a three cents an hour pay cut. Watch while they burn the building to the ground. No the impact to the individual family will be more than $67.00 per year. It will be more than three cents for every hour worked.

To understand the true impact on Michigan citizens one has to remember something that the Governor has either failed to realize or refuses to acknowledge; namely, business in Michigan are owned by individuals, staffed by individuals and services are purchased by and sold to individuals. If the last several years have taught us nothing, they have taught us this; as goes the wellbeing of job providers in this state, so goes the wellbeing of our citizens.

The Governor has also missed a key economic reality: business is mobile, even in the services sector.

Gone are the days when the purchase of services took place within several miles of the purchaser’s location from a finite list of vendors. Today, savvy customers take full advantage of their Internet purchasing power using mobile data capabilities, inexpensive shipping costs and off-shore or out-of-state vendors to acquire the services that they require at the lowest possible cost.

If an example of the mobility of a service business is required, we need to look no further than the recent decision of Comerica to move its long-standing headquarters from Michigan to Texas. Again, business is mobile, even in the service sector.

The Governor’s proposed 2 percent tax on services is bad for Michigan businesses on both the expense and revenue side of the ledger.

Consider this real life example of the expense side. Lake Michigan Mailers provides free, laundered uniforms to all of its route drivers. Our uniforms, as well as our laundered floor mats and shop rags, are provided by a family-owned and -managed company in Battle Creek. With the advent of this tax, our costs for these services would increase by 2 percent. To avoid that cost I could try to compel my Battle Creek vendor to eat the additional 2 percent or find a vendor that is not subject to the tax, say one in Indiana, where they do not have a sales tax on services.

Gov. Granholm’s proposed new tax is nothing more than a 2 percent discount coupon for all service providers in Indiana and other states.

Recently, Gov. Granholm was asked what the role of state government is with respect to businesses.

Her response was that the state should work to create a climate for growth and facilitate that growth. She has also said that the state needs to support small businesses and partner with small business to keep them competitive.

I think that is a great objective, however, the sad reality is that her 2 percent proposed tax will do nothing more than retard the ability of Michigan’s businesses to compete at the national level.

On the revenue side the impact is just as devastating. Consider for a moment that Lake Michigan Mailers, like many Michigan businesses, sell services both within Michigan and throughout the United States.

When I review the impact of the proposed 2 percent service tax on the revenue side of my business, I know that I will be left with several extremely problematic options to offset this new cost:

  1. I can attempt to raise my price. However, since I know my customers very well, I know that a 2 percent will simply be unacceptable. Such a price increase will make my service unattractive to customers within Michigan and simply eliminate any competitive advantage I might already have with competitors in states without a service tax, like Indiana

  2. I can keep my prices the same and eat the 2 percent cost increase. However, since I cannot afford to take a 2 percent increase in overhead, I will not be able to eat the new cost. I will have to find a way to offset the new cost from my existing operation.

  3. I can keep my price the same, and reduce wages and benefits to account for the new tax cost. However, since I am in the service business, every new job means additional, unearned taxes to the state. Cutting benefits and wages may work in the short term, but over time, it will interfere with my ability to attract and keep the associate talent that I need to run my business. Moreover, in the short term, it will negatively impact my associate’s livelihood.

  4. I can keep my price the same and reduce my continuing investment in technology. However, in my capital-intensive industry, innovation is a requirement not a luxury. Again, a short-term solution but one that cannot succeed over the long term.

  5. I can keep my price the same and reduce my head count. However, I don’t have any "excess" employees any reduction in head count will interfere with my ability to service my customers. From the perspective of my associates, this approach is tragic in both the short and the long term.

  6. I can keep my price the same and transfer operations to a state that does not have a tax on services. I am told that most states have some type of tax on some services. Indiana does not. I don’t know how many of my current associates would be able or willing to travel to Indiana for the same job they have now. I have never asked them. Then again, I have never had a need to ask them.

As you can see, my options, that is to say, our options, while not numerically limited are, to say the least, abhorrent.

Companies throughout Michigan continue to exist on the smallest of margins. As proof I offer, for your consideration, the extensive number of companies who impose a surcharge for fuel costs when the price of fuel exceeds a predetermined point. If margins were larger, Michigan companies could afford to absorb the short term fuel cost increase. If their customers were not price-sensitive, companies could simply pass the increased costs along to their customer in the form of higher prices. As it is, companies are compelled to implement fuel surcharges so as to recover their increased costs but differentiate such costs from the costs of their services.

Companies throughout Michigan have been waiting and waiting for the right time to raise their prices. If this new tax is implemented, the state with be "taking up all the oxygen" in the room. There will be no space in the market for both a company-based price increase and a state imposed new tax on services.

Like most business in Michigan, we buy a lot of services. Consulting services, software services, maintenance services, accounting services, payroll services, bank services, legal services, postage, shipping and freight services, just to name a few. Do you know how much your company purchased last year?

In my case, without sharing company secrets, I can tell you that if Lake Michigan Mailers had to endure a 2 percent increase on the services we purchased last year, our tax liability to the state would increase by $128,000 per year more than under the current SBT structure.

To offset the cost associated with the Governor’s proposed tax, I would have to reduce my full-time employee headcount by more than 8 percent. With such a reduction, I would be unable to service my customers at the current levels.

I guess the other option that I could exercise is to shift from buying services from Michigan-based companies to a state that does not have a service tax. Once again, there is more than just corn in Indiana.

I have been told that the current legislation surrounding this proposed tax contains language that would require those who buy services outside of Michigan to pay the 2 percent service tax. I would argue that these funds will be difficult, if not impossible, for the state to collect. This will undoubtedly lead to collection issues, fines being levied and litigation.

The increase in our tax liability of $128,000.00 that I just mentioned does NOT include any costs associated with calculating, invoicing, collecting, and paying the new tax. How many service companies in this state are not currently collecting any sales tax? The Governor has said she wants to have this tax approved by the end of March of this year with a implementation date on June 2007. How many service companies will be caught unaware? How many will be out of compliance on the first day simply because they do not have the management bandwidth to stay on top of this critical issue.

Governor Granholm thinks that the proposed tax on services is a great idea for Michigan. But her proposal specifically exempts the State of Michigan and the federal government from any tax on service purchase it may make. In addition, it has also been suggested that exemptions might also be available to:

  • Health care

  • Childcare

  • Newspapers

  • Tickets to Sporting Events

Now some of you may be thinking, hey great, I am covered by one of these exemptions. If you are, there but for the grace of Granholm go you.

I would ask you to consider if the Governor is right and the proposed tax is a great idea for Michigan, why did she deem it important to exempt the state and federal governments, health care, childcare, newspapers? Could it be that she recognizes the regressive nature of her proposed tax? Could it be that she is acknowledging that the state could not afford such a cost increase for the services it purchases?

What about postage? I am in the mailing business. I buy a lot of postage on behalf of my customers. Surely I should be able to have postage exempted from the proposed tax. In fact, if postage is not exempted then the $128,000 per year increase in tax liability I mentioned earlier balloons to a staggering $325,000 per year.

In May of this year, the Postal Service expects to implement an increase in postage of about 8 percent. If this proposed new tax is implemented and postage is not exempted, Michigan businesses and individuals will be paying an additional 2 percent on every stamp they purchase; more than any state in the union.

What about shipping? Why shouldn’t anyone who ships UPS or FedEx be exempt from having to pay the new tax on stuff they ship to their customers or buy on eBay?

Please be advised that the Department of Treasury has already gone on record as saying that IF an item in a specific category is not exempted from a specific tax, it is, by definition, taxable.

What about your building rent payments?

What about the brokerage fees paid on your 401(k)?

What about your life insurance premium?

What about your car insurance premium?

What about your Internet service?

What about movie tickets?

What about bowling?

What about guitar lessons?

What about… what about… what about.

There is a buzz in Lansing in certain circles that goes something like this: "It is about time that services paid their fair share."

My answer to this is simple. "I already have."

As a service business in this state, I have not received one dime of state assistance.

No tax abatements for capital improvements, no funds for training, no incentives to create the good paying jobs that I have always provided

I have paid every penny of real and personal property tax on every piece of equipment, software and real estate I have purchased.

I have created good paying jobs with a rich benefits package that have in-turn created significant payroll taxes to the state.

My business has provided jobs that have helped our associates buy homes and cars and guitar lessons and pizza and beer and so on.

Supporters of this tax have said that this "investment" is needed to maintain "our quality of life in Michigan."

Think about that statement for just a moment.

When I take my money and invest it, I create jobs and opportunities for growth. When the state "invests" my money jobs are lost and opportunities for growth evaporate.

Perhaps most troubling is the state laying claim to the title "provider of a quality of life." I cannot recall when it happened but somewhere along the way we have allowed ourselves to be fooled into believing that our quality of life emanates from state government.

The quality of life my family enjoys comes from the grace of God, our hard work and dedication to one another, not from the state. My friends, I would argue that such statements are dangerous not only to our business community but also our societal wellbeing.

The mere specter of this proposed new tax is already hurting Michigan.

  • It negatively impacts market value of service businesses in Michigan

  • It makes Michigan an unattractive location for companies considering locating in Michigan

  • It compels existing Michigan companies to reconsider new investment and expansion.

This proposed tax, combined with an absence of an appropriate replacement to the ridiculous SBT results in two words that no business person wants to hear: ECONOMIC UNCERTAINTY.

In December of last year, Michigan had the second highest unemployment rate in the nation. In January, the state’s unemployment picture improved slightly and the state sill managed to finish dead last, and two positions lower than Mississippi, a state that endured a devastating hurricane and on its best day is…Mississippi.

Michigan’s unemployment is now ranked 43 levels worse than Louisiana.

This proposed tax is a bad idea at the wrong time. It is wrong for Michigan, its business and the communities that they support.

I am proud to say that Lake Michigan Mailers is a Michigan company. This is where we have built our business. This is where we live. Michigan literally is our middle name. But there is a limit to what we can endure.

The governor classified Pfizer’s announcement to close the Ann Arbor facility as a "punch to the gut." I have also heard the term "blow to Michigan" used in reference to Comerica’s decision to move its headquarters. With the beating Michigan’s economy is taking, and the pain that our fellow citizens are being forced to endure, how can we even consider standing on the throat of Michigan’s business community by proposing a new tax on services?

Thank you all for your time and consideration of this important issue.

If we still have time, I would welcome the opportunity to answer any questions. If not, I can stick around for a few moments afterwards.