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.
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
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
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.