Making Michigan Safe for Investors

Governor Engler, whose first term delivered a total net tax cut to Michigan of at least $600 million, promises to cut taxes more in his second term. He would go far toward keeping that promise, promoting basic fairness, and helping Michigan attract more investment, by eliminating the infamous Michigan intangibles tax.

The intangibles tax is levied on the ownership of "intangible" property such as stocks, bonds, or land contracts. Calculated for each piece of intangible property, the tax is the greater of 3.5 percent of the income produced from the property to 1/10 of 1 percent of the property's value.

If income received from intangible property exceeds $10,000, or if the value of non-income-producing intangible property exceeds $350,000, or if the combined ownership of income-producing and non-income-producing property produces an intangibles tax liability that exceeds the $350 statutory deduction, a married investor must file an intangibles tax return.

Clearly, the tax confiscates capital, which is a prime source of economic growth and job creation. That's abundantly evident when the tax is applied directly to the property. First, the investor pays federal and Michigan income taxes on his earnings. Then on top of that, the investor pays an intangibles tax on that portion of his earnings that he saves for investment purposes. If he simply consumed his earnings and invested nothing, he could escape the intangibles tax.

Michigan residents also pay state and federal income taxes on capital gains, dividends, and interest income earned from their investments. This means that when applied to investment income, the state intangibles tax actually represents for many investors triple taxation of dividend and interest income.

Consider a $10,000 investment in a taxable, high quality corporate bond. This money may be used by the issuing corporation for expansion or for a new product line. If the investment earns a nominal 7 percent, the Michigan investor will receive $700 in nominal interest income during the year. Let's assume that this interest is subject to the intangibles tax.

This investor will pay 7.9 percent of the interest earned from this investment to the State of Michigan--3.5 percent for the intangibles tax and 4.4 percent for the state income tax. After deducting state income and intangibles taxes on his federal return, he also will pay 25.79 percent of the interest he's earned to the federal government.

Ignoring inflation, the nominal, after-tax return on this $10,000 investment is $464.18, or 4.6 percent to the investor. The state and federal governments together will collect $235.82 of the $700 in taxes.

Now consider the effect of inflation. Let's assume inflation is 3 percent for the year. For a one year, $10,000 investment at 7 percent, the Michigan investor receives a paltry, after-tax and inflation-adjusted return of only $164.18. He might easily have done better than 1.64 percent in some off-shore venture or at a friendly poker game.

The Michigan intangibles tax is a disincentive for Michigan citizens to save and invest. It directs investment capital away from investment and toward current consumption or into less worthwhile investments that are not subject to the intangibles tax such as federal debt instruments, bank certificates of deposit, or Michigan municipal bonds.

Eliminating this tax would free up as much as $115 million in capital for investment-the amount the State was expected to collect from the tax in 1994. Facing a budget surplus of at least $300 million in the current fiscal year, the State of Michigan could more easily afford to forego it than hard-working, risk-taking private citizens could afford to pay it.

Economic progress means enhancing opportunities, promoting capital formation, insisting on fairness in taxation, and keeping good people who create jobs here in Michigan. The onerous intangibles tax works against all these things. Governor Engler could strike another blow for progress by seeking an end to it.