Service Tax: $1.3 Billion Tax Hike on Thousands of Services

The Michigan Senate Fiscal Agency has performed an initial review of Jennifer Granholm's executive budget recommendation, which reveals that the proposed service tax would increase sales tax revenues by more than $900 million when fully implemented. The revenue would (eventually) be offset by a reduction in business taxes.

Below is the Senate Fiscal Agency's list of the revenue the governor expects to raise from the service tax, by industry:

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The current sales and use taxes extract more than $7 billion for the state, meaning that this proposal would be an 18 percent increase.

The parenthetical additions in the Senate Fiscal Agency's table are examples of services that would be taxed under each industry category. Unlike a 2007 service tax law passed and quickly repealed by the Legislature — which would have selectively taxed an irrational mix of services targeted on purely political grounds — the current proposal would impose the levy on a broad range of services to consumers.

The Senate Fiscal Agency list is aggregated by the broadest categories as defined by the North American Industrial Classification System. NAICS starts with these and then "drills-down" to include over 9,000 non-manufacturing activities. Producing a detailed list that includes all the thousands of services provided by Michigan businesses will involve complex administrative work by the state Department of Treasury. Even these 9,000 NAICS subcategories implicitly include many "sub-subcategories," so the actual number of services taxed (and revenue raised) could turn out to be much higher.

The tax increase is unnecessary. There are many ways for Michigan to save more than $1.3 billion.