Michigan Mediocre on New Business Tax Climate Index (and Awful on MBT)

The Tax Foundation released its 2011 State Business Tax Climate Index today, and not surprisingly Michigan comes off looking rather mediocre. Our overall ranking is 17th, which may strike some as not too bad given all the dislike for the Michigan Business Tax expressed by both business owners and the politicians who represent them.

The not-horrible ranking is due to the fact that the index consists of five components, the most heavily weighted of which is the personal income tax. Due to our constitutional prohibition on having a graduated income tax, and a comparatively moderate flat rate of 4.35 percent, Michigan comes in 12th on this component. Four states achieve a perfect score by having no personal income tax at all: Alaska, Florida, South Dakota and Washington.

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No one will be surprised that it's the business tax score that knocks Michigan for a loop: With the MBT's bizarre and complex combination of a profits tax and modified gross receipts tax, we're 48th. Three states have no corporate income tax: Nevada, South Dakota and Wyoming.

The index also dings a state if its business tax structure includes an excessive number of credits for specific factors, which is seen as an attempt by politicians to micro-manage a state's business mix. The following passage from the report that accompanies this year's index is worth repeating:

Many states provide tax credits to lower the effective tax rates for certain industries and/or investments, often for large firms from out of state who are considering a move. Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a bad business tax climate. Tax credits complicate the tax system, narrow the tax base, drive up tax rates for companies that do not qualify and distort the free market.

A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state's competitiveness as compared to other states.

Rounding out the major index components, and Michigan's score on each, are Sales Tax (12), Property Tax (32) and Unemployment Insurance Tax (45).

That last doesn't get much attention by the public or the political class, but it is a huge job-killer for Michigan. Our ranking is rotten because job providers here pay an increasingly heavy unemployment tax rate for every person on their payroll. This is partially due to our "lost decade" of high unemployment, but politicians are also culpable: In 2002 the Legislature increased the maximum unemployment benefit by 20 percent, greatly adding to the tax burden imposed on employers ever since. Many in the House (names here) and Senate (names here) who voted for this "gift" that keeps taking are still in office today, or are currently running for different offices.