Wise spending pays for killing biz tax

(The following commentary originally appeared on May 30, 2006 in The Detroit News.)

In the midst of Michigan’s economic doldrums, there is progress to report but much remains to be done.

Nearly 20 years ago, the Mackinac Center for Public Policy issued its first policy study — on the state's onerous, job-killing Single Business Tax. Many times since then, the center called for slashing or abolishing the tax — often evoking dismissive responses about what a "radical" notion that was. Now, just about everybody wants to get rid of it and some have embraced the idea as "moderate." That's progress.

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According to the Michigan Department of Treasury, more than 140,000 Michigan businesses pay the SBT — after they expend much energy and resources just to figure it out.

Eliminating SBT a consensus

For a corporate income tax to raise the same revenue as the SBT, it would have to be one of the very highest in the country. Small businesses — where most new jobs are traditionally created — represent nearly three-quarters of all firms that file and pay the SBT. Few of those small firms are lucky enough to be picked as "winners" and eligible for the selective favors doled out by the Michigan Economic Development Corp.

Combine the SBT with Michigan's taxes on company equipment and you get the worst tax climate for business in the United States. Not to mention our high regulatory costs or a labor climate that elsewhere is viewed as one of the most hostile in the country. Ending the SBT is at least a belated recognition that when you discourage enterprise, you get less of it.

But where the train threatens to jump the track is on the question of what to do if the SBT is junked. The governor wants the lost revenue replaced dollar-for-dollar by a new tax that could leave Michigan's high tax status largely intact. On a per capita basis, U.S. Census Bureau data show Michigan's burden to be 18th, meaning that residents in 32 other states pay less in state and local taxes than Michiganians.

Some have suggested applying a 1.25 percent sales tax on services to raise all $1.9 billion the SBT now brings in, but the numbers don't add up. Total sales taxes "lost" because Michigan doesn't extend its 6 percent levy to services are estimated to be a little over $9 billion. This amount includes about $2.7 billion for what the state identifies as "health care and social assistance," most of which is provided by the nonprofit sector.

No to tax on services

So unless we want to tax the poor and sick, a 1.25 percent sales tax on services won't come close to replacing the SBT.

Florida and Massachusetts briefly experimented with a sales tax on services and then repealed it. It's an administrative, auditing and enforcement nightmare, especially if all services from babysitting to plumbing to overnight package delivery are included. It disproportionately hurts small businesses, which don't have lawyers, accountants and janitors on their payrolls and must contract for their services.

Some are urging Lansing to replace the SBT dollar-for-dollar with another tax and dedicate much of the revenue to increased higher education spending. State support for higher education is down by a little since 2002 but in the previous 20 years it had roughly doubled, exceeding the inflation rate by 24 percent.

By 2000, reports Ohio University economist Richard Vedder, Michigan was spending 2.34 percent of its personal income on state support for higher ed, almost twice that of Illinois and well above that of Ohio. A little reform for all those dollars — such as long overdue internal efficiencies and improvements in the curricula for preparing K-12 teachers, for starters — would do far more good than chasing higher tuitions with more state aid.

Attracting job creators

Until we make Michigan attractive again to job creators, it makes little sense to export our graduates with more expensive degrees to states where the jobs are.

In the competition with other states, Michigan can do much about its outdated labor laws, costly regulations, and negative tax climate. It has complete control over what and how much it chooses to tax, and how it spends the revenue.

Michigan can be smart about it by lowering burdens and spending wisely, or it can rearrange the viewing platforms on the Hindenburg. Take your pick.


Lawrence W. Reed is president of the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.