Michigan Lawmakers Create New Business Tax That Remains Complex and Costly

On June 28, 2007, the Michigan Legislature voted to create the Michigan Business Tax, a replacement for the state’s Single Business Tax, the main tax on Michigan businesses. On July 12, 2007, Gov. Granholm signed the MBT into law.

The SBT had been ranked by the Tax Foundation of Washington, D.C., as the most economically damaging corporate income tax levied by any state in the nation. A citizen-initiated law that passed the Legislature last summer called upon lawmakers to repeal and replace it with a new tax that is "less burdensome and less costly to employers, more equitable, and more conducive to job creation and investment."

But Mackinac Center Policy Analyst Kenneth M. Braun observes that the politicians who created the MBT failed to accomplish any of these tax-reform goals. Noting that the Michigan Chamber of Commerce had identified 30 flaws in the MBT and opposed passage of it, Braun wrote in an August Mackinac Center Viewpoint, "[A] tax that was supposed to be ‘less burdensome’ for employers appears to be filled with flaws and is so complex that one of the state’s largest and most knowledgeable business advocates is still trying to untangle it."

While Lansing politicians predict that the MBT will put the state on the "path to economic recovery" and that it signals Michigan is "open for business," Braun noted that the MBT really just provides tax cuts for some businesses by hiking taxes on others. He added that there is a legitimate concern that the whole thing may be a net tax increase compared to the old SBT, which already took in $1.9 billion per year. "Rather than an investment-friendly and equitable tax," he observed, "this is a disruptive and complicated government game that pits the interests of some industries against others."

Examining the SBT’s impact on the Michigan economy, the Mackinac Center has concluded that the state would benefit from a far less costly replacement — an actual tax cut — and that the ideal course of action would have been to kill the tax and not replace it at all. "Of the three major state taxes — personal income tax, corporate income tax and sales tax — the states that have consistently eaten Michigan’s lunch are those with only one or two such taxes, not all three,"
David L. Littmann, the Mackinac Center’s senior economist recently noted.

Braun has investigated what has happened in the states that don’t have a corporate income tax and concluded that Michigan would have done well to heed their example. "If our job growth had paced the three states that have no general corporate tax at all," wrote Braun, "then the additional [annual] income and sales taxes would be more than $3.2 billion — making up all of the ‘lost’ SBT revenue and tacking on an extra $1.3 billion."

Nor is it clear that state government needs the revenue collected by its main business tax. Michael D. LaFaive, the Mackinac Center’s director of fiscal policy, examined a recent state budget and found several billion dollars worth of spending that could be reduced. Two examples of his recommendations are contracting state police road patrols out to less costly local sheriffs’ departments and selling assets that the state should not own in the first place.

LaFaive’s state budget study may be read in its entirety at www.mackinac.org/6545, and Littmann’s commentary on the state economy is available at www.mackinac.org/7601. Braun’s description of the MBT may be read at www.mackinac.org/8809, and his look at job growth in the states that do not impose a corporate income tax is available at www.mackinac.org/8112.