Tax Parity? Or Just A Big Tax Hike On Many Michigan Small Businesses?

Democratic Gov. Gretchen Whitmer has proposed raising the income tax rate on thousands of Michigan business owners. The increase mostly affects owners of smaller firms, raising their income tax rate from 4.25 percent to 6 percent.

The proposal did not sit well with the National Federation of Independent Business, which is the largest association of small business owners in the country.

“We understand that the budget is a process and, while we are disappointed with the governor’s initial proposal, we look forward to working toward a practical budget that moves our state forward,” Charlie Owens, the NFIB state director in Michigan, said in a news release.

Under Michigan’s current business tax system, the earnings of C corporations – which is the most common business form for large corporations – are taxed at 6 percent. By contrast, owners of flow-through entities – which include sole proprietorships, partnerships, S corporations and some businesses – pay state taxes on company earnings at the same rate as individuals, which is currently 4.25 percent.

The governor says that her proposal would create parity between the different forms of business.

Owens said in a phone interview that if Whitmer wants parity, she should propose lowering the rate for C corporations rather than raising the rate for other forms of corporations. Her proposal, he said, would amount to a $300-million tax increase that mostly harms small businesses. He said that such a large increase will lead to slower economic growth.

The proposal would exempt the first $50,000 of income earned by a flow-through entity from state income tax, which is said to offset part of the tax hike. Treasury Department officials estimate there are 250,000 Michigan firms that are not C corporations and due to the deduction, 100,000 of them would see no increase.

Additionally, Owens said that taxpayers are still on the hook for $600 million annually in corporate subsidies over 30 years, most of which were granted by former Democratic Gov. Jennifer Granholm. These subsidies, he said, overwhelmingly help larger corporations at the expense of smaller ones.

Ron Leix, a spokesperson for the Michigan Department of Treasury, said that classifying this as a small-business tax is a misconception.

“We protect many of our small businesses from this increase with a $50,000 deduction,” Leix said. “So those with business income below $50,000 will pay no additional pass-through tax.”

“The largest pass-through businesses will likely see their combined federal and state taxes decrease,” he continued. “The smallest businesses with income less than $50,000 will not pay any additional tax. A typical pass-through business with $80,000 in profit will see their state and federal taxes increase by $309.”

For this to pass, Whitmer will need support from the Michigan House and Senate. Both chambers have a Republican majority.