Snyder and ideas for the state tax system

Rick Snyder wants to put a new spin on taxing business

BY DAWSON BELL
FREE PRESS STAFF WRITER


Rick Snyder's big idea for Michigan is audacious, if inexact. He wants Michigan to make a clean break from the old ways and reinvent itself. He sometimes calls it Michigan 3.0 (with 1.0 as the mine-and-timber era, and 2.0 as auto manufacturing).



So it may strike some people as curious that the centerpiece of his reinvention is an idea as old as the lumber barons -- a tax on corporate profits.

Snyder wants to replace the Michigan Business Tax, which he calls "the worst business tax in the country," with a 6% levy on corporate profits. The switch would result in a $1.5-billion tax cut for businesses.

In his policy statement on the subject -- virtually the only detailed policy prescription he has issued -- Snyder said his proposal will send the single, strongest possible signal that "Michigan is serious about turning around its reputation and becoming business-friendly again." He calls it "a simple solution ... that career politicians will not implement."

Snyder may be correct about the signal Michigan would send by scrapping the MBT. Certainly cutting taxes on business by nearly 60% will attract attention.

But if elected in November, Snyder is certain to find that nothing is ever simple in Lansing when it comes to business-tax policy.

A little history:

Michigan had a corporate income tax in the 1960s (the first corporate-profits tax nationwide dates from 1894). It was scrapped, along with a handful of other business taxes, in 1975, and replaced by the Single Business Tax.

The SBT, a modified form of the Value Added Tax unique to Michigan, was reviled and amended for most of its 32-year lifespan, before an L. Brooks Patterson-led petition drive put it down for good. In 2007, facing the loss of all that revenue and a huge budget deficit, Gov. Jennifer Granholm and the Legislature created the MBT, a modified form of gross receipts tax.

It is undeniable that the MBT and the SBT each contained controversial elements: One of the most galling to business owners was the requirement to pay taxes even when an enterprise is losing money.

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But that didn't happen because politicians set out to design a Frankenstein's monster of a tax code. It was because of the inherent complexity of business taxation.


LeAnn Luna, an associate professor of business at the University of Tennessee and expert on state tax policy, said arguments can be made on behalf of both of the principal forms of business taxation, gross receipts and corporate income.

Taxing gross receipts, or business activity as Michigan tried to do with the Single Business Tax, invites endless rounds of politically driven changes as favored industries seek special treatment, Luna said.

But simply taxing income has its drawbacks as well, as business owners try to game the system through reorganization (a corporate income tax, including Snyder's proposal, doesn't apply to businesses organized as sole proprietorships, partnerships or LLCs). Profits distributed as income from such businesses would be reported on the personal income tax forms of individuals -- who pay a maximum of 4.35%.

Taxing income also promotes other strategies about how a business operates in an effort to reduce profits subject to taxation, Luna said, creating economic inefficiency that curtails growth.

Snyder's plan could minimize those kinds of objections by reducing the number of business taxpayers who are required to pay state taxes and, more important, by delivering his $1.5-billion tax cut.

Gary Olson, director of the Senate Fiscal Agency, said it is likely almost every business taxpayer in the state would end up paying less if the state would forgo that much revenue.

"Would that be beneficial to business? Of course it would," Olson said. "But what do you do with the things you're spending the $1.5 billion on today?"

MBT revenue is a major source of funding for all manner of state operations, like prisons and universities, as well as contributing nearly $750 million a year to K-12 schools.

Snyder spokesman Bill Nowling said those questions would be addressed after a thorough and ongoing examination of state finances. Snyder said he believes significant savings can be found by re-examining every operation in state government.

If elected, Snyder's first priority will be the reorganization of government and business tax reform as soon as possible, he said.

"It's an issue of creating jobs. We need to have a competitive tax structure," Nowling said. "We know people are skeptical. That's OK. Rick thinks it's the best thing for Michigan."