MITA is seeking feedback on Gov. Snyder’s MBT plan.
Michigan “C” corporations would be taxed 6 percent on their business income, with almost no deductions or credits to reduce their tax, under a draft proposal for a new Michigan business tax prepared by Governor Rick Snyder and obtained by Gongwer News Service. Under the proposal, most businesses in Michigan would pay no business tax because most are not “C” corporations, and at least one business official said the proposal could actually mean a tax increase for many Michigan businesses. (A copy of the plan can be downloaded by clicking here.)
The proposal would take effect beginning in 2011 and replace the Michigan Business Tax. The proposal follows in broad measure what Mr. Snyder discussed during the 2010 election campaign and what he called for in his State of the State Address last week. And the draft says the intent of the tax is “improve the economic condition of the this state, foster continued and diverse economic growth in this state, and enable this state to compete fairly and effectively in the world marketplace for economic development opportunities that will provide for and protect the health, safety and welfare of this state, now and in the future.”
While there is no timeframe for when the proposed tax would be introduced in the Legislature, sources said Mr. Snyder intends to have the bill introduced soon. Doing so would be in keeping with his so-called 182-day agenda to make major changes to the state’s structure.
“Essentially, this is the next step in the development of the most effective and comprehensive approach to eliminating the MBT and replacing it with a 6% corporate income tax,” said Snyder press secretary Sara Wurfel. “We’re intending to present a plan mid-February in conjunction with the budget. The draft plan follows the Governor’s overarching principles for reforming the business tax: unlike the MBT, it is simple, fair and efficient.” Forecasts of what such a tax could mean in state revenues had pegged a loss of some $1 billion to $1.5 billion over what is collected in the MBT. There were no further estimates on potential costs based on the current draft available.
The outlines of the proposed tax were issued Wednesday to House Speaker Jase Bolger (R-Marshall) and Senate Majority Leader Randy Richardville (R-Monroe), as well as the chairs of the two chambers’ appropriations and tax committees, in a session led by Lt. Governor Brian Calley and attended by Treasurer Andy Dillon and John Nixon, the governor’s budget chief.
Copies of the draft, obtained Thursday by Gongwer, were also circulated to officials in different business advocacy organizations.
“We’re previewing it because we’re working on a short timeline to make Michigan more competitive and, while this is still a working draft, we wanted to get the discussion and dialogue going,” Ms. Wurfel said.
Under the proposal, only companies defined as “C” corporations under federal tax law, essentially companies that issue stock whether publicly or privately, would have to pay the tax. Partnerships, sole-proprietorships, limited liability corporations and other company types that pay business income directly to the owners and do not issue stock would not pay the business income tax.
That will mean an enormous tax break to most businesses in the state, since most are not “C” corporations but now pay both the MBT and personal income tax. Under this proposal they will now pay only personal income tax, which is now 4.35 percent and scheduled to go down to 4.25 percent later this year.
The draft defines business income as federal taxable income (although it also provides more than a dozen pages of definitions of the types of sales and transactions that are counted towards income). It will affect companies with sales in Michigan of at least $350,000, the same level as companies taxed now under the MBT.
And companies with revenues of less than $20 million, and that do not pay their chief executives more than $180,000, would be eligible for a small business tax credit. The credit would reduce the tax by the amount it exceeds 1.8 percent of the firm’s adjusted business income. That is the same as the small business credit in the MBT. Michigan insurance companies would pay a tax of 1.25 percent of their gross direct premiums written in the state, also unchanged.
Aside from the small business credit, and a deduction companies could claim on a business loss that occurred after December 31 of this year, though, the proposed tax does not provide for other deductions or credits.
That could prove to be a big problem for large corporations, especially large industrial corporations.
Mike Johnston, vice president of government affairs for the Michigan Manufacturers Association, said the tax has to reflect credits now recognized in the MBT for the personal property tax paid if the administration does not intend to eliminate the personal property tax.
The tax should also reflect other credits and deductions now allowed for investments, Mr. Johnston said.
And especially critical is that the tax should accommodate corporations that have invested to locate in Michigan based on tax credits given them. Mr. Johnston said companies, especially advanced battery manufacturers, have invested billions of dollars to come into Michigan based on those credits.
If those credits are not restored then those companies could end up paying more in taxes than they do under the MBT, Mr. Johnston said.
But he also said his organization is supportive of the general direction the proposal takes, and will work with Mr. Snyder’s administration to get a proposal manufacturers can support.
Business officials and Republican legislators had yet to review the draft bill in detail, but said what they have seen and heard so far encouraged them.
“I think it’s very positive. It resembles quite closely what we expected as a corporate C tax,” said Charles Owens, director of the National Federation of Independent Business-Michigan.
“It kind of walks and talks like the typical corporate C tax that you see in other states.”
Mr. Owens said the discontinuation of including partnerships and other businesses entities besides C-corporations in the tax would end double-taxation on several small businesses that under the Michigan Business Tax paid both the MBT and income tax.
“I’m very encouraged by what I’m seeing,” he said. “I want to take some time to drill into it a little more, but it seems very encouraging.”
Taking partnerships and non-C-Corporations out of the business tax would “supercharge an entrepreneurial economy,” said Rob Fowler, president and CEO of the Small Business Association of Michigan.
Mr. Owens said maintaining the credit for small businesses is important.
“We target so much of these tax credits in the past on whether they’re in manufacturing or they’re in this industry or that industry,” he said. “This is an across-the-board indication that small businesses need a period of time to grow.”
Sen. Jack Brandenburg (R-Harrison Twp.), chair of the Senate Finance Committee, said he liked what he heard at the Wednesday presentation to top legislators and legislative staff.
He said the new tax would mean 95,000 fewer businesses would have to file a return, something he called positive.
“I really haven’t gotten into the details of it yet, but from what I can see it’s something we need to do to vault us into the top ten of tax friendly states,” he said.
Rep. Jud Gilbert (R-Algonac), chair of the House Tax Policy Committee, said his initial understanding of the bill is positive.
Article reprinted with permission of Gongwer News Service.
Please feel free to send any feedback or analysis to Keith Ledbetter at keithledbetter@mi-ita.com or call the MITA office at (517)347-8336.
