MI Group: Slash Business Taxes, Expand Sales Tax

ABC News

A group of Michigan business executives said Wednesday it's encouraging lawmakers to begin looking at restructuring taxes and improving the state's business climate this year.

Business Leaders for Michigan would like to slice the state's main business tax roughly in half. The lost money would be replaced by extending the state sales tax to a host of services, while dropping the sales tax rate from 6 percent to 5.5 percent.

The group also wants to reduce the size of the state government work force by 5 percent to 10 percent, shrink employee benefits and eliminate a 3 percent pay increase for most state workers set to take effect Oct. 1. State employees got no pay increase two years ago and a 1 percent raise last fall.

Group leaders said the proposed changes are painful but necessary.

"We're in a situation where Michigan is going to have to take some bold steps," said David Joos, CEO of CMS Energy. "We've got to make some changes."

The suggestions, first unveiled last September, are among the ideas being floated by a number of groups as Michigan looks for ways to deal with a deficit that could be at least $1.6 billion when federal recovery money largely disappears. State coffers also will see the drainage of hundreds of millions of dollars in tax breaks.

The outlook for 2010 is a pattern seen often in recent years, as the state has struggled to make spending and falling revenue match up. Democratic Gov. Jennifer Granholm, Democrats who run the House and Republicans who lead the Senate have settled on patchwork, temporary budget fixes mainly because they haven't been able to agree on longer-term solutions.

That has left the 2010-2011 budget mess unresolved entering a key election year when Michigan voters will pick a new governor and every one of the Legislature's 148 seats are up for grabs.

Groups such as Business Leaders for Michigan are starting to insist that solving the state's budget problems shouldn't wait for new officials to take office in 2011.

"It's a political year," said Doug Rothwell, Business Leaders for Michigan president. "It's an election year. We all realize that. But we can't afford to wait."

The group of 75 business and university leaders says the state can't just focus on cutting spending or increasing revenue. It also must remove barriers so school districts and local governments can save money by sharing more services, require public employees to pay a larger share of health care costs and change the way the state's criminal justice system works so prison costs can be brought down.

The group says its plan, which would eliminate the 22 percent surcharge on the state's corporate business tax and then reduce the overall business tax rate, would be revenue-neutral this year. But the state likely would collect more money from the sales tax in subsequent years.

Michigan could become more attractive for corporations if the business tax were reduced.

Other groups have suggested letting voters decide this year if they support a switch to a graduated income tax rather than the flat rate Michigan now has. The tax would be designed to bring in more revenue.

Granholm hasn't signed on yet to any particular plan, but she said last month in her year-end interview that she would support a "grand bargain" to revamp Michigan's tax structure if enough Republicans, Democrats and other groups are on board.

Just how far the governor is willing to go could be evident when she delivers her annual State of the State address Feb. 3 and delivers her proposed 2010-2011 budget to lawmakers a week later.

Michigan: The State Of Joblessness

from the Wall Street Journal

State lawmakers will soon face large budget deficits again, perhaps as much as $100 billion across the U.S. Here's some free budget-balancing advice: Steer clear of the Michigan model. The Wolverine state is once again set to run out of money, and it is once again poised to raise taxes even as jobs and businesses disappear.

In 2007 Governor Jennifer Granholm signed the biggest tax increase in Michigan history, with most of the $1.4 billion coming from business. The personal income tax—which hits nonincorporated small businesses—was raised to 4.2% from 3.95%, and the Michigan business tax levied a surcharge of 22%. The tax money was dedicated to the likes of education, public works, job retraining and corporate subsidies. Ms. Granholm and her union allies called these "investments," and the exercise was widely applauded as a prototype of "progressive" budgeting.

Government is the largest employer in the state, but the number of taxpayers to support these government workers is shrinking.

Some prototype. Every state has seen a big jump in joblessness since 2007, but with a 15.2% unemployment rate Michigan's jobs picture is by far the worst. Some 750,000 private-sector payroll jobs have vanished since the start of the decade. For every family that has moved into Michigan since 2007, two have sold their homes and left.

Meanwhile, the new business taxes didn't balance the budget. Instead, thanks to business closures and relocations, tax receipts are running nearly $1 billion below projections and the deficit has climbed back to $2.8 billion. As the Detroit News put it, Michigan businesses are continually asked "to pay more in taxes to erase a budget deficit that, despite their contributions, never goes away." And this is despite the flood of federal stimulus and auto bailout cash over the last year.

Following her 2007 misadventure, Ms. Granholm promised: "I'm not ever going to raise taxes again." That pledge lasted about 18 months. Now she wants $600 million more. Among the ideas under consideration: an income tax increase with a higher top rate, a sales tax on services, a freeze on the personal income tax exemption (which would be a stealth inflation tax on all Michigan families), a 3% surtax on doctors, and fees on bottled water and cigarettes. To their credit, Republicans who control the Michigan Senate are holding out for a repeal of the 22% business tax surcharge.

As for Ms. Granholm, she and House speaker Andy Dillon continue to bow to public-sector unions. There are now 637,000 public employees in Michigan compared to fewer than 500,000 workers left in manufacturing. Government is the largest employer in the state, but the number of taxpayers to support these government workers is shrinking. The budget deadline is November 1, and Ms. Granholm is holding out for tax increases rather than paring back state government.

The decline in auto sales has hurt Michigan more than other states, but the state's economy would have been better equipped to cope without Ms. Granholm's policy mix of higher taxes in order to spend more money on favored political and corporate interests. If any larger good can come of the experience, it is that Michigan is teaching other states how not to govern.

State Receives Good Marks for Tax Codes

Story from the Detroit Free Press

You may want to cover your ears. I am about to explode two dangerous myths.
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• The first: Michigan is a high business tax state.

• The second: We can cut business taxes without replacing the revenue they generate.

Neither could be further from the truth. And both make it harder to create jobs and promote economic growth in our state.

Those who argue our business taxes are high ignore the facts. When comparing how state tax laws affect economic performance, the nonpartisan Tax Foundation ranks Michigan 20th best in the country, ahead of most of our Midwestern neighbors.

Even with recent changes to Michigan's business tax structure, including implementation of the Michigan Business Tax and the MBT surcharge, which was developed and promoted by the business community, the Tax Foundation's State Business Tax Climate Index for 2009 shows Michigan has a "more favorable" tax system for businesses than in previous years.

The myth that Michigan is a high business tax state is sustained by politics, not facts. It has been perpetuated throughout Gov. Jennifer Granholm's tenure by her critics, who never stop to explain how the business tax structure she inherited from her Republican predecessor and the Republican Legislature he dominated became completely oppressive the moment she took the oath of office.

"When comparing how state tax laws affect economic performance,
the nonpartisan Tax Foundation ranks Michigan 20th best in the
country, ahead of most of our Midwestern neighbors"

Since then, the myth has had an almost constant companion in the notion that we can reduce business tax revenues without sacrificing the things that all of us -- including the business community -- want. Businesses and families will choose to come to Michigan or stay here because we offer good schools, good jobs, access to health care, and safe communities in which to live, work and raise a family.

To find that balance, the governor has done more to reduce state spending than any governor before her. Michigan's general fund expenditures dropped by 7% between 2001 and 2007, the largest decline of any state, according to the National Association of State Budget Officers. And total state expenditures rose the least of any state. State government is also much smaller than it was 30 years ago. Just since 2000, state employment has declined 17%. Michigan ranks 45th in the number of state/local employees per 10,000 citizens, according to Census Bureau data.

Our over-arching goal must be to grow our state's economy and create jobs. To do that, we need a tax structure that allows us to invest in our state, because at the end of the day, businesses and individuals want to be in a state that is thriving, not a state that has failed to invest in its future.