Business Tax Cuts Pass in Michigan But Falter Elsewhere

Tom Little, who owns the Kalamazoo branch of the ServiceMaster cleaning business, says a sweeping corporate tax cut the state of Michigan just enacted will be a big help for his company. As a result of the lower tax burden, Little says he might sweeten the benefit package he offers his employees or maybe expand into new lines of service.

“This is a hugely positive move,” says Little, who is 56. He thinks the tax deal, which promises to cut corporate taxes by nearly $1.8 billion a year, will make Michigan more competitive in the race to attract and grow businesses.

By signing the tax package last week, Governor Rick Snyder made good on his campaign promise to eliminate the much-hated “Michigan Business Tax.” That tax was a 22 percent surcharge on top of corporate income and gross receipts taxes that corporations paid. The new law will replace it with a 6 percent corporate income tax. “The overhaul of our tax structure lets job providers nationwide know that Michigan is the place to be,” the governor said when he signed the law on May 25.

Snyder is one of several Republican governors who came to office this year pledging to cut business taxes despite facing huge deficits. In Michigan, Snyder has a budget gap of $1.3 billion to fill, and the business tax cut means the state will have to make up the difference in the budget being crafted now. Snyder and the other governors have argued that cutting business taxes will help the private sector create much-needed jobs and eventually lead to higher revenues for states.

Some business tax cuts enacted in 2011 Arizona : Cut the corporate income tax rate from 6.9 percent to 4.9 percent

Florida : Some 14,000 businesses were removed from the corporate income tax rolls

Indiana : Corporate income tax reduced by 2 percent to 6.5 percent over four years

Kansas : Will allow “expensing,” which essentially expands income tax deductions for new business equipment and software

Michigan : A $1.8 billion cut in business taxes was financed with $1.5 billion in higher income tax revenue

Missouri : Will gradually phase out Missouri’s corporate franchise tax over the next five years.

Source: Stateline reporting

Some Republicans oppose

But not all of the governors have found the same success Snyder has.

In Florida, for example, Republican Governor Rick Scott hit resistance from members of his own party. Scott sought to cut corporate income taxes and property taxes by more than $2 billion over the next seven years. The GOP-controlled legislature was not comfortable doing that in a year when substantial cuts in education were necessary to balance the budget. Lawmakers pared down Scott’s request to a tax cut worth $30 million, accomplished by removing 14,000 businesses from the corporate income tax rolls.

In Iowa, lawmakers from both parties are resisting Republican Governor Terry Branstad’s proposal to cut the state’s corporate income tax rate in half. Branstad wanted to make up the $200 million in lost revenue from the tax cut with higher taxes on casinos. The legislative session was supposed to wrap up two weeks ago, but the governor and lawmakers still can’t agree on a budget.

A different wrinkle in the business tax debate is unfolding in Nevada, where lawmakers are now deciding whether to extend temporary business taxes passed in 2009. Republican Governor Brian Sandoval wanted to let those taxes expire, despite facing a $1.5 billion budget deficit, which is 45 percent of its 2011 budget and among the most severe of any state in the country. Sandoval wanted to balance the budget through spending cuts, but has since had to back off his strict no-tax policy after last week’s Supreme Court decision that invalidated efforts to take hundreds of millions of dollars from localities to balance the state budget.

Businesses in Nevada are divided over whether they want a tax cut at a time when state services are in for huge budget reductions. Billy Vassiliadis, who heads up the Nevada consulting agency that came up with the famous “what happens in Vegas stays in Vegas” catchphrase, wants the state to skip the tax cut for businesses. “As we look at what the impacts of this economy is doing to our public education system, our higher education system, health care, senior citizen support, in good conscience, we would just as soon not get a tax cut,” Vassiliadis, a veteran lobbyist, testified recently on behalf of the Nevada Resort Association.

Benefit of tax cuts debated

Economists are deeply divided over the benefits of business tax cuts, especially if states have to cut services to pay for them.

Corporate taxes make up about 7 percent of all state tax collections, according to the Rockefeller Institute of Government. In general, states rely much more heavily on two other major revenue sources: the personal income tax and the sales tax.

For businesses, state and local corporate taxes account for just 1.2 percent of their overall costs, says Robert Lynch, who chairs the economics department at Washington College in Maryland. “It’s become almost a religion to say that one way to promote economic growth is to cut business taxes,” says Lynch. “But the data isn’t there.” In 2004, Lynch surveyed several studies on the issue and concluded that “any jobs that might be gained by cutting taxes can be more than offset by the jobs lost as a result of cuts in public services.”

In Michigan’s case, the state will make up lost business tax revenues with a higher tax on personal income. Under existing Michigan law, the state income tax rate was supposed to drop to 3.9 percent by 2015. The measure Snyder signed keeps the income tax rate at its current 4.35 percent until January 1, 2013, when it will drop to 4.25 percent.

The Tax Foundation, which ranks states’ business tax climate each year, expects the changes will improve Michigan’s competitiveness. In 2011, Michigan ranked 48th in the foundation’s corporate tax index and 17th overall. If Snyder’s proposals had been in effect in 2010, the group says Michigan would have ranked 22nd in the corporate tax index and 13th overall. “Taxes matter to businesses,” the group said in the report accompanying its latest ranking. “And those places with the most competitive tax systems will reap the benefits of business-friendly tax climates.”

In Michigan, Tom Little of ServiceMaster says it’s a misconception that businesses don’t want to pay taxes. His biggest complaint is that tax structure Michigan had for business kept changing and the latest version was so convoluted that he says “my accountant didn’t even understand it.” With a new simplified system, he says, he won’t have to call his accountant mid-year and ask for an update but can look at the books himself and have a general idea what his tax bill is looking like. “I couldn’t do that before,” Little says. “I’m very optimistic.”