Legislation

After a prolonged break, the 94th Session of the Michigan Legislature is finally off and running. As you know, we have a new Senate Majority leader, Republican Mike Bishop, and a new Speaker, Democrat Andy Dillon. However, they returned to a budget mess worse than anticipated. Both the House and Senate fiscal agencies project that the state is facing a $900 million deficit this Fiscal Year and will be face a $2.8 billion hole next fiscal year.

On February 8, the Governor’s Budget Director, Bob Emerson, presented the executive budget to a joint meeting of the House and Senate Appropriations committees which was predicated on passage of her business tax and service tax plans. Governor Granholm has proposed a mix of budget cuts coupled with a 2 percent excise tax on services and other revenue enhancements. The 2 percent tax on services would apply to virtually every service related expenditure except those that are health or education related. Additionally, the tax would apply to business to business transactions. The Governor estimates the total tax collection on services at $1.5 billion annually. More on the service tax appears below.

In addition to the new excise tax on services, the Governor has proposed a nickel per pack increase in the cigarette tax and increasing the liquor mark-up tax from 65 percent to 75 percent and an increase in liquor licensing fees. More on the other tax changes are discussed below. Additionally, she has proposed the Michigan Business Tax (MBT) which would replace the state’s Single Business Tax with $1.5 billion in estimated revenue. If enacted, the MBT would generate $400 million less than the SBT. The proposed revenue increases coupled with the MBT and the proposed spending reductions would close the estimated budget deficits this Fiscal Year and next. The largest of the Governor’s spending reductions would come from the Department of Corrections and inmate "reforms." These proposed reforms include: revisions to sentencing guidelines to punish non-violent offenders at the local level, rather than the state level; increased utilization of community placement and electronic monitoring; expansion of the Michigan Prisoner Re-Entry Initiative; and, increased funding for parole and probation officers. She has also suggesting that the state release elderly or infirmed non-violent offenders and deport imprisoned foreign nationals to their countries.

Another complicating factor facing the Legislature is the elimination of the SBT at the end of this year. This is a $1.9 Billion revenue issue and no agreement has been reached on how to replace this business tax. While there are at least five different versions "floating around", no one version seems to be catching fire at this time. In fact, people are trying to pick pieces out of each proposal to come up with some modified or hybrid proposals to add to the mix. All proposals have the same factors at different degrees: a sales component, a gross receipts component and a profits component. In addition, proposals range from being revenue "neutral," that is replacing all the $1.9 billion of revenue, to those that would call for some $200 million to $400 million in an overall business tax cut. Treasury has stated that they need at least 13 months lead time to implement any new business tax. With time running short, speculation has risen that the Legislature may opt to give themselves more time by extending the SBT for another year.

Below is a brief overview of each of the proposed tax plans.

Single Business Tax Replacement Plans

The Michigan Business Tax (MBT) introduced by the Governor at the end of last year created a tax base of 0.125% on sales and assets, 1.875% on profit, and a commercial and industrial personal property tax (PPT) exemption from 24 mills with an average PPT cut of 46% as a credit against MBT liability.  The plan also includes an elimination of the existing credits for Michigan based insurance companies and increases the current insurance tax rate of 1.07% of gross receipts to 1.25%. The original plan would replace dollar for dollar the existing Single Business Tax (SBT). Recent changes to the plan which would result in a $480 million reduction from anticipated SBT revenue include a "headquarters" exemption, excluding foreign assets from the tax base and subtracting sales of intangible assets and inter-company sales among affiliates from gross receipts.

The business and economic stimulus (BEST) tax introduced by the Senate Republicans and passed by the Senate Finance Committee (Senate Bills 94, 95, and 96) in February contains a total business tax cut of $290 million and provides a combination of business income tax and a mix of gross receipts tax of $100 for firms between $100,000 and $300,000 and no gross tax liability for firms under $100,000.  The plan provides a PPT exemption for new industrial property and a 10% PPT credit for property acquired within the previous five years.  It also includes a Michigan entrepreneurial exemption for small businesses under $25 million in gross receipts meeting a specified investment and job creation criteria, with the rates established at 0.72% upon the bill introduction which has since been lowered to approximately 0.60%for gross receipts and 1.5% for income. The plan now also removes franchise fees from the base.

The Michigan Chamber of Commerce plan (Senate Bill 151) calls for a 50% PPT credit in addition to a replacement of the current SBT through a combination of a business income tax and a business license tax.  The business income tax rate would be set at 3.05% with a 0.48% general license tax rate and a wholesale/retail rate of 0.24%.  The plan includes a $150 minimum tax and a $2 million cap per return on the gross receipts/license tax.  The plan would also subject insurance companies to a gross premiums tax rate of 1.0735%, retaining the current deductions.  The threshold for the $150 minimum tax would be apportioned on business with gross receipts of $350,000 or less.  Current exemptions and credits for Brownfield, renaissance zones or MEGA would be allowed as a credit against either the license or income taxes.  All taxpayers would be allowed a refundable credit for 50% of PPT paid to local units of government. 

It has been announced that the Greater Detroit Regional Chamber of Commerce is now supporting SB 151. Recall their original plan included an annual business license fee schedule that would base the tax owed on gross sales in the State of Michigan. Companies with gross sales totaling $350,000 or less would have paid no business tax while companies with gross sales totaling between $350,001 and $500,000 would have paid a $1,000 annual license fee and companies within the $500,001 and $100 million sales ranges would have paid license fees ranging from $2,000 to $500,000. Companies with gross sales totaling $100 million or more would have paid a $1 million license fee. The plan was estimated to have generated approximately $1.5 billion for the State of Michigan and afford businesses a net $400 million cut.

An unidentified business group is floating "Plan V." The plan would expand the Governor’s proposed tax on services to 6% while completely eliminating the need for a replacement to the Single Business Tax. According to the Department of Treasury, a 6% tax on services would generate $4.5 billion in revenue. Plan V calls for a "services" deduction or credit against either the businesses Personal Property, General Property or State income tax liability. The plan would also increase the earned income tax credit, lower the income tax rate for low income earners and allow a refundable credit for low income seniors while exempting "necessary services" like hair cuts.

Excise Tax on Services

In addition to the Michigan Business Tax described above, the Governor has also released a number of proposed tax restructurings for Michigan to help close the projected deficit enhance revenues. She has proposed levying a 2 percent excise tax on most services consumed or used by consumers and businesses in Michigan. Examples include entertainment activities, repair and maintenance services, construction, legal and accounting services, landscaping and lawn care and personal care services. In addition, virtually every service provided by a towing company would be taxed: tows, storage, road-side services, and vehicle repairs. The plan exempts health care and educational services as well as those purchased by federal, state and local units of government and school districts. Non-profit organizations would also be exempted for purchases "related to the organization’s main purpose." Scientific research and computer system development would also be exempted as would admissions to zoos, museums or historical sites. This tax would raise approximately $447 million for the remainder of 2007 and $1.47 billion in 2008.

Other Tax Restructuring Proposals

In addition to this tax on services, the Governor has proposed the following tax changes necessary to carry our her entire plan and balance the budget. These tax treatments are as follows:

a reduction in sales tax liability on the purchase of a new vehicle by allowing the value of the trade in vehicle to be counted against the total cost of the vehicle being purchased – thus lowering the sales tax liability on the new vehicle: saving taxpayers approximately $180 million.

Doubling the rate on "other tobacco products" (OTP) from the current rate of 32% to 64% and adding a five cent per pack increase on the cigarette tax: raises approximately $57.6 million combined.

Increasing the 65% markup on liquor (approximately 20% of the retail price) to 75%: raises approximately $29 million for the school aid fund.

Decoupling the state estate tax from the federal estate tax so that the state tax which was fully repealed in 2005 could be reinstated in spite of the current phase out of the federally assessed tax: raises approximately $119 million for 2008.

Placing a tax on food sold through vending machines: raises approximately $27.2 million - $7.2 million in the general fund and $20 million for the school aid fund.

Expanding the current use tax on in-state telecommunication services to include interstate services: raises approximately $22.8 million in 2008 - $15.2 million for the general fund and $7.6 million for the school aid fund.

Subjecting out-of-state single business enterprises to Michigan business taxes if they share a trademark or trade name with a related Michigan business: raises approximately $3.6 million for 2008.

Adding in the percentage of usage by interstate trucks and trailers on Michigan roads: raises approximately $16.9 million for 2008 - $11.3 million in general fund and $5.6 million in the school aid fund.

Subjecting purchases made by Michigan prisoners to the sales tax: raises approximately $700,000 for 2008.

Removing commercial rental property from the General Property Tax Act and creating a new tax to subject commercial rental property to a new specific tax: raises approximately $5 million for school aid fund revenue in 2008.

Elimination of the provision allowing insurance companies to avoid the use tax on items purchased from out-of-state retailers and from the sales tax on property sold at retail: raises approximately $3.7 million - $2.5 million in general fund revenue and $1.2 million for school aid fund revenue in 2008.

Subjecting Michigan oil and gas activities to income tax: raises approximately $3.9 million - $2.9 million for the general fund and $1 million in school aid fund revenue for 2008.

Expanding penalties for taxpayers who fail to file a tax return: raises approximately $5.1 in general fund revenue for 2008.

Legislation to address the Governor’s plan to replace the current SBT with the MBT and to establish her proposed recommendations for restructuring the tax code including the expansion of the tax on services have been introduced. The Senate and House packages are Senate Bills 306 – 328 and House Bills 4367 – 4386 respectively.

For additional information, please contact Bill Zaagman at 517/484-6216.

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