Within hours after voters soundly rejected a sales tax increase to help pay for improving the state’s roads, Democratic lawmakers started suggesting that Michigan’s business community needs to pay its “fair share” for infrastructure.
Their reasoning: After seeing the business tax burden decrease by over a billion dollars since Gov. Rick Snyder took office, perhaps it was time for companies to foot their portion of the bill to improve the state’s failing roads and bridges.
“It’s certainly not helping businesses’ bottom line right now to have terrible roads,” said State Rep. Brandon Dillon, a Grand Rapids-based Democrat.
Currently, Democratic and Republican lawmakers are wrangling with each other — and with factions within their own parties — over how best to pay for infrastructure improvements.
However, the numbers show there’s little debate that the amount of state tax revenue collected from businesses has declined since Snyder took office and eliminated the Michigan Business Tax to create a Corporate Income Tax.
Net business tax collections (collections minus exemptions and credits), based on current consensus estimates, are expected to be $335.9 million this fiscal year and drop to $169.3 million — or nearly half — next year, said Mitch Bean, a Lansing-based consultant and former director of the House Fiscal Agency.
That also doesn’t include the impact of eliminating the Personal Property Tax, which is expected to reduce net state collections by $60 million in the 2016 fiscal year, Bean said, and by more than $300 million by fiscal year 2020.
“We’re certainly taking in less, significantly (less) directly from business entities,” said Robert Schneider, director of state affairs for the nonpartisan Citizens Research Council. “Owners still pay personal income tax in Michigan, but we certainly have much less revenue from direct business taxation than we used to.”
When Snyder took office, net collections for the state were about $2.4 billion.
“The tax cuts over the past 20 years have reduced current state revenues and services by about $3.5 billion, and there is little evidence that it has much impact on economic growth,” Bean said in an email to MiBiz, adding that Michigan has the lowest state-local tax burden, at 9.9 percent, among Great Lakes states. If Michigan were at the average among Great Lakes states, or 11.1 percent, state-local revenues would be about $4.7 billion higher.
“The state tax burden has dropped from 8 percent in 2000 to 6.4 percent today, crippling Michigan’s ability to make the investments needed to promote a stronger economy,” Bean said.
A recent House Fiscal Agency report found that Michigan’s state and local business tax burden was about 3.8 percent of state GDP, below the 4.7 percent U.S. average. Also, state and local taxes paid by businesses accounted for 36.3 percent of all state and local taxes. The U.S. average is 44.9 percent, the report found.
COMPARISONS PROVE DIFFICULT
Lawmakers have continued to debate Michigan’s business taxes for most of this legislative session, particularly after tax credits from previous administrations were found to be creating a $9.4 billion budget liability over the next two decades.
After those findings were revealed in February, Democratic lawmakers called for a comparison of Michigan’s business tax burden to other states. While it’s difficult to account for nuances in state financing structures, the nonpartisan House Fiscal Agency reported that Michigan’s cumulative taxes on businesses are now below the national average.
But as the Legislature now must come up with a funding solution for roads, which is likely going to involve raising more revenue, some economists say it’s much more complicated than simply demanding that businesses pay more or comparing with other states.
“The idea of competing with or comparing to other states is really a false dilemma,” Bean said. “We’d be far better off to eliminate as many exemptions, credits and special programs as we can to bring the (tax) rate down to the absolute lowest we can and broaden the base as much as possible.”
Bean also called it a “fallacy” to consider only the rate at which businesses are taxed.
“Part of it is what you use (tax revenue) for,” he said. “If you don’t have infrastructure, public safety, courts or the right kind of social safety net, then your economy doesn’t work right.”
In other words, it’s how tax revenues are spent, not necessarily the rates at which they’re collected.
That’s a view shared by Charles Ballard, an economist at Michigan State University.
“Talking about businesses and the fair share of the tax burden doesn’t have any meaning,” Ballard said. “What (economists) think you should be interested in is what people pay and how much — and businesses are not people. They are legal organizations that help facilitate certain kinds of activities.”
A ‘PHILOSOPHICAL DEBATE’
When people say businesses should pay more, Ballard believes that they really mean that higher-income individuals should pay more through a graduated tax structure.
If higher taxes on corporations were borne by shareholders (generally more high-income individuals), that could be seen as progressive, Ballard said. But those costs could also be passed onto consumers in the form of higher prices or to workers via lower wages.
Schneider from Citizens Research Council called the current discussions a “philosophical debate” over whether businesses should be paying more as a solution to the transportation-funding dilemma.
Yes, it would generate more revenue, as Democrats have argued, he said. On the other hand, business advocates argue that changing the state’s corporate tax structure was necessary to stimulate economic activity. By demanding more from businesses, it would ultimately hurt consumers through higher prices and lower wages, advocates say.
“The tax burden (on businesses) is still significant,” said Andy Johnston, vice president of government and corporate affairs for the Grand Rapids Area Chamber of Commerce, noting their additional contributions through property and sales taxes and unemployment contributions. “While some folks want to tax job providers more, most (taxes) are passed onto the consumer directly or in the form of higher prices or lower wages. Higher tax burdens don’t really benefit Michigan residents as a whole.”
But economists are quick to note that there is not a direct link between the decrease in business tax burden and economic growth.
“I supported getting rid of the Michigan business tax, though I would have done more to fully replace the revenue somehow,” Ballard said. “In terms of how much difference it has made, I’m not clear that it has galvanized our economy. What we’ve seen is mostly a rebound from the great recession.”
WHERE WILL REVENUE COME FROM?
After Prop 1 failed by a 4-1 margin on May 5, the ball was back in the Legislature’s court to come up with $1.2 billion a year for transportation funding.
As it relates to roads, Johnston said the focus for new revenue should be on user fees and raising funds directly for the transportation system rather than altering the state’s tax structure.
While the Senate is still drafting its proposal, House leadership unveiled a $1 billion plan a week after Prop 1 failed, a proposal that relies heavily on projected general fund revenue growth and spending cuts.
When asked whether businesses should shoulder a higher tax burden, a spokesperson for Gov. Rick Snyder said he will consider all options brought forward.
“Governor (Snyder) has said that this is a time for anyone with an idea for a comprehensive solution to Michigan’s infrastructure needs to bring them to the table,” spokesperson Dave Murray said in an email to MiBiz. “He wants to hear from many groups about their ideas.”
While State Rep. Rob VerHeulen, a Republican from Walker, believes the business tax structure prior to Snyder taking office was unfair to begin with, “it’s always difficult to know what the right balance is.”
“I think they are contributing significantly to infrastructure,” he said. “We need to create an environment where business feels welcome in this state.”
Currently, VerHeulen is “not hearing many complaints” from businesses about the way they’re taxed. Although he notes that state unemployment levels have continued to drop, “you can’t correlate that exactly with the tax environment,” he said.
VerHeulen, who refused to say how he voted on Proposal 1, maintained that the current business tax burden is fair. To VerHeulen, “it looks like a good headline” to say businesses should be paying more.
“It may seem to the ordinary resident that that’s true, but I just think it’s a disingenuous argument,” he said.
However, VerHeulen acknowledges “it’s not realistic” that lawmakers will find $1.2 billion in wasteful spending in the state budget to divert to roads, suggesting there may need to be some form of new revenue.
A MOVING TARGET
Democrats, meanwhile, are pushing for a greater contribution from the business community.
“Individuals have seen their taxes go up for the last four years — whether through losing their pension tax exemption or the Earned Income Tax Credit — while corporate taxes have gone down significantly,” said Rep. Dillon. “In order to have a full reflection of all the costs associated with business and how important a good solid infrastructure is, suggesting that (businesses) shouldn’t have to pay some portion of the cost to make sure roads and bridges are in good shape is disingenuous.”
“For many Democrats,” he added, not seeing any increase on corporate tax rates to help pay for roads “is a non-starter.”
But determining what exactly is a “fair share” is subjective and the source of much debate in Lansing. Dillon said a new formula should account for benefits that both individuals and businesses receive from well-funded infrastructure.
“What it ultimately looks like, how it is balanced and how we determine corporations pay their fair share is a moving target,” Dillon said. “Suffice it to say, zero is not acceptable. It has to be an amount or contribution that is commensurate with the benefits corporations and businesses are receiving. Where people and corporations more fairly share the burden — and it is reflective of how each benefits from good roads — is the sweet spot. I don’t know exactly what that number is.”