State revenue from taxes paid by small businesses more than doubled as Michigan’s economy improved coming out of the Great Recession and as the overall business tax burden in the state declined.
That finding comes from an analysis of Michigan’s business tax structure that East Lansing-based Anderson Economic Group conducted on behalf of business advocates.
The report should refute the notion that small businesses don’t pay their fair share of taxes following reforms made in 2011, said Charles Owens, director of the Michigan office for the National Federation of Independent Businesses.
“To suggest that small businesses are not paying their fair share is absolutely false. In fact, the data shows the opposite: They’re paying more than their fair share,” Owens said. “This is a much fairer approach to taxation to them than we had in the past.”
Under the 2011 reforms, legislators repealed the Michigan Business Tax and implemented a 6-percent corporate income tax, which small businesses do not pay. Small business owners instead now pay the 4.25 percent personal income tax on the income from their businesses, plus an assortment of other state and local taxes that all businesses pay.
The change five years ago, made early in the first term of Gov. Rick Snyder, eliminated the double taxation on the same money that small business owners paid under the prior tax structure with the MBT and the personal income tax.
Even with the change, the amount of taxes paid by small business owners under the personal income tax rose 51 percent to $702 million in the state’s 2014 fiscal year from $464 million in the 2011 fiscal year, according to the Anderson Economic Group analysis.
Owens attributes virtually all of the increase to Michigan’s economic recovery during the period.
“When the economy is doing well and the personal income tax is bringing in more revenue, so will small business taxes,” he said. “Instead of fighting over how much of the slice of the pie everyone’s getting, the pie is bigger, and that benefits everybody.”
Overall, businesses in Michigan paid $14.07 billion in the 2014 fiscal year in various state and local taxes, a decline of $1.12 billion from the $15.20 billion paid in 2011 before reforms went into place.
The difference essentially stems from the $1.37 billion in revenue that was collected in the 2011 fiscal year from a gross receipts tax that went away with the repeal of the Michigan Business Tax.
Owens offers a reminder that the intent of the 2011 reforms was to ease the tax burden on businesses in Michigan as the state’s economy struggled.
Michigan previously ranked 32nd in the nation for its tax burden, with business paying 10.2 percent of profits in taxes. The state improved to 20th by the 2014 fiscal year as the tax burden declined to 8.4 percent, according to the Anderson Economic Group analysis.
The question of business taxation has arisen in Lansing as the state faces budget problems that stem largely from corporations cashing in tax credits granted during the administration of former Gov. Jennifer Granholm. Those tax credits are now “coming back to haunt us,” Owens said.
“The previous administration was running the charge card and left town, and now the bill is due and the rest of us that are still here have to pay,” he said.
The tax credits now getting cashed in have cut into state receipts from the corporate income tax, which generated $881 million in the 2014 fiscal year, a 161-percent increase from $720 million in the 2011 fiscal year.
Specific taxes and tax rates paid by businesses and individuals, no matter where they are set, will always remain subject to political and public debate, said Alex Rosaen, director of public policy and economic analysis at the Anderson Economic Group and a co-author of the report.
Designed to improve the state’s business climate and spur investments, the 2011 reforms in the tax structure did move Michigan from worse than most states to better than the national average for the business tax burden at a time the state was just beginning to recover from the deep economic downturn, Rosaen said.
“When you look at public policy, you have to look at what are the actual tradeoffs here, and then decide what you think about those,” he said. “That’s really important information for people to understand, whatever side of these debates they’re on.”
The Anderson Economic Group analysis was commissioned by the Michigan chapter of the NFIB, the Small Business Association of Michigan, Business Leaders for Michigan, the Michigan Chamber of Commerce, the Michigan Retailers Association, and the Michigan Realtors Association.