Key aspects of Gov. Gretchen Whitmer’s first budget proposal involving education and road funding have drawn mixed reactions from the business community, but advocates are aligned in opposition of leveling the tax rate among Michigan companies.
Whitmer has proposed reinstating a tax exemption on pensions that was eliminated by former Gov. Rick Snyder, and offsetting the decreased revenue with higher taxes on smaller businesses.
To offset the loss of $259 million in the first year of reinstating the tax exemption on pension income, Whitmer proposes increasing the 4.25 percent tax rate for certain S corporations, LLCs and partnerships to the corporate income tax rate of 6 percent. Whitmer’s proposal is projected to bring in $203 million in revenue in the first year, while exempting the first $50,000 of small business income. Business owners would receive an individual income tax credit to avoid double taxation.
Leading advocates for small and large businesses oppose the 1.75-percent increase.
“We thought that was a very bad approach,” said James Holcomb, executive vice president with the Michigan Chamber of Commerce, claiming that reinstating the pension tax exemption primarily benefits retired government employees. “It’s really just attacking small businesses. They’re taxed appropriately — we think we should leave the system as is.”
Other groups in opposition include the Grand Rapids Area Chamber of Commerce, the National Federation of Independent Businesses and the Small Business Association of Michigan.
Crain’s Detroit Business reported Whitmer said earlier this month if business groups don’t like her tax parity proposal, they could advocate against it while supporting a road-funding plan. The report raised speculation that Whitmer was attempting to build support for her 45-cent gasoline tax increase by conceding the business tax issue. The Michigan Advance followed up with Whitmer downplaying the suggestion.
The day after unveiling her budget plan on March 5, Whitmer met with Grand Rapids Chamber members.
“They let the governor know how concerned they are with that when she visited us,” said Andy Johnston, vice president of government and corporate affairs with the Grand Rapids Chamber. “She encouraged us to go out and advocate on that. We think it runs counter to the vibrant business environment we’re trying to create.”
Johnston called the retirement tax aspects of Whitmer’s plan a “distraction.”
Michigan State University economist Charles Ballard, who is board president for the Michigan League for Public Policy, agrees that eliminating the pension tax is a “bad idea.”
“This (proposal) is cutting taxes for affluent old folks, and I think it’s a mistake,” he said. He added that while he likes Whitmer’s plan to increase the Earned Income Tax Credit to 12 percent of the federal EITC, he would boost it back to 20 percent, where it was eight years ago.
But Ballard also believes businesses should be paying the same tax rates.
“I’ve always been an advocate of if you tax business income, you should tax it in a comprehensive way,” he said. “The form of organization should not make a difference. Why should a corporation pay tax but doctors, lawyers, accountants and various others don’t pay?”
Ballard added that the exemption for businesses that take in less than $50,000 in revenue “is still pretty generous. There’s this notion that corporations are big and bad, while partnerships and S corps are mom and pop. That’s a caricature of what’s actually going on. Anytime you say you’re not going to tax one kind of business but you are going to tax another kind, I want to know why that is.”
Charles Owens, Michigan director for the National Federation of Independent Business, countered that businesses not considered corporations have increased the amount of revenue sent to the state from $400 million to $800 million annually under the 4.25 percent tax rate.
“The confiscatory tax system we had in the past is the reason we didn’t get much revenue,” Owens said. “The idea of adding a new tax on a segment that has doubled its contribution to the treasury is going to be like a wet blanket.”
While the increase would generate nearly $300 million in new revenue by the 2021 fiscal year, Whitmer’s proposal notes that it would be deductible from federal taxes, costing the state $100 million or less.
On Whitmer’s proposal to phase in a 45-cent gasoline tax increase over a year — the lynchpin of her effort to bring in $2.5 billion in new road-funding revenue — business groups’ positions are more nuanced. The 45-cent increase would be on top of Michigan’s existing 26.3-cent gasoline tax, making it the highest in the nation.
Business Leaders for Michigan, a Detroit-based roundtable of statewide business executives, supported the plan as a way to raise revenue from those who use the roads. The group has called for a quick infusion of revenue given that the state’s deteriorating roads are getting progressively worse.
Owens said NFIB members will be surveyed to determine their support for a 45-cent increase, although he criticized other transportation programs that would receive funding under the proposal. Johnston also said the measure will be taken through the Grand Rapids Chamber’s transportation committee and full board to gauge support.
The Michigan Chamber’s Holcomb — while not dismissing the need for new revenue potentially through user fees — called for more transparency in the budget process to pick apart specific programs to see where money could be shifted in the existing budget. It’s a common refrain from Republicans that lawmakers should seek savings elsewhere in the budget, even though they were unable to substantially do so for eight years under former Gov. Rick Snyder.
“Like many complicated issues they face, politics can get hard and messy,” Holcomb said, referring to past opportunities to shift spending priorities. “There’s a lot of competing interests. Sometimes it’s easier to say we can’t do more, we need more revenue. We just don’t believe that.”
While Whitmer’s $60.2 billion overall budget proposal is a 3.6-percent increase over last year, the proposed $10.7 billion in general fund spending is at the same level as 2000.
Ballard, who “on balance” sees “more plusses than minuses” in the proposal, raised some concerns about the gasoline tax being regressive.
“On average, it takes a higher percentage of income from lower- and middle-income folks. We already have a very regressive tax system (in Michigan),” he said. “But given the choice between a road-funding program financed by a gasoline tax and nothing, I’d definitely choose fixing the roads.”
Elsewhere in the budget, the Michigan Chamber and Grand Rapids Chamber are interested in Whitmer’s plans for K-12 education funding, the Michigan Reconnect program to retrain adults in specialized careers and the MI Opportunity initiative for free community college tuition.
“We’re very intrigued” by the community college plan, Holcomb said. “That’s had success in Tennessee. We look forward to working with the governor and legislature on that. We think it’s crucial for economic development in the state.”
Whitmer’s March 5 proposal sets off the budget appropriations process in the legislature. Negotiations could last for several months, while Whitmer has said she wants to follow Snyder’s tradition of having a budget completed before the summer break in June. The next fiscal year budget begins on Oct. 1.
“This is the opening salvo in this discussion of how we’re going to address these issues with this administration and legislature,” Johnston said, referring to talent and infrastructure. “There’s a lot of agreement on what the priorities need to be. The next big step is the discussion about how we tackle them.”