Republican lawmakers are advancing bills that would reduce Michigan’s corporate income tax rate by 20 percent and create tax credits for businesses that lost at least a quarter of their revenue during COVID-19 restrictions.
The legislation is designed to help businesses recover from the pandemic through tax relief instead of new state grant or loan programs. A lower tax burden would free up needed cash flow while avoiding at times burdensome grant or loan application processes, according to bill supporters.
“When you try to do grants and programs that have all of this criteria, you’re imposing a paperwork burden on them that most are not familiar with or not equipped to navigate. Those businesses that do have that kind of expertise, which tend to be larger, usually gobble up that limited amount of money very quickly,” said Charles Owens, director of the Michigan chapter of the National Federation of Independent Businesses (NFIB).
“When you use the tax system to help small businesses, that’s a pretty straightforward process. It’s a rather simple calculation,” he added.
Owens cited Gov. Gretchen Whitmer’s Michigan Economic Jumpstart Plan that was proposed this month and would use billions of dollars in federal funding for a variety of initiatives. For example, the Michigan Mainstreet Initiative would allocate $300 million for small businesses in the form of restart grants, microenterprise grants and SmartZone funding.
Owens said that while grant programs are well-meaning, they also include administrative costs that siphon off some of the funding.
“If we can focus most of our effort on these broad-based programs that are going to have a widespread (effect) and touch many of these businesses, we think that’s a smarter approach,” he said.
Senate Bill 392 — introduced in late April by Sen. Jon Bumstead, R-Newaygo — would reduce Michigan’s corporate income tax rate over two years from 6 percent to 4.9 percent. If approved, the state’s corporate tax rate would decline retroactively to 5.5 percent for 2021 and to 4.9 percent in 2022.
The Senate Finance Committee approved the bill along party lines on June 2, sending it to the full Senate for consideration.
“The pandemic has been an economically challenging time for our local businesses,” Bumstead said during a May hearing on the legislation. “Providing tax relief now is the most direct way that we can help our financially struggling businesses keep their doors open now and in the future.”
Bumstead argues that a lower corporate income tax rate would also make Michigan more competitive with other states. He cited Indiana’s 5.25 percent corporate income tax rate that will decrease to 4.9 percent this summer, and Kentucky’s present 5 percent rate.
“Providing this tax relief is important so our state can be competitive with not just these neighboring states but with all states across the nation,” Bumstead said. “Reducing our business tax to a competitive rate like other states near us is important to incentivize companies to come and stay in Michigan.”
The Grand Rapids Area Chamber of Commerce also supports the bill as a way to keep Michigan competitive with other states.
“This is all about signaling to our business community and businesses about making it a little more business-friendly state, and especially taking that into account as we get ourselves out of COVID mode and back into whatever this new normal looks like,” said Alexa Kramer, director of government affairs for the Grand Rapids Chamber. “This is something we can do to help out businesses so we can get our businesses back, get our communities back, and put Michigan in a really good position to be competitive with other states.”
Michigan ranks 14th nationally among states for overall business tax climate and 20th for corporate income tax rates, according to an annual report by the Washington, D.C.-based Tax Foundation. The only Great Lakes state that ranked higher was Indiana, which was ninth overall for tax climate and 12th for its corporate income tax, according to the Tax Foundation’s report on state business climates. The Tax Foundation’s overall business climate rankings are based on corporate, individual income, sales, property, and unemployment insurance taxes.
Michigan’s corporate income tax rate is currently lower than rates in Wisconsin (7.9 percent), Illinois (9.5 percent), and Pennsylvania (9.99 percent). Ohio, which ranks 39th in overall business tax climate, instead levies a gross receipts tax of 0.26 percent that equates to a ranking of 42nd nationally among corporate income taxes, according to the Tax Foundation.
The bill to reduce the state’s corporate income tax has support from the Michigan Manufacturers Association, Small Business Association of Michigan and the Michigan Chamber of Commerce.
The state Treasury Department and the Michigan League for Public Policy indicated their opposition at last month’s legislative hearing.
“Simply put, now is not the time for broad tax cuts for big businesses, as we need investments in our people, like child care, roads and water systems, education, state safety net services and more,” Michigan League for Public Policy President and CEO Gilda Jacobs said in a statement to MiBiz. “We understand that the pandemic has hit our people, our businesses and our economy hard, but as we look to pull out of this health crisis, we believe that strategic investments in what Michigan workers and their families need to thrive will benefit our businesses and state budget as well.”
Refundable tax credit
Meanwhile, Senate Bill 393 would create a two-year refundable tax credit for businesses that were forced to close during the pandemic for at least six weeks and lost at least 25 percent of sales. Those businesses could claim an income tax credit for 2020 and 2021 up to their total property taxes on the affected business.
The legislation “creates another source of relief” for businesses affected by last year’s shutdowns, said bill sponsor Sen. Kevin Daley, R-Lum.
The state Senate passed Lum’s bill on a 19-16 vote on June 9. The bill, which is also backed by several state and local business groups, now sits before the House Tax Policy Committee.
Lawmakers in 2020 passed property tax relief twice for businesses affected by the pandemic, though Whitmer vetoed both efforts. A similar measure included in a supplemental appropriations bill earlier this year was line-term vetoed.
The Treasury Department took a neutral position on S.B. 393, although it has “a number of concerns,” said Aaron Keel, the Treasury Department’s director of legislative affairs. Those concerns include “incredibly difficult” administration of the tax credits, their retroactive nature, and verifying revenue losses of affected businesses.
Still, the Whitmer administration is open to working with lawmakers on potential tax credits as part of broader budget negotiations for the state’s 2022 fiscal year that starts Oct. 1, Keel said.
He noted that the proposed tax credits could result in $150 million to $400 million in potential lost revenue to the state.
“We do believe that that’s a big price tag that belongs in a larger conversation about how best to provide for and target relief for businesses that are struggling the most with the resources that we have,” Keel said. “We want to be a partner in identifying and assisting the businesses that need the most relief. Once that goal is achieved, we want to make sure that we are able to administer the program and ensure that it’s successful.”
Daley and bill supporters estimate that the bill would result in $75 million in lost revenue in fiscal year 2022. While it’s unclear how many businesses might potentially seek a retroactive tax credit, the Senate Fiscal Agency reported that the bill would reduce state General Fund and School Aid Fund revenue by an “unknown and potentially significant amount that would depend on the number of eligible taxpayers affected.”
Owens said the Treasury Department’s willingness to at least discuss the legislation gives him hope for some form of tax relief next fiscal year for businesses hit hard by the pandemic. Whitmer and top GOP lawmakers also recently agreed to negotiate over a 2022 budget, and Owens expects both sides to get part of what they want.
“I think that there’s a possibility that some of these things will be signed into law,” he said.