January 24, 2007
Michigan Must Overcome Barriers to Tax Reform
Misconceptions Hamper Effort to Replace the Single Business Tax
For media inquires please email Brian Phillips or call 202.464.5102
WASHINGTON, D.C. - Misconceptions and political considerations could derail Michigan's historic opportunity to correct its failing tax structure, according to a new report by the Tax Foundation. Authors Chris Atkins and Jonathan Williams say certain pitfalls could doom any chance to put Michigan's economy back on track.
"Tax reform is a risky business. Replacing the Single Business Tax--a complicated tax that few truly understand--is even riskier," said Chris Atkins, co-author of the new report. "Michigan lawmakers have a rare opportunity to remake their business tax system. Will the replacement debate be decided by the principles of sound tax policy or by political expediency?"
Released today, the report spells out the principles of sound tax policy and then evaluates the various SBT replacement proposals according to those principles. "As lawmakers move forward with replacing the SBT, they should look to the motto of the medical profession: First, do no harm."
According to Atkins and Williams, lawmakers should avoid plans that conceal taxes on individuals through methods that appear to just tax businesses. Individuals will ultimately pay the cost of the new tax through higher prices, stagnant wages, and lower returns on investment. "Taxes should be visible to taxpayers, who should easily be able to understand who and what is being taxed," they argue.
"Avoiding the perception that individuals are paying the taxes is purely a political concern and not in the best interest of Michigan's economy," says Williams, who grew up in Saginaw, MI. "The fact is: businesses don't pay taxes, people do. Individuals will pay the cost no matter how it is hidden."
Also, lawmakers should resist calls for "tax exporting" -- a process of shifting taxes to out-of-state companies who have customers in Michigan. These tax-thy-neighbor strategies lead to retaliation and invite Congressional regulation, according to the authors.
"Lawmakers have a real chance at lasting tax reform if they are willing to take the tough steps to lead Michigan down the right path," says Atkins. "If not, they'll be right back where they started in just a few years."
EXCERPTS:
"Unfortunately, the current tax debate in Michigan is marred by a focus on replacing the revenue generated by the SBT-approximately $2.1 billion per year-and several political constraints. Recent news of a $500 million budget deficit will also make things difficult for lawmakers. All told, there is a real danger that lawmakers will replace the SBT with a business tax system that is decidedly less than optimal from an economic perspective, which is a luxury they can no longer afford if they also raise taxes to fix the deficit."
"The SBT debate in Michigan is a prime example of the crucial importance of business tax structure. Unfortunately, most state tax debates center around the tax burden-i.e. the total amount of taxes paid (as a percentage of income) by citizens to government. While tax burden is an important tax policy consideration, it should not overshadow the issue of tax structure-i.e. the system of laws, rules and regulations by which the government collects the tax burden."
"Four of the prominent replacement plans have provisions for gross receipts taxes-a long discredited type of tax that states first enacted during the 1920s and '30s and later repealed in most cases. These taxes appear simple but they have the potential to badly distort business investment. No state that has ever enacted a gross receipts tax has kept it in its "pure" form; thus there is no reason to expect that Michigan would have a different experience."
"It is strange indeed that no one in the Michigan debate has proposed a conventional corporate income tax, which the nation's tax administrators have learned the ins and outs of so well. What would such a plan look like? A good option would be to impose a standard corporate income tax at a rate between 6 and 8 percent. According to one Department of Michigan study, that would raise as much money as the SBT. If it were estimated to fall short of revenue, a good supplementary option would be to broaden the consumer sales tax base to services not currently taxed. This plan would give Michigan a business tax structure that is consistent with those in most other states, rather than a new system that is just as odd as the SBT."
See also: Detroit News Op-Ed
For media inquires please email Brian Phillips or call 202.464.5102
