May 23, 2005
SBT Elimination Would Aid Michigan's Ailing Business Climate
for immediate release
Media contact: Bill Ahern (202) 464-5101
Washington, D.C.—One proposal in the Michigan tax reform debate would greatly enhance the state’s business tax climate according to a new analysis by the Tax Foundation.
“Michigan’s Single Business Tax (SBT) is the most damaging state corporate tax in the United States, and its repeal would help the state keep current jobs,” said Chris Atkins, lead author of the new analysis.
If the SBT had been eliminated before the last calculation of the Tax Foundation’s State Business Tax Climate Index, Michigan would have moved from the 36th best to 13th. SBT elimination would give Michigan the best business tax climate of any state in the Great Lakes region.
Governor Granholm has a plan to address some of the issues with the SBT, but her plan will not go far enough, according to Atkins. Even if the SBT rate were lowered significantly, the SBT would still require Michigan corporations to make significant tax payments during periods of recession.
The SBT is the only state-level value-added tax in the United States. The base of the tax is the difference between a business’ sales and the cost of its materials. The SBT levies a rate of 1.9 percent of the entire SBT base in excess of $45,000. Since the SBT extracts tax payments even from unprofitable firms, it provides a more stable flow of revenues to Michigan, even during a recession. This stability comes at a great cost, however, as unprofitable firms are unlikely to have the cash on hand to make significant tax payments and may respond by cutting jobs.
In 2001, the Michigan Department of Revenue estimated what rate Michigan would have to levy on corporate income to generate the same revenue as the SBT. The 20-year average of the estimates is equivalent to a corporate income tax rate of 14.83 percent. The effective rate was as high as 58.17 percent in 1992 (in the middle of a recession). The state with the highest corporate income levy, Iowa, imposes a top rate of 12 percent on income in excess of $250,000. Thus, the SBT gives Michigan the highest effective tax rate on corporate income of any state in the nation—giving them the lowest rated corporate tax system in the Index.
The State Business Tax Climate Index rewards states that are neutral and create a “level playing field” for economic activity, have moderate tax rates, and do not have burdensome compliance rules.
The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization based in Washington, D.C.
(Click here to read the full analysis.)
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Media contact: Bill Ahern (202) 464-5101
