Sorting out the confusion on the proposed tax cut for Michigan businesses

Written by: Michelle Kaminski

Primary Source: UnionWork

Do you finmonopolyd the tax proposal on the Michigan primary election ballot as confusing as I do? Even after reading the ballot language, I find it hard to understand the whole proposal. It’s clear that it would cut taxes for businesses (again.) But it also rearranges how tax revenues is distributed to communities, and it can be hard to figure out who wins and who loses.

The League of Women Votes has a good, non-partisan guide describing it. Here are the basics of the proposal:

  • The proposal would cut business taxes.
  • The proposal would reconfigure the way the state shares tax revenue with local communities. This does NOT mean there will be more revenue going to local use. It means that the money is reallocated from one kind of tax to another kind of tax.
  • It creates a new agency in the state government, the Local Community Stabilization Authority, to administer this.

Here are my thoughts on the proposal:

1. Business taxes in Michigan, as a percentage of state revenue, are the third lowest[1] in the country. This will make them even lower. Estimates are that this proposal will lower business taxes by about $480 to $590 million per year when fully phased in. It follows the $1.7 billion tax cut businesses received in 2012. My view: No matter how low business taxes are, businesses will still complain about paying them. But since they can’t just come out and say that they aren’t willing to pay their fair share of participating in society, they have to come up with some other reason that doesn’t sound as greedy.  So they claim that tax cuts create jobs. This is simply not true. It’s just one of those things that politicians say over and over again until people believe it. See the data here.showing that tax cuts for the wealthy don’t create jobs.

2. Don’t fall for the ads that focus on small businesses. They are used to play on your sympathy. The bigger the company, the bigger the tax cut. GM will benefit a lot more than the garage down the street or your neighborhood dry clearer.

3. What happens if this measure passes? Well, let’s think about the possible options. If taxes are cut for some taxpayers (in this case, businesses), there are at least three things that can happen:

Option A: Taxes can be raised on other people (in this case, individuals like you and me) to make up for the lost revenue. There is no provision in this proposal to raise taxes, but there will be a need to do something because tax revenue will go down by $500 or $600 million.

What do governments do when revenue goes down?http://www.dreamstime.com/-image25020008

Option B:  They cut services, usually by laying off public sector workers OR

Option C: They borrow money, increasing their debt, and continue services at the current level.

Which option do you prefer?  I prefer collecting sufficient tax revenue in the first place.

4. You’ll see some advertising claiming that this will stabilize funding for local communities. But this provision within the proposal has a certain amount of smoke and mirrors in it. The Personal Property Tax for businesses will be eliminated. That money used to go to local communities.  To make up for it, a portion of a different tax — the State Use Tax — will go local communities.  The money from the State Use Tax that goes to local communities will be taken out of the General Fund. The General Fund will have less money in it.

5. State Legislators promise they won’t shortchange local communities by messing with their funding in the future.  That is how this is supposed to help local communities — by stabilizing their funding source. But in the past decade or so, the legislature has failed to deliver on promised revenues to a number of local communities. I have my doubts that this agreement will hold up in the future.

So here’s my take:

Winners: Businesses – the bigger the business, the bigger the benefit

1332-energy-storage-q1-2012-winners-and-losers

Unclear: Local governments – they could be winners if the State Legislature doesn’t given in to the temptation to keep the money for themselves

Losers: Individual tax payers – we’re likely to end up with fewer services or higher taxes, or both!

This proposal is on the primary election ballot for August 5, 2014.

[1] Total state and local business taxes: State-by-state estimates for fiscal year 2012. See page 14, Table 6.  This study was prepared by the Quantitative Economics and Statistics (QUEST) practice of Ernst & Young LLP in conjunction with the Council On State Taxation (COST).