Business tax climate warms, but are funds for services at risk?

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Capital News Service
LANSING — A new report suggests the repeal of the Michigan Business Tax (MBT) dramatically boosted the Michigan’s tax climate, but many officials and experts say there’s still room for improvement in the state’s tax policy.
The Tax Foundation, a nonpartisan group in Washington, ranked Michigan 12th in the nation in overall business tax climate, a 7-point jump from its rank last year. The state also saw the largest rise in corporate business tax climate, moving from 49th to 7th in one year.
The report based its findings on an evaluation of each state’s tax structure.

Compared to other Midwest states, the foundation said Michigan’s business climate is one of the best — Illinois ranked 29th while Ohio and Wisconsin came in at 39th and 43rd respectively.
Neighboring Indiana ranked one place higher than Michigan at 11th.
The 2011 repeal of the MBT and its subsequent replacement with a corporate income tax contributed largely to the state’s higher scores, said Scott Drenkard, an economist at the foundation and one of the report’s authors.
“It’s the big story this year,” Drenkard said. “Michigan made the most fundamental change, and the results have been highly positive.”
The MBT was signed into law in 2007 and imposed a 4.95 percent business income tax, as well as a gross receipts tax at a .8 percent rate. In 2011 it was replaced with a corporate income tax of 6 percent.
Drenkard said the policies associated with the MBT, which were complicated for many business owners and taxed various levels of the supply chain, were inefficient and detrimental towards smaller businesses.
“I can’t overstate how fundamental the business tax reform was for Michigan this last year,” he said.
Jennifer Kluge, president of the Warren-based Michigan Business and Professional Association, said the MBT was one of the worst policies for small businesses when it was in place, driving up costs and discouraging job creation.
Those negative effects disappeared with the repeal, she said: “There was a direct correlation between that piece of legislation being implemented and the Michigan economy speeding into recession. The counter is true with it leaving.”
However, lowering taxes for businesses doesn’t necessarily mean the state is better off, said Karen Holcomb-Merrill, policy director for the Michigan League for Public Policy.
Holcomb-Merrill said reports lauding the MBT’s repeal should be taken with a grain of salt because the incentives for businesses could take money away from important government services such as education, transportation and public safety.
“Sometimes these reports try to frame it so if you have taxes, that’s a bad thing,” she said. “We think taxes are a way for people to come together and support the kinds of communities that they want.”
Although the report identified many positives associated with Michigan’s situation, some categories indicated the need for improvement. For example, the state ranked 44th in unemployment insurance tax and 31st in property tax.
Drenkard said the legislative actions to improve the state’s tax policy last year were a major step forward, but in the future, he said, cutting personal property taxes and examining the possibilities of taxing services could vault Michigan into the top 10 best states for business tax climate.
Holcomb-Merrill also said a service tax could benefit state programs and provide a compromise between businesses and individuals, making the state appeal to businesses while funding services citizens want.

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