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    In 2007, Michigan lawmakers faced at that time, budgetary woes unparalleled to previous years. With a projected budget deficit near 1.8 billion dollars and a looming October 1st deadline, the legislature was pressed to find a way to balance the budget. The solution was to extend the 6% sales tax on consumer goods to include services as well. However, this rushed and exemption-filled tax was later repealed and replaced by a surcharge on the Michigan Business Tax. Two years later, the surcharge is despised by many groups in Lansing, and many are looking to repeal it. Though both Democrats and Republicans are looking repeal the surcharge, their differences in belief of what role government plays has derailed them from any action thus far.
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    But how and why did this surcharge gain enough support in the first place? As touched upon earlier, the Michigan Legislature passed a service sales tax in order to cover a 1.8 billion dollar shortfall. This tax to most was viewed upon as extremely detrimental to Michigan's economy, especially to businesses located in the state. An effective example of how is given by State Representative Brian Calley:
    "take GM and Nissan, Nissan has little or no presence in Michigan, they just sell their products here. Therefore, they would have no service taxes. Meanwhile, GM, Ford, they are all located here and huge consumers of services and would have had to pay millions in taxes."


    Besides hurting domestic business, it also was contained many exemptions, until what remained was a bizarre list of services. Representative Paul Scott summed up the situation by stating those that were left taxed were the industries that didn't have a lobbyist in Lansing, citing the skiing industry as an example. Only two months after its implementation, the Legislature was scrambling to find something to replace it.
    What replaced it was the surcharge we face today. But how did it pass in the first place, specifically how did it gain the support of Republicans, the party known for being the voice of business? Representative Calley, who voted for the surcharge, defended his action by saying that the services tax was more harmful to Michigan's economy than the surcharge, so that it was still beneficial to have the surcharge if it meant eliminating the services tax. The Michigan Business Tax itself does an efficient job of spreading the burden in the eyes of many lawmakers and interest groups. In fact, some business groups support the original MBT.

    The surcharge raised rates on top of this base, keeping the distribution of the burden the same as the MBT, something that the services tax failed to do. The surcharge settled at 21.99% on top of the base rate set in the Michigan business tax surcharge. Republicans believed that it would be temporary measure, something that could be repealed easily and well before its sunset date of 2017. The reason for this assumption is simple. If Democrats really intended for this rate to be long term, they could have built it into the tax code. As a surcharge however, by its construction, is built to be a huge target for repeal.


    Now in the year 2009, Michigan's economy and fiscal health has only deteriorated further. With a housing market crash that was unforeseen in 2007, along with the bankruptcy of two of the Big Three automakers, the state faces depression level unemployment levels and an ever shrinking tax base. While no one party or action can be blamed for this collapse, many are viewing repeal of the surcharge as one step to help rebuild Michigan's economy. Representative Calley described it as "top priority" for Republicans, and there are rumors that House Speaker Andy Dillon, a Democrat, is also investigating ways to remove the surcharge soon.


    The underlying struggle over repealing the surcharge is not a new one. Republicans feel that it should be removed and not replaced with a new tax, that businesses and tax payers can better provide for themselves than the government can. Democrats counter that any repeal of the surcharge would have to be accompanied by a new source of revenue or tax because the state government cannot efficiently and effectively provide services that many Michigan residents need without this revenue. Furthermore, many programs cannot endure anymore cuts or structural changes. Democrats believe in supporting the many beleaguered and unemployed citizens, Republicans argue that if more is done to help employers and businesses, than there would be less unemployed and impoverished people to help. The basic question is what role should government play?


    The two major parties are not the only players in this debate. Business groups such as the Michigan Chamber of Commerce, the Michigan Manufacturers Association, think tanks such as the Mackinaw Center for Public Policy and Center for Michigan, along with other various business groups have been pushing for a phase out or outright repeal. Without the surcharge, they believe the business climate would improve, attracting more businesses to move here and allow start-ups to survive. This, along with increased employment and thus income, will lead to higher tax collections, even at a lower tax rate, since there would a be a bigger pool to draw from. Recent evidence may support this claim, as even with higher taxes, total revenues collected have fallen by $100 million dollars over just one year, representing the shrinking business base.


    Groups representing various populations offer suggestions on who to tax and how much. The Center for Michigan, a non-profit economic think tank, feels that raising income taxes more would have been more efficient, and that a mix of taxing individuals and businesses is optimal, rather than a surcharge that placed the burden squarely on businesses. They also share a more Republican view that Michigan must first solve its structural budget problems, i.e. cutting the budget to match revenues rather than raising taxes to maintain programs, is necessary to move on. The Detroit Chamber of Commerce suggests the idea of looking for savings, some of which can be found in reforming the prison system by engaging in many measures that will increase the amount of parolees, rather than incarcerating them and then being obligated to house and feed them. They project that these measures could save the state $800 Million. The Michigan League for Human Services even supports a services tax, the same type of tax the surcharge replaced. Their argument is that many other states tax more services than Michigan, and that with more consumption shifting towards services, doing nothing could hurt schools, as their funding is based off the current goods-based sales tax.
    Of course, there are many interest groups that could stand in opposition. They would object not so much to the idea of repealing the surcharge, but rather to whatever may replace it. For example, many groups would oppose the expansion of the aforementioned services tax. Some areas include taxing utilities, sporting events, child care, and vended food. All of these industries have interest groups, and equally important, lobbyists. Some of these are industry groups, such as vended food, or corporate groups, such as AT&T, who both would be against tax increases to their services. This, and because it is easier to kill reforms or a bill than to pass one, illustrate in this example why the surcharge is still in place; for every solution, someone stands to lose and will fight against that action.


    So are there any solutions on the horizon? As briefly mentioned earlier, Speaker Dillon has been rumored to be working on a plan with the former Detroit Renaissance and other business groups. Though not released, it is suspected that this plan will call for the repeal of the surcharge, being replaced instead by a lower sales tax applied to a broader range of goods and services. The downside to Republicans is that it may not lower taxes and that services taxes can be very complicated, especially if exemptions are included. Besides Sen. Jansen's SB 1, future legislation is in the works from Rep. Calley to rework the Michigan Business Tax to be friendlier to small businesses, a sector where there has been a net gain in jobs, instead of trying to chase big business, a sector from which there has been a net 1 million jobs lost. This would be done by raising the gross receipts tax filing threshold from $350,000 to $1,000,000. However, this would also lower revenues by over a billion dollars and would require reforms and possibly cuts, a move Democrats are not in favor of. In addition to this fundamental difference in opinion of the role of government, current economic uncertainty makes large changes to tax codes more risky.


    Raising the income tax has also been discussed, especially the notion of making it more graduated. Currently, Michigan has a rate of 4.35%, and the Constitution dictates that the tax rate be flat. Because of this, implementation of this policy is unlikely. The most glaring reason is that it would require changing the state Constitution to allow it. The idea of a possible tax increase could incite constituents, making it a hard sell to many lawmakers, the ones voting to amend the Constitution. Regardless to the large challenges that this action faces, raising the highest rate to %6.9 could raise $600 million in additional taxes. (Of course this depends on what the income the tiers are set at.)


    Other solutions include previously mentioned reforms. Representative Calley suggests changing bridge card eligibility to help eliminate its use (and abuse) by many college students across the state. Another area of fraud can be found in reimbursements to child care providers from the Department of Human Services. These reimbursements help pay for childcare for low income households who need this service to work and provide for their families. Representative Scott is a strong supporter of a workplace smoking ban, better recognized as a smoking ban in almost all public places, saying this measure could lower healthcare costs by millions, especially those paid for through Medicaid, ultimately leading to government savings. Other Republicans, especially gubernatorial candidate Mike Buchard, strongly support privatization of prison services. Democratic also highlight reforms of their own, most notably being to close tax loopholes and removing tax exemptions, which would raise more in revenues.


    This and the division of power between the parties, with the Democrats controlling the House and the Governor's office and the Republicans controlling the Senate, suggests that while all sides may not like the surcharge, they also do not agree on what actions to take to lead to its repeal. However there are still some reasons to believe that change is possible. Speaker Dillion's plan, once announced, may lead to compromises that both sides can agree with. Representative Calley also believes that the Governor will create a taskforce-like body that will collect ideas from businesses, industries, think-tanks, lawmakers and members of the fiscal offices to help evaluate Michigan's system. This could help set in motion an eventual repeal of the surcharge.


    After analyzing many editorials, reports and interviews, no instances were found of groups being supportive of the surcharge or opposing its repeal outright, but more opposing cuts to revenues (removing the surcharge and not replacing it with anything). This trend is not necessarily surprising. The fact that Republicans have taken a firmer stance on supporting repeal is in line with its emphasis on taxation, a topic which Democrats do no prioritize as highly (just as Republicans do not place much focus on the environment, while Democrats push for higher environmental standards). When asked if he could think of any groups that supported things as they stand, with the MBT plus the surcharge, Representative Paul Scott said that he could not think of a single group, but rather groups opposed or fearful of reforms that could cut their funding, such as groups like the Michigan Education Association. The MEA also states on their website their belief that tax cuts do not stimulate the economy, but rather that investment in human capital, such as our children's education for example. Applying this to surcharge, it would not benefit the state to reduce tax revenues by repeal and cut per pupil funding to schools as much as it would to keep this revenue in order to maintain per pupil funding. This is not to say the MEA opposes reforms or repeal, but to illustrate why some groups are more wary than others.


    As far as any patterns, possible solutions tended to mirror the views of the party more aligned with their views and with those they represent. Conservative groups, such as the Mackinaw Center for Policy and the Michigan Chamber of Commerce favor removal and little or no replacement of revenue, a position similar to that held by the Republican Party. The Michigan League for Human Services, a group that describes itself as "Using data-driven advocacy to improve the lives of Michigan's low-income residents", supports replacing revenues in order to keep essential services and also supports changing the income tax to be more progressive, ideas shared more amongst Democrats. Along with support for essential services, the taxes that MLHS favors would affect more well off citizens, such as entertainment taxes. Beyond tying together parties and interest groups based on their proposals, pieces were also analyzed based on how criteria to determine how technical it is, one example being finding the term "gross receipts" in an article. This helped to further separate editorial pieces with thought out policy.


    Overall, even with possible solutions and suggestions being introduced and lobbied , it is not likely that there will be any substantial changes to the status quo regarding the MBT surcharge. Legislation for a phase out of the surcharge before its 2017 sunset has already cleared the Republican controlled Senate. Being the first billed passed this session, it illustrates the disdain Republicans have for the surcharge and the level of importance they place on its removal. It then moved to the Democrat controlled House, where it after being referred to committee, it sits. With the state patching budget holes with stimulus money and many government programs facing cuts, Democrats cannot support a reduction in tax revenue. Plus the argument remains that any repeal of the surcharge must be "revenue neutral", or replaced by income from a new tax, something that Republicans are not likely to agree with. After having to slash many services to the bone, such as Medicaid coverage and Early Childhood programs, and even eliminating whole Departments, such as the Michigan Department of History, Arts, and Libraries, Democrats are staunchly opposed to any action that could leads to cuts. Though many share the same opinion on the surcharge, there is no one solution or policy that a majority supports. Parties remain steadfast in their beliefs of the role government should play, while interest groups fight for repeal or fight to keep possible future burden off their members. If one party manages to control both chambers of the Legislature and the Governor's Office after the 2010, it's possible that reforms can move and be implemented. As for now, the groundwork is in place for meaningful tax policy discussions to take place, however the likelihood of a solution or agreement in the near future is slim.

    Bebow, John. "Michigan is not a high-tax state." The Center for Michigan The Center for Michigan, 11 Mar. 2009. Web. 20 Nov. 2009.
    .
    Calley, Representative Brian. Personal interview. 27 Oct. 2009. Personal interview.
    Catherine, Lindsey. "Michigan's Business Tax Climate Ranks 17th in the Nation for 2010 ." Michigan Policy Network Michigan Policy Network, 16 Nov. 2009. Web. 2 Dec. 2009.
    Catherine, Lindsey. "The Michigan Business Tax." Michigan Policy Network Michigan Policy Network, 29 Oct. 2009. Web. 20 Nov. 2009.
    Lane, Amy. "Senate moves to repeal Michigan Business Tax surcharge." Crain's Detroit Business Crain's Detroit Business, 29 Jan. 2009. Web. 10 Nov. 2009. .
    Power, Phil. "Taxing that fellow behind the tree." The Center for Michigan The Center for Michigan, 19 Mar. 2009. Web. 20 Nov. 2009.
    .
    Scott, Representative Paul H. Phone interview. 13 Oct. 2009. Phone interview.
    Freep.com The Detroit Free Press, 15 Nov. 2009. Web. 20 Nov. 2009. .xFM.pdf>.
    "Facts Matter: Sales Tax on Services: Modernizing the Revenue Structure." Michigan League for Human Services Michigan League for Human Services, n.d. Web. 20 Nov. 2009. "Legislative Priorities-Budget and Tax Policy." Michigan Chamber of Commerce Michigan Chamber of Commerce, 2 Feb. 2009. Web. 10 Dec. 2009. .
    "Since Tax Cuts Don't Grow the Economy, What Does?." Michigan Education Association National Association, 7 Nov. 2006. Web. 10 Nov. 2009. .
    "2007 House Bill 5408 (Impose Michigan Business Tax surcharge and repeal service tax )." Michigan
    Votes Mackinac Center for Public Policy, n.d. Web. 20 Nov. 2009.
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    "$800 Million in State Budget Savings Recommended by Chamber ." Detroit Regional Chamber Detroit
    Regional Chamber, 29 Sept. 2008. Web. 20 Nov. 2009.

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    The Michigan Policy Network is a student-led public education and research program to report and organize news and information about the political process surrounding Michigan state policy issues. It is run out of the Department of Political Science at Michigan State University, with participation by students from the College of Social Science, the College of Communication, and James Madison College. 

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    Nicholas Biondolillo is tax policy correspondent for the Michigan Policy Network. Nicholas is a first-year student in Engineering at Michigan State University.