Last Thursday, Governor Granholm released her proposal for the 2011 budget, in which she proposed a reduction in the sales tax- from 6% to 5.5%, and then extending the tax to consumer services. This service tax would be applied to the sale of most personal services excluding business-to-business services, education, real estate and insurance commissions, health care and social assistance and new construction and remodeling..
Back in 2007, legislation extending the sales tax to services was signed into law as an attempt to reform the tax system, and generate new revenue. The logistics of the tax, however, were very confusing, implementing tax on certain services and exempting other services. The policy received a negative backlash from the citizens of Michigan and it was repealed on the day it was was supposed to be enforced. The repeal of this legislation lead to the quick drafting of the Michigan Business Tax surcharge, which is still in place at 22%.
Granholm's proposal this time would allow for the elimination of the Michigan Business Tax (MBT) surcharge, which has been under heat ever since it's enactment in 2007 [read more: http://www.michiganpolicy.com/index.php?option=com_content&view=article&id=623:the-michigan-business-tax&catid=55:taxes-policy-briefs&Itemid=222 and http://www.michiganpolicy.com/index.php?option=com_content&view=article&id=688:the-michigan-business-tax-surcharge-repeal-on-the-horizon&catid=56:taxes-current-issues&Itemid=227]. The phasing out of the surcharge, and implementation of this service tax would result in a cut of the MBT by around $979 million.
The 5.5% tax on sales and use as well as services is estimated to bring in around $554 million additionally per year. This money, Granholm plans to use to ensure that the education budget is not cut by the proposed $255 per pupil amount for next year.
The plan has been met with some opposition. Republicans in the House and Senate have stated that the real direction to head is in reforms and that tax hikes will not do what is needed to help our state. Michigan House Representative Bob Genetski worries that "[the service tax will not] create the jobs Michigan desperately needs". Rep. Elsenheimer states "Let's be clear: the governor's budget is not revenue neutral and it ignores reforms we need this year. It is a tax hike...It would be absolutely disastrous to Michigan's small businesses and working families suffering through this Great Recession". Many others say that the problem lies in the tax generating new revenue for the state, not just making up for the deficits. Republican legislators may agree to work with such a change in the tax system if reforms are first put into place, and that the tax increase is revenue neutral.
Governor Granholm's proposed service tax is estimated to close a $1.6 billion gap in revenues and expenditures, and additionally $330 million in savings for the state. It failed in 2007, but with the budget crisis only seeming to get worse, a tax on service could be much more likely now.