Approved by Michigan Chamber Board of Directors January 25, 2012

The Michigan Chamber of Commerce reaffirms its support for legislative action to eliminate the burdensome business personal property tax. The Michigan Chamber opposes efforts to implement a constitutionally guaranteed source of revenue replacement.

Background

Michigan’s personal property tax is imposed on virtually all Michigan job providers and continues to be a source of great frustration for business taxpayers. The tax is levied generally on machinery and equipment which is not considered real property (land and buildings), including industrial, commercial and utility equipment. The tax is primarily administered by individual local units of government.

The tax has been the subject of debate for decades; many legislative efforts have begun and failed primarily due to the fact that local governments (and to a lesser extent schools) are the primary benefactors of the tax revenue. Total revenue generated statewide is approximately $1.2 billion, with approximately $800 million going to locals and $400 million going to schools. Further complicating the debate is the fact that different local governments depend on personal property tax revenue to varying, and wide, degrees.

However, the tax places Michigan at a competitive disadvantage, particularly in the Midwest. While numerous states still do impose the personal property tax, nearly all Midwest states do not. In fact, Ohio recently phased out its tax effective 2009. In addition the complicated nature of assessing a tax on multi-use, depreciable property, which is often inconsistently administered, does not lend itself to uniform taxation across jurisdictions, but rather numerous and costly appeals. The State Tax Commission and Tax Tribunal are currently experiencing significant backlog due to appeals regarding classification of property. The costs associated with compliance are not exclusive to taxpayers; local governments often report that it is more costly to administer the tax than the tax revenue itself generates.

The Michigan Chamber of Commerce has been a strong advocate for eliminating the personal property tax in a responsible manner that recognizes the need for adequate revenue replacement options for local governments. The Snyder Administration and House and Senate leadership have indicated a strong desire to address personal property tax, while at the same time seeking alternative revenue replacement options.

However, led by the Michigan Municipal League, numerous local government service providers have recently called for a constitutional guarantee of full funding replacement if the tax is eliminated. Providing a guaranteed revenue stream despite population shifts and competing priorities would remove legislative oversight and accountability, regardless of the circumstances, and should be opposed.

The Michigan Chamber supports meaningful efforts to begin elimination of personal property tax through proposals including:

• Phase-out of tax over time for all taxpayers. Providing a planned phase-out of the tax would allow local governments to adjust resources, seek efficiencies and consolidation.
• Immediately implementing a reasonable threshold exemption. Approximately 80% of taxpayers have property valued at less than $50,000 in taxable value. For relatively little cost (estimated $70 million) most taxpayers would be alleviated from the tax. In addition, local governments would be immediately relieved from administration of the tax.
• Efforts to improve administration of the tax statewide. Providing clarity and consistency in assessing the tax would help reduce costly and time-consuming disputes and appeals.
• Allocating expiring tax credits as a source of revenue replacement. Efforts to rely less on targeted industry, and company, specific tax credits potentially affords an opportunity to re-direct those “unused” dollars towards general business tax relief to benefit a wide range of job providers.

Bills to implement repeal of the personal property tax have been introduced in both the House and the Senate. The Administration has indicated that addressing personal property tax is a priority and Lieutenant Governor Brian Calley has taken the lead on this issue. We anticipate legislative debate and action in 2012.

The Michigan Chamber of Commerce supports legislation to allow the State of Michigan to enter into a multi-state agreement to simplify administration of sales and uses taxes by reducing the burden of tax compliance on individuals and businesses through the development of a more uniform collection process. In order to receive support from the Michigan Chamber, any streamlined sales tax legislation must:

• Conform with national model legislation.
• Provide for adequate legislative oversight, including a December 31, 2002 sunset date.
• Contain meaningful safeguards for taxpayers, and
• Not result in a broadening of the tax base.

Background 

On January 25, 2001 the Michigan Chamber Board of Directors reviewed and approved legislative priorities for the 2001-2002 legislative session. These legislative priorities include a chapter captioned "Cutting Taxes" which contains a section on Sales and Use Taxes that has the following statement relating to streamlined sales tax legislation:

"The Michigan Chamber supports reasonable efforts to level the playing field between retailers located in Michigan who must collect the state sales tax and out-of-state companies that may not be subject to Michigan's sales or use tax. However, due to on-going problems with the administration of the current sales and use tax laws, plus many unanswered questions about the practical and revenue implications of the proposed model legislation, the Michigan Chamber does not at this time support the proposed multi state 'streamlined sales tax project.' Should the Legislature decide to take up this issue, we urge the House and Senate to proceed slowly and with caution to avoid opening the door to a broadening of the tax base."

During the past few months, members of the Michigan Chamber's Tax Policy Committee and Chamber staff have spent a considerable amount of time and effort working to improve proposed streamlined sale tax legislation to make it worthy of support. As introduced, Senate Bill 433 (Emmons) was poorly drafted and lacks meaningful procedural safeguards for taxpayers.

For example, contrary to model legislation developed at the national level, the original version of the Michigan bill said that if there was a conflict between Senate Bill 433 and Michigan's Sales Tax Act of 1933 or Michigan's Use Tax Act of 1937, the provisions of the new law would prevail. This could easily have been interpreted by the Michigan Department of Treasury as a grant of authority to narrow many carefully crafted exemptions affecting industries statewide, without prior legislative approval. Many of these exemptions are currently enjoyed by retailers, manufacturers, vendors and other businesses. Allowing the Michigan Department of Treasury sole authority to determine sales and use tax laws could have led to the overturning of decades of case law protecting current exemptions. Michigan Chamber lobbyists worked to close this loophole.

The original bill also contained broad language preventing taxpayers from having access to the courts to resolve problems with the new law, but did not contain a sunset or expiration date to provide for legislative oversight. Taxpayers must have the ability to file tax grievances and appeal assessment findings through a dispute and appeals process. These rights were abdicated in the original bill. Given these shortcomings and other significant problems with the original bill, Chamber staff, after consulting with members of the Chamber's Tax Policy Committee, decided to oppose Senate Bill 433 as introduced. Throughout the process, the Michigan Chamber has worked with the sponsor of the bill, other lawmakers, and the Treasury Department to strengthen and improve this legislation. We were joined in this cooperative effort by members and staff from the Detroit Regional Chamber and the Grand Rapids Area Chamber of Commerce. We are pleased to report to you that a concerted lobbying effort by all three chambers of commerce resulted in numerous positive changes to Senate Bill 433.

Regrettably, on July 27, 2001, the Michigan Retailers Association (MRA) sent an Action Alert concerning Senate Bill 433 to some of its members. This document, captioned "Michigan Chamber and State House Turn Backs on Main Street," unfairly blamed the Michigan Chamber for a lack of progress on this issue. When the Chamber became aware of the July 27th MRA Alert, we called the CEO of the association to bring these inaccuracies to his attention. He said he would remedy the situation. On July 30th,  the Michigan Retailers Association sent out an Action Alert captioned, "Chamber On Board with Retailers over Streamlined Sales Tax."

Despite these difficulties, Chamber members and staff have continued to work diligently on this issue to set the record straight about our position and continue to play a constructive role in the legislative process. The Board of Directors is requested to revise and update our policy statement to more accurately reflect the progress we have made on this complicated but important tax issue.

The Michigan Chamber of Commerce supports the statutory initiative and/or legislation to repeal the Single Business Tax (SBT) in 2007, while continuing to work to develop replacement tax revenue to be paid by business that results in a net tax reduction, is less burdensome on employers, less complicated, and encourages economic development.

Background

In 1999, the Michigan Chamber supported legislation to implement a 23-year phase-out of the SBT, which currently has stalled. In 2002, legislation was passed and signed by Governor Engler to move repeal of the SBT to December 31, 2009.

The merit of Michigan’s Single Business Tax continues to be the subject of intense debate and scrutiny. While Michigan’s economy struggles, many legislators and policy leaders believe one source of our state’s troubles rests with this unique and burdensome tax system.

Republican legislative leaders as well as Oakland County Executive, L. Brooks Patterson, propose to accelerate repeal of the SBT by moving the elimination date to December 31, 2007, and to develop an alternative that is “less burdensome and less costly to employers, more equitable, and more conducive to job creation and investment.” Brooks Patterson is leading an effort to gather petition signatures (350,000) for a statutory initiative to repeal the SBT. Simultaneously, the Michigan legislature has passed legislation to do the same (HB 5743 and SB 1170). Governor Granholm vetoed the legislation on March 31, 2006. Legislators may have another opportunity to pass the statutory initiative or voters would vote on the question of repeal during the November 2006 election if at least 254,206 valid signatures are gathered by May 31, 2006.

Numerous business organizations support legislative and petition efforts to repeal the SBT in 2007 including; the Detroit Regional Chamber, the National Federation of Independent Business - Michigan, the Small Business Association of Michigan, the Michigan Business and Professional Association, and the Michigan Food and Beverage Association.

Since 2002, the Michigan Chamber has continued to be a strong advocate for substantially reducing the overall burden of the SBT on job providers, but current Board policy does not speak directly to the question of repeal. On March 10, 2006, a special meeting of the Michigan Chamber’s Tax Policy Committee was held to discuss pending legislation and Mr. Patterson’s petition drive to accelerate repeal of the SBT, and determine a recommended position regarding repeal of the SBT. Mr. Patterson presented his proposal to the Tax Policy Committee and answered questions. After discussion, and by a majority vote, the Tax Policy Committee recommends that the Michigan Chamber support repeal of the SBT while working to develop an alternative. 

The Michigan Chamber reaffirms opposition to any state level inheritance or estate tax.

Background

In her 2008 Executive Budget Message, Governor Jennifer Granholm proposed a seven-part plan to revise Michigan’s tax structure and provide additional revenue for various state and local government programs and projects.

In addition to replacing the Single Business Tax and imposing a new two percent tax on services, an important element of the governor’s 2008 tax plan is: “An estate tax applicable to about 350 estates each year and decoupled from the federal estate tax. At least 18 states and the District of Columbia have decoupled from the federal estate tax to ensure that their tax codes would be independent and no longer affected by federal changes. Estates that are valued at $2 million or more would be subject to this change with the exception of family farms and businesses. This change will generate about $119 million in 2008.”

Bills to implement the governor’s estate tax proposal have been introduced in the State House (HB 4377) and Michigan Senate (SB 314). On March 15, 2007, as part of the debate over how to balance the state budget, Senate Bill 314 was discharged from the Senate Finance Committee to the floor of the Senate, where it remains on the Senate calendar eligible for debate under general orders (committee of the whole).

Throughout the 1980s and early 1990s, the Michigan Chamber was a leading advocate for repeal of Michigan’s inheritance tax. On July 28, 1989, the Chamber’s Board of Directors approved a policy statement that said, “The State Chamber supports repeal of Michigan’s inheritance tax to help reduce Michigan’s heavy tax burden, assist family-oriented small businesses, and make our state attractive for retirees.” In July 1990, the Chamber Board again approved a similar statement supporting repeal of Michigan’s inheritance tax.

In a major breakthrough for taxpayers and the business community, Michigan’s burdensome inheritance tax was abolished in 1993. However, quickly thereafter Michigan implemented a “pick-up tax”, dependent upon the federal estate tax, which provided taxpayers with a credit for any state death taxes they paid. In 2001, Congress voted to phase out the federal estate tax by 2010. As a result of this federal action, Michigan’s “pick-up tax” was also phased out in 2005. Only 17 states have chosen to establish a stand-alone estate tax as the governor has proposed.

The Granholm administration has called for an estate tax between 8% and 16%, with a $2 million exemption, excluding assets of family-owned businesses and farms. However, this provision relating to small businesses may be disingenuous. According to the American Family Business Institute (AFBI is a Washington, D.C.-based organization opposed to death taxes), the Internal Revenue Code criteria to qualify for the small, family business exemption are extremely difficult to meet. In fact, AFBI experience with this wording has been that it can cost thousands of dollars in legal fees to determine if a business qualifies for this relief.

Inheritance and/or estate taxes result in double taxation of income and encourage Michigan residents to engage in costly and complicated tax planning or simply move to other states. Re-establishment of a Michigan inheritance or estate tax would send taxpayers a negative message that Michigan plans to punish successful entrepreneurs and investors.

Another significant effect of a state inheritance tax is the loss of leaders who set up residency where estates are not taxed. This leads to disinvestment of financial resources in Michigan, and affects service and gifts to various philanthropic cultural, educational, religious and other institutions.

The Michigan Chamber reaffirms support for retaining Article 9, Section 7 of the 1963 State Constitution, which provides “No income tax graduated as to rate or base shall be imposed by the state or any of its subdivisions.”

Background

The Citizens Research Council of Michigan (CRC) Outline of the Michigan Tax System, January 2007, reports that as of December 31, 2006 48 state and local taxes were levied in Michigan, including an income tax. The CRC Outline goes on to explain that income taxes are levied on earnings, with state and local income taxes based on federal adjusted gross income. Local nonresident income taxes are based on earnings from within the taxing cities. In Michigan, only state government and cities are authorized to levy income taxes. Twenty-two Michigan cities have exercised this option.

The State of Michigan enacted a 2.6% flat rate personal income tax in 1967. The state income tax rate reached an all time high of 6.35% in 1983. The current income tax rate is 3.9%. Net income tax collections in 2004-05 totaled $6,038,578,000. Revenue from the income tax is deposited into the State’s General Fund and School Aid Fund.

Historically, the Michigan Chamber has supported a flat rate income tax and opposed establishment of a graduated income tax. Broad policy statements on taxes were approved by the Michigan Chamber’s Board of Directors on January 18, 1967 and July 25, 1980. Portions of the 1967 policy relating to the state income tax follow:

“INDIVIDUAL INCOME TAX: A tax with low rates and low individual exemptions, on the federal exemption system, is definitely preferred over a higher tax rate with higher exemptions … The great majority of public expenditures are made for the benefit of individuals, and good government requires that as many as possible of those whose needs and desires create pressures for public spending should have the corresponding responsibility to assume their fair share of its tax costs …”

The 1980 policy statement effectively guided Chamber efforts in the area of tax reform and tax limitation for over a decade. The following on income taxes still seems appropriate today:

“The State Chamber continues to endorse the concept of a flat rate income tax as embodied in the Michigan Constitution and opposes the concept of a graduated income tax. Considering the graduated rates of the federal income tax, the graduated affect of exemptions and credits on the Michigan income tax, and the exemption of food and drugs from the sales tax, Michigan citizens are already burdened with a highly progressive tax structure …”

Over the 40-year history of the Michigan personal income tax, state legislators and governors have taken steps to make the tax “more equitable” by raising the personal exemption 10 times and creating or expanding various credits. Most recently in 2006, the Legislature approved and Governor Granholm signed into law a bill to further moderate the impact of the tax on low-income individuals by establishing an Earned Income Tax Credit (EITC) beginning in 2008. By 2009, the annual tax savings from the Michigan EITC are estimated to be approximately $300 million.

Since 1967, Michigan voters have rejected three proposals to amend the State Constitution to establish a graduated income tax. Each of these ballot proposals was defeated by a wide margin. In November 1968, a proposal to permit the state to impose a graduated income tax was rejected by a vote of 614,826 in favor to 2,025,052 against. In November 1972, a proposal to permit the state to impose a graduated income tax and allow the Legislature to authorize political subdivisions to levy graduated income taxes was rejected by a vote of 959,286 in favor to 2,102,744 against. In November 1976, a proposal to permit the state to impose a graduated income tax was rejected by a vote of 897,780 in favor to 2,332,513 against. The Michigan Chamber was a lead organization in opposition to the 1968, 1972 and 1976 ballot proposals relating to a graduated income tax.

According to “Michigan at the Millennium, A Benchmark Analysis of Its Fiscal and Economic Structure” (2003 Michigan State University Press), 42 states and the District of Columbia levy income taxes. Most states employ a graduated income tax. Michigan is one of eight states that employ a flat rate income tax. As mentioned previously, Michigan’s personal income tax has numerous credits and exemptions. In the Great Lakes region, Illinois and Indiana also use flat rates. Minnesota, Ohio and Wisconsin use graduated rates.

Following the November 2006 election, much of the public policy debate in Lansing has been focused on the size and scope of state government’s budget issues. As the Legislature and administration have wrestled with possible solutions, Governor Granholm, Speaker Andy Dillon, other Democratic lawmakers, and some interest groups have expressed support in pursuing a ballot proposal in 2007 or 2008 to amend the State Constitution to establish a graduated income tax. This would require a 2/3’s vote of the House and Senate to put a proposal on the ballot for the November 2008 general election. The same type of proposal could be placed on the ballot through a petition drive. Some proponents of a graduated income have also suggested the possibility of a costly special election to consider this new tax as part of the effort to balance the state budget.

Unfortunately, unlike much of the debate over possible expansion of the sales tax to services (which often includes consideration of reform measures like lowering the sales tax rate and/or exempting business-to-business transactions), the latest proponents of a graduated income tax for Michigan have focused almost exclusively on the desire for a substantial increase in state revenue to maintain or increase government spending with little or no consideration of tax reform.

Michigan’s business climate has several strikes against it in terms of tax policy. For example, the Single Business Tax has resulted in decades of confusion and litigation. Our state also continues to impose a costly and burdensome personal property tax on business equipment, machinery and furnishings. Yet, one tax advantage that we have over other states is a flat rate income tax that does not penalize or discourage individual and business taxpayers from working, saving or investing in Michigan.

The Michigan Chamber supports significantly reducing or fully eliminating the Michigan Business Tax Surcharge at the earliest opportunity. The Chamber is also opposed to any further increase in the Michigan Business Tax or the Personal Income Tax.

Background

Michigan’s state budget continues to face structural problems. The Citizens Research Council of Michigan estimates that state government spending pressures will grow 6.5 percent per year compared with a 2.8 percent growth per year in revenues unless significant changes are made in state spending priorities and tax policy. The Fiscal Year 2007/2008 budget “solution” resulted in little in the way of government restructuring, spending reforms, or fiscal efficiency measures. Instead, the budget process relied heavily on tax increases, which were enacted in the middle of the night without adequate input from the business community. Specifically, the legislature and governor agreed to $1.4 billion of increased taxes through a personal Income Tax increase and a new 6% service on over 60 business and personal services. These taxes were increased under the guise of filling a “hole” in a budget that has been “cut to the bone.”  

However, in reality the ‘07/08 state budget was increased by a stunning $900 million over previous year’s spending. The Michigan Chamber’s 2007-2008 Legislative Priorities – under the heading of “Cost of Government” – clearly state “That the appropriations process should not drive tax policy decisions.” Yet, it’s become increasingly clear that that is exactly how, and why, tax policy decisions in Michigan are currently being made.

Faced with an angry business community over the passage of an ill-conceived 6% services tax that did not provide business clarity or appropriate time to adapt business practices and procedures to cope with the new law, the legislature replaced the services tax with a new tax on business; a 21.99% surcharge to the new Michigan Business Tax (MBT). The Surcharge is expected to “sunset” in 2017. However, in light of the fact that Michigan can no longer sustain unbridled spending, real and meaningful cost-saving reform measures must be enacted immediately, and the legislature and governor should make every effort to reduce or fully eliminate the MBT surcharge at the earliest opportunity in order to improve the tax and business climate.

The Michigan Chamber of Commerce continues to believe that our state's economic competitiveness should be improved by providing all taxpayers with broad based tax relief. However, we oppose the 2008 Michigan Fair Tax ballot proposal to amend the State Constitution to impose a 9.75% sales and use tax on consumer purchases of goods and services because the petition currently being circulated has too many unanswered questions and unresolved problems to warrant support.

Background

The Michigan Chamber is convinced that the current situation with taxes and spending in Michigan is unacceptable. Allowing the state appropriations process to drive tax policy decisions has resulted in significant tax increases on many Michigan job providers. Furthermore, the complicated and administratively burdensome nature of our current tax system leaves much to be desired. Though a state-level “Fair Tax” initially sounds appealing, and a national-level concept may have some merit, the proposed 9.75% Fair Tax ballot proposal has too many unanswered questions and unresolved problems to warrant support.  

In response to increasing calls to reduce Michigan’s tax burden and improve our business climate, proponents of a so-called “Fair Tax” have spent the past three years advocating for a Michigan Fair Tax. Their goal has been to eliminate certain business taxes and broaden Michigan’s sales and use taxes in an effort to bring simplicity to our current tax system. The plan generally calls for imposing Michigan sales/use taxes to 9.75% (an approximate 62% increase), expanding the taxes to services, food and drugs (except those exempt by law), while repealing two major business taxes (MBT and business personal property taxes) and Michigan’s Personal Income Tax.

The State Board of Canvassers has approved language for this Constitutional amendment, and the petition and signature-gathering effort (approximately 400,000 needed) is underway to place this on the November 2008 ballot. Due to public interest, and the fact that the Michigan Chamber has been actively involved in the state’s tax limitation movement, it is important for the Michigan Chamber to formulate a position on this issue.

Proponents are advocating the plan based on the following selling points: simplicity; repeal of the MBT, the business personal property tax, the Michigan Personal Income Tax; and “pre-bates” (annual refunds to all taxpayers to alleviate regressive nature of sales tax).

Other features of the plan include providing increased and guaranteed funding to local governments, elimination of any estate taxes and a constitutionally required insurance premiums tax.

There are too many unanswered questions and unresolved issues to warrant support; first and foremost is the recent experience with the 6% “service” tax, which was hastily approved by the Legislature and Administration. The debacle proved that it is much easier to talk about the idea of a sales tax on services than it is to implement. 

Michigan “Fair Tax” advocates claim that their proposal will eliminate income taxes and prohibit general business tax increases without a vote of the people. However, in their proposal is the potential for a major expansion of the income tax, allowing any subdivision of the state (City, Village, Township, County, School Districts) to levy an income tax. Currently, only cities above a certain population threshold may adopt a city-level income tax. In addition, the proposed Article IX, Section 47 of the proposal, provides that if revenues from the increase in the expanded sales and use tax falls short of expected revenues, the rate will automatically increase for one year (the baseline formula is previous years’ sales and use tax revenues adjusted for population and inflation). No reference to these two provisions is found in the proponents marketing material.

There are several other significant concerns and reservations about the Michigan “Fair Tax” proposal.

• This proposal would shift out-of-state tax burden to in-state taxpayers. Despite the ability to levy a higher sales tax on visitors from outside Michigan, we would lose the ability to tax out-of-state taxpayers through the MBT (shifting an estimated $850 million onto Michigan taxpayers). States are currently prohibited from mandatory collection of sales tax across state borders. This would put Michigan sellers at a competitive disadvantage to businesses in other states that would not have to charge a tax on services, or such a high rate in general – particularly those in border counties.  In addition, the potential for tax avoidance is increased. Michigan would have the highest state sales tax rate in the country, having a potentially negative impact on sales of cars, boats, trucks, appliances, etc. 
• Shift to individual taxpayers. Regardless of the reality of the final incidence of tax, the perception that businesses would be nearly fully relieved of paying taxes at the expense of individuals could create challenges in securing voter approval. 
• Complicated and difficult to administer. For example, the proposal calls for providing “pre-bates” to be sent to individuals to offset the regressive nature of sales taxes. Upon close inspection, the tax application, collection and distribution are complicated and would be difficult for taxpayers and administrators of the tax policy. Also, the proposal calls for a complicated revenue distribution stream based on sales on tangible property versus sales of services, food, drugs, etc. It is not uncommon for a retailer to remit sales tax revenues to the state of Michigan en masse. There is not a tracking system currently within the remittance mechanism to determine the revenue source. This problem would introduce a whole new level of administrative complexity for taxpayers and Administrators.
• Rate and revenue questions. “Fair Tax” proponents claim their proposal would be “revenue neutral,” – however, this has not been confirmed by an objective third party. There has been some concern expressed that the revenues generated by a 9.75% rate fall significantly short of the intended goal.

As of this date, the only business organization supporting this proposal is the Small Business Association of Michigan.

At the February 29, 2008 meeting of the Michigan Chamber Tax Policy Committee, a majority of committee members voted to oppose the 2008 Michigan Fair Tax ballot proposal.