Advocacy News – December 17, 2021
Tuesday night, after almost a year of legislative hurdles and a previous veto from the Governor, state and local tax (SALT) reform legislation was once again sent to the Governor’s desk. The bill helps certain businesses, including S-corporations, partnerships and limited liability companies, reduce their federal tax burden. It is highly expected that the bill will be signed into law this time around.
House Bill 5376 (formerly HB 4288), both sponsored by Representative Mark Tisdel, received an overwhelming 34-2 vote in the Michigan Senate and 100-3 vote in the House. The bill was originally vetoed after the Governor requested an appropriation of almost $5 million for the Michigan Department of Treasury to implement the pass-through entity tax.
After the Michigan Legislature included the outlined amount, the bill was reintroduced and swiftly passed the state’s House of Representatives. Tuesday’s Senate vote, and subsequently a House concurrent vote, comes after the Michigan Chamber of Commerce, alongside other business community stakeholders, sent a letter strongly urging a vote be taken.
The Michigan Chamber sent the following memo of support to the Michigan Senate regarding the bill’s impact on pass-through businesses:
“Please support HB 5376 (formerly HB 4288), legislation that will restore tax parity between large C-corporations and smaller “pass-through” businesses. HB 5376 is a re-introduction of HB 4288 which was vetoed by Governor Whitmer. Governor Whitmer requested a $5 million appropriation for implementation costs, which was subsequently included in the most recent budget negotiation and signed into law.
Pass-through businesses are ones NOT organized as a C-corporation but as an S-corporation, partnership or limited liability company. These businesses differ from large C-corporations because a pass-through business’s income “passes through” to the owner where the owner pays personal income taxes on the income from their business.
Smaller, pass-through business are the backbone of Michigan’s economy. Found mostly on main streets all across our communities, they represent the majority of Michigan businesses, they employ the majority of the state’s workers, and they have been particularly hard hit by the pandemic.
HB 5376 can help these businesses at a difficult time. The 2017 Tax Cuts and Jobs Act cap on State and local tax (SALT) deductions applies to many of Michigan’s 250,000 resident owners of S-corporations, partnerships and limited liability companies. This loss results in tax rates 1.3 to 1.6 percentage points higher than if they were allowed to fully deduct those taxes like C-Corporations are allowed to do. This puts Michigan businesses at a disadvantage compared to businesses operating in states with no income taxes or those, like Wisconsin, operating in states that have already adopted SALT parity.
HB 5376 would address this disparity and restore the full SALT deduction to Michigan’s pass-through businesses without reducing revenues collected by the state. The legislation:
- Provides an election for pass-through businesses to pay their SALT at the entity level;
- Includes an income exemption, so that owners of businesses making the election are not subject to double taxation; and
- Provides Michigan business owners with a credit for taxes paid to other states that have adopted similar SALT parity reforms.
This last provision is designed to ensure that businesses operating in multiple states are not disadvantaged by double taxation, and its increasingly important as the number of states adopting the SALT parity reform grows. Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island and Wisconsin have all passed similar SALT parity reforms, while more than a dozen other states are actively considering it. In November 2020, the Internal Revenue Service approved these efforts as “consistent with the longstanding position” of the agency.
SALT parity will help these businesses better survive the pandemic by reducing their federal tax burden without reducing tax collections to the state. It is a win-win for Michigan and its business owners.
We encourage support on HB 5376.”
Please contact Leah Robinson with questions at lrobinson@michamber.com.