When Gov. Gretchen Whitmer proposed a 6-percent income tax on small businesses in early March, business lobbying groups and Republican lawmakers slammed it faster than you can say “lost decade.”
The Michigan Chamber of Commerce called the proposed tax “alarming” and “a disaster for small business owners and jobs.”
The Small Business Association of Michigan said the tax would mark “a return to Michigan’s troubled past.”
The National Federation of Independent Business-Michigan said Whitmer’s plan would “bring back the confiscatory tax policies of the past that included the Single Business Tax and the Michigan Business Tax.”
And state Senate Majority Leader Mike Shirkey said the proposed tax was “doubling down on stupid.”
Nonsense. None of these business groups and lawmakers offered any evidence in their denunciations that raising state business taxes hurts job growth and the economy.
That’s because they can’t. State corporate income taxes aren’t a big enough share of overall business costs to have much of an impact on jobs.
“It’s de minimis” — too small to make a difference, said Mitch Bean, the former director of the nonpartisan House Fiscal Agency.
Michigan had higher annual payroll job growth in the 1990s, a time when businesses paid the reviled, complex SBT, then it did during Gov. Rick Snyder’s eight years in office, when only large “C” corporations paid state business income taxes.
The state added an average of 88,000 jobs a year during the nine years of economic expansion between 1991 and 2000. That compares to an annual average of 69,400 jobs between 2010 at the bottom of the Great Recession through 2018.
Yes, the state lost jobs every year during the 2000s — the “lost decade” — a time when businesses paid the MBT, which taxed business income and gross receipts. But the reason for the economic swoon was primarily because the domestic auto industry went into a decade-long freefall, dragging down the rest of Michigan, as well.
Gov. Rick Snyder and the Republican-controlled Legislature revamped the state’s business tax structure in 2011 by scrapping the MBT and instituting a 6 percent corporate income tax on large “C” corporations, which have shareholders.
Partnerships, limited liability corporations and “S” corporations were exempted from paying the corporate income tax. Snyder called the tax overhaul “simple, fair and efficient.”
Overall, businesses received a roughly $2 billion tax cut. The tax cut was paid for by a mix of budget cuts and tax increases on individuals, including removing the exemption on retirement income.
Whitmer wants to shift the tax burden from retirees to back to businesses.
Her plan would levy a 6-percent income tax on these “pass-through” businesses, in which owners report business income on their personal tax returns. Michigan’s personal income tax rate is 4.25 percent.
But the impact of the new business tax would be largely offset by allowing pass-through business owners to take a 4.25 percent credit for business income on their personal returns, avoiding double taxation of business income.
That would result in an effective business tax rate of 1.75 percent. About 250,000 mostly small businesses would be subject to the tax. A tax credit on the first $50,000 in income would shield many of the smallest businesses from tax liability.
The tax hike would be coupled with the elimination of the so-called “pension tax” that Whitmer vowed to abolish during her gubernatorial campaign. That shift would result in a net state revenue loss of $133 million over the next two years.
Several economists I spoke with told me taxing pass-through businesses would increase tax fairness and recognize that they benefit from a variety of state government services, including schools, universities and transportation infrastructure.
“One argument in favor of taxes on business income is that businesses do receive a variety of benefits and they should pay something,” said Michigan State University economist Charles Ballard, who has written several books on Michigan’s economy.
And Tim Bartik, senior economist at the Upjohn Institute for Employment Research, said Whitmer’s plans to boost education and road funding “have far more significant long-run economic development benefits than the costs due to the relatively slight business tax increases we’re talking about.”
But Ballard and Bartik disagree with Whitmer’s plan to exempt retirement income from personal income taxes, in line with the belief of many economists that all types of income should be taxed to promote fairness.
“The proposed system will provide no benefits to low-income retirees, but will shower benefits on affluent retirees,” Ballard said.
But eliminating the tax on retirement income is politically popular in Lansing, even among many Republicans, who control the state Legislature.
Boosting taxes on small businesses isn’t. And these businesses have powerful lobbyists who often prevail by arguing that higher business taxes kill jobs. Even if it’s not true.