MMichigan’s business tax climate ranks relatively well compared to other states, and business advocates say the election-year tax cuts offered to Lansing could further improve that situation.
Based in Washington, D.C. Tax foundationMichigan’s annual report ranks Michigan 12th out of 50 states for its business tax climate in 2022, an improvement of one position from 2021. It’s a ranking that’s also better than every other state in the Great Lakes region, with the exception of Indiana, which ranks ninth overall. .
The Tax Foundation’s January report on the states’ business tax climate comes as Governor Gretchen Whitmer pushes for targeted tax cuts by repealing the so-called “retirement tax” and increasing the credit. earned income tax.
Whitmer’s proposal contrasts with a sweeping $2.5 billion plan that Republicans in the Legislature advanced this month, but which Whitmer called irresponsible and quickly vowed to veto. . The GOP plan includes a reduction in state personal income taxes and would double exemptions for retirement income. Another bill would reduce the corporate tax rate.
Competing plans by the Democratic governor and Republican lawmakers offer a good chance that some sort of tax cut in Michigan will happen this year as the two sides work out a budget for the state’s fiscal year that begins May 1. October.
“It will be a negotiation. The way I look at it: We now have bookends for negotiation on the more modest plan of the governor and the more aggressive plan of the legislature. They will negotiate and hopefully come to an agreement that achieves each other’s goals,” said Brian Calley, President and CEO of Michigan Small Business Association and a former Republican state legislator and lieutenant governor under former Governor Rick Snyder.
“Hopefully we come out of this with a slightly more competitive state and taxpayers recognized for their contributions to growing state resources,” Calley said.
Legislation the GOP-controlled House and Senate advanced two weeks ago on party votes would have cut Michigan’s personal income tax rate from 4.25% to 3.6%, doubled the amount of tax-exempt retirement income to $40,000 per taxpayer and $80,000 for a couple filing jointly and lowering the age of eligibility for the exemption from 67 to 62. The legislation, House Bill 768, would also create a tax credit of $500 per dependent 19 and under.
In a letter to lawmakers promising to veto HB 768, Governor Whitmer called for negotiations on a tax cut.
“While I do not support legislation that forces cuts to schools, road repairs and public safety, I am encouraged that the House and Senate agree in principle that putting money back in the pockets Michigan’s retirees and working families is a priority,” Whitmer wrote. . “I sincerely hope that we can now come together to negotiate a compromise that fully considers a budget alongside all tax policy decisions while putting the people of Michigan first.”
Whitmer’s proposed budget offers narrower tax cuts and would increase the state’s earned income tax credit from 6% to 20% of the federal credit, providing nearly $3,000 in tax relief to approximately 750,000 households. The governor also wants to repeal the state tax on public pensions over four years and restore deductions from private retirement income such as IRAs and 401(k), generating more than $1,000 in savings. annual tax for 500,000 households.
The increased working income tax credit has the support of several business groups, including a coalition of chambers of commerce that includes the Grand Rapids Area Chamber of Commerce and the West Coast Michigan Chamber of Commerce in Holland.
What’s more, the idea has the backing of a separate coalition that consists of dozens of business groups, including SBAM, nonprofits and businesses who believe that expanding the tax credit on the state’s earned income “would not just put more money back in the pockets of working Michigan residents.” , but it would also help address the slow return to the labor force that is holding back Michigan’s economic recovery,” according to a recent letter to lawmakers.
A higher income tax credit “would benefit residents in all parts of the state – rural and urban areas, all counties, both peninsulas and in every political district and jurisdiction,” the coalition wrote.
Business groups are watching closely
A separate GOP-backed bill that the Senate passed on March 3, which Whitmer is also likely to veto if he passes the House, would cut the state’s corporate income tax by $6. % to 3.9%. A Senate Tax Agency analysis of Senate Bill 392 concluded that the proposed corporate income tax cut would reduce state revenue by $465.5 million over the next fiscal year and $490 million in 2023-2024.
In the Tax Foundation’s annual report, Michigan ranked 20th for corporate income tax, still better than every other Great Lakes state except Indiana, which ranked ranked 11th.
Business groups are watching closely to see how the political debate over state tax cuts ultimately unfolds as lawmakers and the administration craft a budget this spring and summer. They also offer their perspective on what they would like to see happen.
The Grand Rapids Area Chamber of Commerce wants the upcoming debate in Lansing to include cutting corporate income taxes and eliminating commercial property taxes, said Andy Johnston, vice-president. Senior Chair of Advocacy and Strategic Engagement. The legislature under Snyder a decade ago repealed the industrial property tax as part of a sweeping reform package that created the current corporate income tax.
Whitmer and lawmakers agreed in late 2021, as part of a supplementary spending bill, to increase the small business property tax exemption from $80,000 to $180,000.
The Tax Foundation’s 2022 report ranks Michigan 21st in the nation for property tax burden, though the data used for the index predates the exemption increase that was enacted in December. . The Tax Foundation’s classification includes state taxes on real estate and personal property, net worth, and transfer of assets.
Complete repeal of what he calls a “dumb tax” that imposes an administrative burden on businesses “would go a long way” to improving the state’s long-term competitiveness, Johnston said.
The Grand Rapids Chamber also urges both parties to reach a budget agreement that reduces the tax burden in a way that is lasting and does not lead to future budget problems, Johnston said.
“From a business community perspective and from a taxpayer perspective, it’s definitely time to have this discussion,” Johnston said. “We want to make sure that what’s being done really helps advance Michigan’s long-term competitiveness, and is also responsible from a long-term fiscal standpoint.”
Make it “sustainable”
Michigan’s push to cut taxes comes after the state posted a $2.69 billion budget surplus for the 2021 fiscal year that ended Sept. 30, and as estimates called for a surplus of $1. $.44 billion for the current fiscal year 2022. The state also has billions more in one-time money from federal pandemic assistance and infrastructure funding.
Similar to the bedroom view of Grand Rapids, Business Leaders for Michigan wants the governor and lawmakers to design a tax reduction plan that avoids future tax problems.
“It is perfectly appropriate for the governor and our legislative leaders, with so much revenue flowing into the state, to consider whether some of those dollars should go back to taxpayers. We want to make sure that whatever can be done is sustainable,” said Randi Berris, vice president of marketing and communications for Business Leaders for Michigan, a statewide roundtable of top CEOs from Michigan. business and university presidents. “One-time funds should be used for one-time investments. We don’t want to create a bigger problem with a structural hole in the budget. »
The Grand Rapids Chamber, SBAM, and business organizations generally support reducing the state’s personal income tax rate. Michigan ranks 12th in the Tax Foundation’s 2022 report for its personal income tax rate, just ahead of Illinois at 13th and neighboring Indiana at 15th.
Michigan small business owners generally do not pay corporation taxes, but rather pay taxes on the income they receive from the business.
“One message we’ve heard (from SBAM members) is that we’d rather focus on things that improve the overall environment for all small businesses than one-time (grant) programs. The idea of lowering the personal income tax rate — which is what most small business owners pay since their businesses are flow-through entities — is appealing,” Calley said. “Although it was not something that was planned, the fact that it was put on the table was welcome compared to less or concentrated tax relief. been battered by restrictions on industries dominated by small businesses.
The Michigan office of Federal National Independent Business estimates that 60% of small business owners would benefit from a reduction in personal income tax. The other 40% of small businesses are organized in C bodies and pay 6% corporation tax.
Johnston thinks Whitmer and GOP lawmakers can agree on a budget that includes cuts and will find a “solution that will benefit this state.” He points to past deals which include the deal they quickly reached late last year to create a $1 billion fund to help major economic development projects in the state, as well as the higher personal property tax exemption.
“They worked together recently,” he said. “Decisions will be made one way or the other. I think there is a budget agreement to be had that includes these different components.
— Editor Andy Balaskovitz contributed reporting for this story