Fight Looming in Michigan Over Single Business Tax; Dayton’s Earnings Tax Up for Renewal

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Officials and voters will be deciding state and local tax policies in Michigan and Ohio in coming weeks. Michigan lawmakers took the first step toward repeal of the state's 30-year old Single Business Tax (SBT) last week when a House committee voted to repeal the tax, although it is not due to expire until 2009. Governor Jennifer Granholm said she would veto any bill to repeal the SBT unless lawmakers come up with a replacement tax, the Detroit Free Press reports.

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In Dayton, Ohio, voters will get to reconsider the city's request for renewal of a 0.5 earnings tax through a special election on Wednesday, March 14. The city has a permanent 1.75 earnings tax and the total of the two taxes will bring in about $113.3 million this year. Voters are likely to approve the measure; the off-day election historically “leads to low turnouts and high passage rates,” the Dayton Daily News says.

Michigan House Tax Policy Committee Chairman Fulton Sheen (R-Plainwell) said that he personally favors replacing the income, personal property and SBT, with a bigger sales tax on more goods and services, the Free Press says. But Speaker Craig DeRoche, (R-Novi) added to the controversy by saying he wasn't looking to replace a business tax with a consumer tax.

The SBT was created in 1975 to replace seven business taxes in Michigan, including a corporate income tax. It now taxes business' gross receipts, as well as payroll and fringe benefits, the Free Press says. The current rate is 1.9 percent, but credits and exemptions have been added to the tax, making it confusing for Michigan business owners.

“I haven't got a clue what I own or how a business decision will affect it,” Jim Donahue of Sterling Solutions & Systems in Plymouth told the Free Press in a separate story.” It's not tied in any way to making money. If I have a terrible year, I can still end up owing it. It seems to defy logic.”

Local earning taxes, like Dayton's, are the subject of a study by University of Missouri-Columbia economics professor Joseph Haslag, who says that a city's income growth is slowed ,compared with its surrounding suburban areas, if it taxes wages, according to the Kansas City Star. The study used U.S. Census data and earnings tax figures from 101 cities. One in four, including Kansas City, has an earnings tax, Haslag says.

Kansas City officials acknowledged that the earnings tax was unpopular, but said that the tax was the largest source of income for the city, 45 percent of revenues. “We just can't cut that amount out of the budget,” said Kansas City Councilman Charles Eddy, chairman of the Finance and Audit Committee.

Economists argue that Michigan's SBT discourages investment, despite a report from the Tax Foundation of Washington, D.C. that ranked Michigan 26th among the 50 states in overall business taxes. But Patrick Anderson, an East Lansing economist, questioned the validity of the study, the Detroit Free Press reports.

Changes made on behalf of special interests have corrupted the original SBT, Anderson says. The original SBT gave a break for money spent on equipment or facilities, which was helpful to the auto industry, and Anderson thinks that future changes should also benefit the industry. “People who call the auto industry a dinosaur forget that manufacturing constitutes 40 percent of investment in this state,” Anderson said. “It's one of the biggest hi-tech employers in the country.”

The Michigan Chamber of Commerce opposes the SBT, Tricia Kinley, the Chamber's tax policy director, told the Free Press. “Most people feel it's a disincentive to doing business,” she said. “Any replacement has to be simpler, less of a burden to pay and easier to comply with. And it must encourage economic development.”


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