Investigative
12:21 pm
Thu March 3, 2011

Eliminating business tax credits

Update 12:21 p.m.

The State of Michigan will have to honor some tax credits for years to come because of contractual obligations.  In a speech today, Governor Snyder indicated over the next four years, the state was on the hook for $2-billion dollars in credits.  About $500-million of that is in next year's budget. 

March 2nd, 8:23a.m.

Governor Snyder says his approach to taxes in Michigan is “simple, fair, and efficient.”  One way the Governor wants to make the tax structure more fair is by eliminating all tax credits for business.  It’s a controversial move which surprised many people in Lansing.

The Snyder administration wants to scrap the complicated Michigan Business Tax and replace it with a flat 6% corporate income tax. 

To make things even simpler, the proposal would eliminate the dozens of tax breaks that have been carved out for certain industries.  You’ve heard about some of them in the news recently.  There’s the movie tax credit, and the advanced battery industry tax credits.  But there are lots of credits and exemptions:   for the retail food industry, the Michigan International Speedway, the iron ore mining industry, tax credits for reclaiming and building on old industrial sites, the so-called brownfield tax credits. 

And then there are two big tax credits that kind of compete against each other.  There is a credit for hiring workers. And then there’s a credit for investing in equipment which often replaces workers with automation.  The list of tax breaks benefitting certain businesses goes on-and-on.   

When the Governor’s proposed budget was presented to members of the legislature, Lieutenant Governor Brian Calley explained some of the details.

“Now, we eliminated the credits that are attached to this tax.  And now I’m just going to make that blanket statement.  And we keep on getting follow-up questions, ‘What about the—‘  ‘Yeah, that one too.’ ‘What about—‘  ‘Yeah, that one too.’  We eliminated all of the credits.”

Lieutenant Governor Calley explained the State of Michigan will honor its existing commitments, but the goal is level the playing field for doing business in Michigan.

“In most cases these credits were either picking winners and losers based on access or influence or they were solving a symptom to a problem.  And we want to get to the root of the problem instead of treating those symptoms through credits.  So, treat everbody the same:  simple, fair and efficient.”

Governor Snyder has said even Wall Street doesn’t always do a good job of picking winners and losers, so why would government think it can do any better.

So, how did we get to the point where there are so many business tax credits?

The basic idea is supposed to be using the tax breaks as an economic development tool to keep jobs in Michigan.  But once the tax breaks are on the books, it’s hard to get rid of them… even if they’ve outlived their usefulness.

David Zin is the Chief Economist for the Senate Fiscal Agency.   He says his agency doesn’t advise the legislature whether a tax credit is worth keeping.

“We try to avoid the normative judgement of, ‘Oh, wow, you got to get rid of that,’ or ‘Oh yeah, don’t touch this.’  It’s more of, ‘Here’s what we think it’s doing; here’s what we think it’s costing,’ and we leave the legislature up to kind of make that decision about whether it’s a worthwhile item.”

But Zin says some of these tax breaks would not get the nod of approval from many economists.

 “The more specialized one of these credits, exemptions or deductions is, the less it kind of fails the good economics litmus test.  But there are political considerations  and in some cases you want to do specific things for specific groups .  You know, both economic and social policy sometimes get channelled through the tax system.”

When times are good and tax revenues are rolling in, no one thinks about removing those tax breaks for favored industries.  And when times are not good, no one wants to take a tax break away from an industry. 

But times have not been good for Michigan for a decade.  This complete business tax overhaul proposed by the governor gives the state government a chance to clear the deck.

These tax breaks for business amount to a lot of money, an estimated $2.6 billion in lost revenue for the state.

Joan Crary is an economist at the University of Michigan.  She says tax credits usually do get a second glance when state budgets get tight.

“It’s probably a healthy thing to do periodically anyway, but the incentive’s much greater when you’re looking for additional revenue.”

Crary says if these tax credits are going to be eliminated, businesses need time to prepare.  They need to know for certain as soon as possible.  That’s part of the reason the governor introduced his budget early and he’s asked the legislature to approve it early.

Joan Crary says even with a corporate flat tax lowering the tax burden on business overall, there are going to be some businesses who likely will fight to keep the lucrative tax credits. 

 “But I think we’d be kidding ourselves to think that there won’t be changes at the margin as we go forward with it.  I think it may be unavoidable.”

And there’s the argument that even with low business taxes, a special tax break is an expected part of the deal to attract business to a state.

John Lindstrom is the Publisher at the Gongwer News Service.  He says everybody –even businesses— likes to feel as though they’re getting a special deal.

“You know, the free rustproofing school of business development.  You know, throw in the free rustproofing and I’ll buy the car.  Even in states that have extremely low business taxes, there’s usually some form of incentive that they have to come up with.”

But for now, businesses already in Michigan seem willing to give the governor’s budget a shot even if they’re not thrilled about losing some of the tax breaks they’ve been getting.

Lindstrom says trade groups and businesses are quietly preparing, though, talking to their lobbyists in Lansing.

“There’s no question that the lobbyists are going to earn their money, that they’re going to be watching this stuff extremely closely.  And this next month could be a deciding line on some of this stuff.”

What they’re watching for… is a change in the budget proposal.   All of the pieces of the tax structure change are dependent on the others.  If the legislature is not willing to tax pensions or if it does not eliminate the Earned Income Tax Credit benefitting the working poor, or an industry is able to preserve its tax credit, the Governor’s budget plan is out of whack.   John Lindstrom with Gongwer says that’s what the Snyder administration is worried about.

“If anybody succeeds in winning a change to the proposal, then the whole thing could unravel completely.”