Snyder signs tax restructuring... Now what?

May 26, 2011

Two-thirds of Michigan businesses are in line for a tax rollback next year. The rest will pay a six percent tax on profits. Pensions in Michigan will be taxed for the first time. An income tax reduction will be delayed to save money to help balance a budget that reduces spending on schools, local governments, and higher education.

These are all details of a sweeping tax overhaul signed into law yesterday by Governor Rick Snyder.

Snyder made cutting and simplifying the taxes paid by businesses his marquee campaign promise, and he got to fulfill that promise just a few days short of five months in office.

“It will create jobs. I’m confident of that.”

The governor says Michigan’s business tax plan will be simpler, and fairer. Only a third of Michigan businesses – those with lots of shareholders and registered as “C” corporations under the tax code – will pay the six percent tax on profits after expenses.

The governor acknowledged some parts of the plan are controversial – especially taxing pensions. Next year, someone living on a $50,000 pension can expect to pay about $1,400 in state income tax.

Snyder says extending the income tax to people born after 1946 with pension income exceeding $40,000 means that share of the burden won’t be shifted to younger people.

“That’s going to help on that issue of keeping our young people right here in Michigan.”

And the governor – a former tech company CEO and venture capitalist -- says the state’s new business tax system should be solid enough to endure for another 50 years.

It’s been not quite that long – 46 years, to be exact -- since Michigan made a change of this magnitude to its business tax structure. That’s when Michigan abandoned a profits-based business tax because it was too unstable, says Charles Ballard. He is a professor at Michigan State University and the author of two books on Michigan’s economy.

“Back in the 60s and the 70s we had a corporate profits tax, and the reason we got rid of it in 1975 was that its revenues were extremely volatile. Corporate profits go up in good times faster than other things and they go down in bad times faster than other things."

Other businesses owned by sole proprietors or partnerships won’t pay taxes, but the owners will pay their personal income taxes. The governor says the state is banking – literally – on their success.

“And who am I talking about? The job creators, which are our small businesspeople and our medium-sized businesses in the state of Michigan. They’re the people that create most of our jobs.”

But Governor Snyder can’t say how many jobs he expects the new tax system will create compared to new employment that’s the result of the emerging economic recovery.

Bob Fish is the founder of the Biggby’s chain of coffee shops. Fish – he likes to be called “Biggby Bob” – closed the deal to open the chain’s 133rd franchise this week. He says the prospect of a tax cut led him to hire a 26th employee for his office, and he expects to hire more.

“I think most small business people are born to grow and build, that’s really what drives them every day.” So, I think when you have that kind of tax relief on that group of people, what you get is a bunch of people trying to figure out how to spend that money to grow and when they want to grow, I think the economy grows.”

Fish says his business helps keep people employed at a Lansing coffee roasting company, he pays truckers to ship coffee and other products to franchises across several other states, and construction workers are needed to build new franchises.

Fish says the simplicity of the new system will also make it easier for small and medium-sized businesses to plan and to chart their futures.

But Mary Lu Hultin says that’s at the expense of her ability to chart a future for her and her family. Hultin is 53 years old and accepted a buyout last year after 24 years as an environmental toxicologist for the state. She says the buyout allowed her to stay home to care for her husband with cancer as well as their 12-year-old daughter, while she trained for a new career. Hultin says she knew leaving the state workforce would cost her family money.

“I sought advice from a tax accountant, who reminded me that, yes, our pensions are   free from Michigan tax and that was a significant factor in me deciding to take the incentive.”

State employee unions say that’s a broken promise by the state because it diminishes the value of their pensions, and that it violates the state constitution. Unions are expected to challenge the new tax on pensions in court.