Some legislators voting to eliminate their own business taxes

Apr 27, 2011

The Michigan legislature and Governor Rick Snyder are considering a new tax structure for the state.  It would cut the state budget and shift some of the tax burden from businesses to individuals.  The Governor has said up to two-thirds of Michigan’s businesses might not have to file a state tax return at all.  Reporters Lester Graham and Bridget Bodnar with Michigan Watch learned that means some legislators who own businesses could be voting to cut their own taxes.

LG:  This story started out with a simple question:  how many legislators own the kind of businesses that might not pay business taxes under this proposal?  That turned out to be difficult to answer.

BB:  That’s because Michigan legislators don’t have to reveal the source of their income. Actually, Michigan is one of only three states in the nation which do not require some kind of financial disclosure from legislators.  The other two states are Vermont and Idaho.

Peggy Kerns is the Director of the Center for Ethics in Government at the National Conference of State Legislatures.  She says these disclosures usually don’t require legislators to report how much they make, just how they make it.

“It’s the source of the income, not the amount of money that somebody earns, but where that money comes from.”

That way the public can tell if there’s a conflict of interest, you know…if a legislator is voting on something that specifically benefits their own bank account.

LG:  Kerns told us usually these financial disclosure laws usually are passed because there’s been some kind of scandal.  It’s not often that these laws are passed as a preventative measure.

“Probably this issues hasn’t risen to the level that there’s a lot of public interest.  Otherwise, legislators would have passed a bill.”

So, we had to find out which of the legislators owned businesses through other means.

BB:  Quite honestly, that put us at the mercy of the legislator.   Many are up front that they are a business owner.  It’s often in their campaign literature or on their legislative website. We checked that against data kept by the state.  Then we made follow-up phone calls to businesses or we checked with the local Chamber of Commerce, or local newspaper.   

But that only told us if a legislator was the primary owner of a business.  We did NOT learn whether they were part-owners or investors in other businesses.    

Given all that, we still were able to confirm at least one-out-of-every-three legislators or their spouse owns a business.

LG:  And that brings us to our next question:  would voting in favor of eliminating a business tax on two-thirds of all businesses in Michigan--  be a conflict of interest for these legislators who own some of those businesses? 

Michigan law only states that legislators cannot enter a contract for state work in a way that “shall cause a substantial conflict of interest.”  That leaves some room for interpretation.

BB:  So, we contacted a legislative ethicist.  Alan Rosenthal is a Professor of Public Policy at Rutgers.   He doesn’t think a legislator who owns a business would have a 'substantial conflict of interest'  by voting for a tax structure even if it would mean their business would no longer have to pay a business tax.  That’s because they’re not getting a better deal than any other business.

“If he or she declares ‘I do not feel there is any conflict of interest,’ discloses the interest that the legislator has  --which are otherwise probably filed on financial dislcosure forms anyway--  I think making a public disclosure would be sufficient.”

LG:  But, remember, there is no public disclosure requirement in Michigan. 

“Well, that may be something that Michigan might want to look into.  I mean, most states have them.  I think in today’s climate and given public expectations, given the general political culture as it’s evolved, I think disclosure is a good idea.”

So, our legislative ethicist says, no, voting to eliminate a business tax even if you benefit is not a ‘conflict of interest’ because it affects such a wide swath of the citizens of the state.

BB:  And that brings us to our third question.  Why should some businesses pay a business tax and not others?   Governor Snyder says right now some business owners are taxed twice.  Once when they pay the Michigan business tax, and again when they pay their individual income taxes. 

“It’s a double-tax.  If you’re a business owner that is not a regular corporation, if you’re in a partnership, sole-proprietorship --which are most businesses-- you pay tax on your individual tax return, but in addition to that you were being asked to pay more.  You could be paying over 6% more.  You could have a tax rate of over 10% on your business income.  Is that fair?  It is not!”

So, the Governor says just pay the individual income taxes and do away with the business tax on those smaller businesses.

LG:  Economists say the current tax structure is an unfair mess from start to finish. The MBT acts as part corporate income tax AND part tax on gross receipts!   

BB:  Add to that tax breaks for some industries and not for others… it’s just sloppy.

LG:  So, just about everyone says scrap the current Michigan Business Tax.

BB:  But this idea of completely eliminating business taxes on two-thirds of the state’s businesses has raised some eyebrows.  Economists say taxes ought to be spread out as evenly and broadly across the economy as possible.

LG:  Instead, this proposal puts the business tax on just one-third of the businesses in the state, the larger incorporated businesses. 

BB:  Ed Jennings is the University of Michigan tax manager.  He says he sees another problem.   He wonders if completely eliminating the business tax on two-thirds of the businesses in the state is a good idea in the long run. 

LG:  Jennings says it would be better to impose some kind of tax--  even if it’s as little as one-percent--  in case this new tax structure does not work as well as the Governor and the legislature think it will.

 “So, let’s say we’re not bringing in enough revenues as we thought and we have to go back and change something.  It’s more difficult to tax people now when you weren’t taxing them before.  So, you just have to be careful when you’re going to be this generous, that everybody has to realize if it’s not going to work, they’re going to have to ante up.  That’s a hard pill to swallow.”

BB:  We also talked to State representative, Rick Outman.  He owns an excavating business.  It’s one of those businesses which would not pay a business tax under the Governor’s proposal.   .

 “This is a fair tax code.  You’re not getting a tax break, you’re just not getting double-dipped anymore.”

He says he’ll pay individual income taxes on what he earns from his business and he thinks that’s enough for small businesses such as his.

LG:  But some business owners say--  wait a minute, as a corporation such as an LLC, my business IS a citizen under the law and gets benefits from the state.  There are roads that my customers use to get to my business, and my deliveries are made on those roads, my business gets fire and police protection, I get the benefit of a state educated workforce and other state-funded advantages.  My business should pay its fair share of taxes.  Now, it’s not a widely- held argument, but some business owners do not see a tax on their business as a double-tax.

BB:  Representative Outman --  the guy who owns the excavating business--  rejects that argument based on what his accountant tells him.

 “I’m not a CPA.  But, what he has told me is, ‘You are paying business taxes twice.  You’re paying it on your business; you’re paying it again on your personal income tax.  Now, you’re only going to be paying it through your personal income tax so, you’re only going to get taxed once.”

BB:  And the prevailing argument in the legislature is lower taxes for those kinds of businesses will mean a better economy for all of Michigan even if others have to pay more in taxes.

With Michigan Watch, I’m Bridget Bodnar.

LG:  And I’m Lester Graham for Michigan Radio News.