Business advocates in Lansing panned Gov. Gretchen Whitmer’s proposal to implement what she called “tax parity” by having small businesses pay the same 6-percent state income tax now levied on corporations in Michigan.
Under the $60.2 billion budget proposal presented Tuesday to lawmakers, small businesses classified as LLCs and S corps — also known as pass-through entities whose owners now only pay taxes on their income from the business — would get a $50,000 tax deduction.
“Pass-through entities with less than $50,000 in income will not pay any additional tax. Individual owners of pass-through entities will claim a credit on their individual income tax return to avoid double taxation on their share of the business income,” according to Gov. Whitmer’s budget proposal.
In exchange for the pass-through tax on small businesses, Whitmer proposes to repeal a pension tax on retirement income for senior citizens, “ensuring that seniors get the full benefit of the pensions they worked so hard to obtain.”
Business groups were quick to oppose the proposed pass-through tax, which would impose significant changes to the state tax code implemented in 2012 during former Gov. Rick Snyder’s first term. They included the elimination of the much-maligned Michigan Business Tax and eliminating double taxation on small business owners who previously paid taxes on their business and the individual income tax.
“A tax increase on certain businesses is concerning in our work to maintain a strong business climate,” Grand Rapids Area Chamber of Commerce President and CEO Rick Baker said in a statement.
The Small Business Association of Michigan contends the pass-through tax proposal would equate to a 41-percent tax increase affecting about 100,000 small businesses in Michigan.
“Michigan has made substantial economic gains in employment since double taxation on small businesses was eliminated in 2011,” SBAM CEO Rob Fowler said. “Gov. Whitmer’s proposal would be a major step backward and a job-killer for small businesses, who make up most of the employment and employment growth in our state.”
The Michigan office of the National Federation of Independent Businesses termed the tax proposal as disappointing.
The NFIB cited a January analysis by East Lansing-based Anderson Economic Group that shows individual income tax revenue for the state from sole proprietorships, partnerships, and S corporations grew 81 percent over five years and more than doubled from $400 million to more than $800 million since 2010.
The analysis shows “small businesses are already paying more than their fair share of taxes in this state,” said Charles Owens, state director in Michigan for the NFIB. The governor’s proposal would bring back double taxation on the same income for many small businesses, he said.
“The governor expressed a desire to ‘level the playing field’ for small business in her State of the State address,” Owens said. “We fail to see how taxing small businesses twice on the same income is consistent with that goal.”
The pass-through business tax would generate an estimated $203 million in state revenue in the 2020 fiscal year and $280 million in the 2021 fiscal year.
Whitmer’s budget proposal points out that small businesses could deduct their state income tax on their federal tax returns, reducing the net state and federal cost of the tax to $100 million or less and “allow for repeal of the retirement tax at a greatly reduced cost and keep more tax dollars in Michigan.”
The budget proposal estimates that more than 400,000 households would each save an average of $800 a year through repeal of the state tax on pensions and retirement income. Repealing the levy would cut state revenue by $259 million in the 2020 fiscal year and $355 million in 2021.