Michigan’s business tax climate ranks comparatively well to other states, and business advocates say election-year tax cuts proposed in Lansing could further improve that standing.
The Washington, D.C.-based Tax Foundation’s annual report ranks Michigan 12th overall among the 50 states for its 2022 business tax climate, an improvement by one position from 2021. That’s a ranking that’s also better than every other state in the Great Lakes region except for Indiana, which ranks ninth overall.
The Tax Foundation’s January report on state business tax climates comes as Gov. Gretchen Whitmer pushes for targeted tax cuts through repealing the so-called “retirement tax” and raising the earned income tax credit.
Whitmer’s proposal stands in contrast to a broad-based, $2.5 billion plan that Republicans in the Legislature advanced this month but which Whitmer has labeled irresponsible and quickly promised to veto. The GOP plan includes a cut in the state’s individual income tax and would double exemptions for retirement income. Another bill would cut the corporate income tax rate.
The competing plans from the Democratic governor and Republican lawmakers makes for a good possibility that some sort of tax cut in Michigan will occur this year as the two sides work out a budget for the state’s fiscal year that starts Oct. 1.
“It’ll be a negotiation. The way I look at it: We have bookends now for negotiation over the governor’s more modest plan and the Legislature’s more aggressive plan. They’ll negotiate and, hopefully, come to an agreement that achieves everyone’s goals,” said Brian Calley, president and CEO of the Small Business Association of Michigan and a former Republican state legislator and lieutenant governor under former Gov. Rick Snyder.
“Hopefully, we will come out with the state a little more competitive and taxpayers recognized for their contributions to the state’s growing resources,” Calley said.
Legislation that the GOP-controlled House and Senate advanced two weeks ago on party-line votes would have reduced Michigan’s individual income tax rate from 4.25 percent to 3.6 percent, double the amount of retirement income exempt from the tax to $40,000 per taxpayer and $80,000 for a couple filing a joint return, and lower the eligibility age for the exemption from 67 to 62. The legislation, House Bill 768, also would create a $500 tax credit per dependent 19 years old and younger.
In a letter to legislators promising to veto H.B. 768, Gov. Whitmer called for negotiations over a tax cut.
“While I will not support legislation that forces cuts to schools, road repairs and public safety, I am encouraged that the House and Senate agree in principle that putting money back in the pockets of Michigan’s retirees and working families is a priority,” Whitmer wrote. “It is my sincere hope that we can now come together to negotiate a compromise that fully considers a budget alongside any tax policy decisions while putting the people of Michigan first.”
Whitmer’s proposed budget offers narrower tax cuts and would increase the state’s earned income tax credit from 6 percent to 20 percent of the federal credit, providing nearly $3,000 in tax relief to an estimated 750,000 households. The governor also wants to repeal the state’s tax on public pensions over four years and restore deductions on private retirement income such as IRAs and 401(k)s, generating more than $1,000 in annual tax savings for 500,000 households.
Increasing the earned income tax credit has the backing of several business groups, including a coalition of chambers of commerce that includes the Grand Rapids Area Chamber of Commerce and the Michigan West Coast Chamber of Commerce in Holland.
As well, the idea has support from a separate coalition that consists of dozens of business groups, including SBAM, nonprofit organizations and businesses that believe expanding the state’s earned income tax credit “would not only put more money back into the pockets of working Michigan residents, but it would also help address the slow return to the labor force that is holding back Michigan’s economic recovery,” according to a recent letter to legislators.
A higher earned income tax credit “would benefit residents in every part of the state — rural and urban areas, all counties, both peninsulas, and in every political district and jurisdiction,” the coalition wrote.
Biz groups watch closely
A separate GOP-backed bill that the Senate passed on March 3, which Whitmer also is likely to veto if it clears the House, would cut the state’s corporate income tax from 6 percent to 3.9 percent. A Senate Fiscal Agency analysis on Senate Bill 392 concluded the proposed corporate income tax cut would trim state revenue by $465.5 million in the next fiscal year and by $490 million in 2023-24.
In the Tax Foundation’s annual report, Michigan ranked 20th for the corporate income tax, again better than every other Great Lakes state except Indiana, which ranked 11th.
Business groups are closely watching to see how the political debate over state tax cuts ultimately unfolds as legislators and the administration hash out a budget this spring and summer. They also are offering their views on what they’d like to see happen.
The Grand Rapids Area Chamber of Commerce wants the upcoming debate in Lansing to include reducing the corporate income tax and eliminating the personal commercial property tax, said Senior Vice President of Advocacy and Strategic Engagement Andy Johnston. The Legislature under Snyder a decade ago repealed the industrial personal property tax as part of a broad reform package that created the present corporate income tax.
Whitmer and lawmakers did agree in late 2021, as part of a supplemental spending bill, to raise the exemption on the personal property tax for small businesses from $80,000 to $180,000.
The Tax Foundation’s 2022 report ranks Michigan 21st in the nation for the property tax burden, although data used for the index was from prior to the increase in the exemption that was enacted in December. The Tax Foundation’s ranking includes states’ taxes on real and personal property, net worth, and the transfer of assets.
Completely repealing what he calls a “dumb tax” that imposes an administrative burden on businesses would “go a long way” to improving the state’s long-term competitiveness, Johnston said.
The Grand Rapids Chamber also urges the two sides to reach a budget deal reducing the tax burden in a way that’s sustainable and won’t lead to future budget problems, Johnston said.
“From a business community perspective, and from a taxpayer perspective, it’s definitely time to have this discussion,” Johnston said. “We want to make sure what is done really helps advance Michigan’s competitiveness for the long term, and is also responsible from a long-term budget perspective.”
Make it ‘sustainable’
The drive to trim taxes in Michigan comes after the state recorded a $2.69 billion budget surplus for the 2021 fiscal year that ended Sept. 30, and as estimates forecast a $1.44 billion surplus in the present 2022 fiscal year. The state also has billions more in one-time money from federal pandemic relief and infrastructure funding.
Similar to the Grand Rapids Chamber’s view, Business Leaders for Michigan wants the governor and legislators to devise a tax-cut plan that avoids future fiscal problems.
“It’s perfectly appropriate for the governor and our legislative leaders, with so much revenue coming into the state, to be asking questions about whether some of those dollars should be going back to the taxpayers. We want to make sure that whatever may be done, that it’s sustainable,” said Randi Berris, vice president of marketing and communications for Business Leaders for Michigan, a statewide roundtable of top corporate CEOs and university presidents. “One-time funds should be used for one-time investments. We don’t want to create a bigger problem down the line with a structural hole in the budget.”
The Grand Rapids Chamber, SBAM, and business organizations in general back reducing the state’s individual income tax rate. Michigan ranks 12th in the Tax Foundation’s 2022 report for its individual income tax rate, just ahead of Illinois at 13th and neighboring Indiana at 15th.
Small business owners in Michigan generally do not pay the corporate income tax, but rather pay taxes on income they receive from the business.
“One message we’ve been hearing (from SBAM members) is we’d rather focus on things that make the overall environment for all small businesses better than one-off (grant) programs. The idea of rolling back the individual income tax rate — which is what most small business owners pay since their businesses are pass-through entities — is attractive,” Calley said. “Though it’s not something that was expected, the fact that it was put on the table has been welcome compared to a smaller amount or concentrated tax relief. Small businesses really feel like they’ve been beat up by restrictions on industries dominated by small businesses.”
The Michigan office of the National Federal of Independent Businesses estimates that 60 percent of small business owners would benefit from a reduction in the individual income tax. The other 40 percent of small businesses are organized as C corps and pay the 6 percent corporate income tax.
Johnston believes Whitmer and GOP lawmakers can agree on a budget that includes cuts and will find a “solution that will benefit that state.” He points to past agreements that include the deal they reached quickly late last year to create a $1 billion fund to assist major economic development projects in the state, as well as the higher personal property tax exemption.
“They have worked together recently,” he said. “Decisions will be made one way or the other. I think there’s a budget deal to be had that includes these different components.”
— Managing Editor Andy Balaskovitz contributed reporting to this story