State Should Keep The Single Business Tax, But With Changes
As the debate continues over how best to overhaul state business taxes, Michigan faces tough choices for replacing the revenue generated by the SBT—scheduled to disappear in 2010.
ANN ARBOR, Mich.—Michigan should consider alternatives that maintain the state's Single Business Tax (SBT) in slightly modified form, rather than scrapping it altogether, says a University of Michigan business school economist.
"The Single Business Tax as originally conceived offered efficient investment incentives, a counter-cyclical revenue stream and tax burdens that fell on economic rents," said James Hines, professor of business economics at Michigan's Stephen M. Ross School of Business. "While in practice the SBT does not promote efficiency as cleanly as it does in theory, the attractive features of the SBT compare favorably to those of leading corporate income tax alternatives."
The most notable feature of Michigan's SBT, which is scheduled to end in 2010, is the very large revenue it collects, relative both to state income and to other revenue sources for the state government, Hines says. In fiscal year 2001, the SBT collected $2.2 billion, representing 9.9 percent of total Michigan taxes and 0.76 percent of Michigan personal income.
According to Hines, the Michigan Legislature adopted the SBT in 1975 during a severe budget crisis, in hopes the new tax would generate an additional $200 million immediately and, over the long term, provide a stable source of tax revenue, encourage capital investment and make tax administration easier. Unlike the corporate income tax or dizzying array of supplemental taxes used by other states, the SBT is a value-added tax levied at a current rate of 1.9 percent on adjusted gross receipts.
The original concept behind the SBT was to encourage business investment in the state by permitting firms to deduct 100 percent of investment expenditures from taxable income, he says. Over the years, the SBT---which is unique to Michigan---has come under increasing attack for the tax burden it imposes on the state's businesses, particularly companies that are losing money, Hines says.
"Michigan's corporate-tax burdens are much heavier, typically exceeding 50 percent greater than the average burdens of other states," said Hines, who also is research director of the Ross School's Office of Tax Policy Research. "However, Michigan's business-tax collections have the potential to respond much less dramatically to business-cycle fluctuations than those of other states."
Hines says an increase in the state unemployment rate of one percentage point is associated with a reduction of 8.5 percent in per-capita corporate tax collections. In Michigan, however, SBT collections from incorporated businesses have been virtually unaffected. This counter-cyclical effect provides important revenue cushions in years when Michigan most needed it. Other states have found that their corporate tax collections move with the business cycle, thereby exacerbating revenue shortfalls in recession years.
The primary sticking point for the SBT in the last decade, according to Hines, has been the difficulty of taxing multistate firms without either providing generous incentives for investments in other states or discriminating against interstate commerce. He believes this problem can be surmounted if Michigan is serious about continuing to use the SBT.
"The Michigan experience with the Single Business Tax serves as a reminder that a tax system with properties that would be very desirable if universally adopted and never changed need not maintain those properties in today's world," Hines said. "What the Michigan Legislature will do to replace the revenues lost by the SBT as its rate falls in coming years and it is eliminated at the end of 2009 is not clear. One would hope the choice of a replacement will be guided by wise anticipation of some of the practical difficulties that tax policies encounter."
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