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Taxes on Businesses
GLOSSARY
Base In
taxation, the dollar value on which a tax is levied.
Capital acquisition deduction (CAD)
Single business tax deduction allowed for purchase of
real and personal property.
Effective rate Tax
rate after credits, exemptions, and deductions are applied.
Final incidence In
regard to taxes, the person or entity that cannot shift all or part
of the levy's cost elsewhere.
Mill A monetary unit
equal to 1/1000 of a dollar; “millage” is the tax rate
on property—the number of mills assessed against the property's
taxable value.
Personal property Generally,
items not attached to real estate; e.g., equipment, computers, furniture,
tools.
Real property Generally,
land and items permanently attached to it—e.g., land, buildings,
fixtures.
Unemployment insurance Provides
money to workers to replace some of their lost wages if they become
unemployed.
Value added The value
a business adds to its product (or service) during production; the
main components are labor, interest paid, depreciation, and profit.
Workers' disability compensation
Replaces wages and extends medical/rehabilitation benefits
to workers injured on the job.
BACKGROUND
[APRIL 1, 2002] According to a 1995 study (latest
available data) by the Institute on Taxation and Economic Policy
(Washington), 42 percent of Michigan's state and local taxes are
collected from business, slightly more than the national average
of roughly 41 percent; Michigan ranks 34th highest among the 50
states. The major levies affecting Michigan businesses are
- the single business tax (SBT),
- real and personal property taxes (state and local),
- the unemployment insurance (UI) tax,
- vehicle fuel and registration taxes,
- the sales tax (although this is a consumer rather
than a business levy, an estimated 25–30 percent is paid
by business), and
- workers' disability compensation insurance (although
this is not a tax, it is a major business cost imposed by government).
It is unlikely that the final incidence of these costs
falls on business: A large share is passed on to consumers, employees,
or shareholders in the form of higher prices, lower salaries, or
lower profit.
Since 1991 business taxes in Michigan have been reduced
significantly. The Senate Fiscal Agency estimates that in fiscal
year 2000–01, tax savings to business will total about $1.5
billion, including $850 million in SBT relief. The next most likely
candidate for major reduction is the personal property tax on machinery
and equipment.
All the levies are discussed below except the sales
tax and vehicle fuel/registration taxes, which are discussed elsewhere
in this book.
Single Business Tax
The SBT, easily Michigan's most important business
tax, is a levy on the value a business adds to its product during
production, whether the product is automobiles or legal services.
The main components of the added value are labor, interest paid,
depreciation, and profit. An SBT deduction is allowed for capital
investment, and special relief is provided for firms that are labor
intensive or have gross receipts below a certain level; complete
exemption is allowed for very small businesses.
The current rate (tax year 2002) is 1.9 percent. The
original rate was 2.35 percent, which was reduced to 2.3 percent
in 1994. In 1999 legislation was enacted that reduces the rate 0.1
percent each year until the tax is eliminated.
The SBT took effect in 1976 as a replacement for seven
business taxes, of which the largest three were the corporate income
tax, personal property tax on inventory, and corporate franchise
tax. Not only has the SBT added stability to the Michigan tax structure,
but it has exhibited reasonably good growth potential: Collections
rose from about $800 million in the levy's first full year (FY 1976–77)
to about $2.2 billion in FY 2000–01. The latter figure is
down from about $2.5 billion in the prior year due to the 0.1 percent
rate reduction and the weak Michigan economy.
Single business tax receipts comprised about 9 percent
of all state tax revenue when the levy went into effect, rose to
a high of 17.5 percent in 1988, and now are back to 9 percent. The
exhibit shows the distribution of SBT revenue
by industry class for FY 1997–98 (latest data available).
Manufacturing provides the largest part of SBT revenue, roughly
39 percent, but in the last decade its share has declined from about
55 percent. In comparison, the services sector's share rose from
about 10 percent to 18 percent.
In theory, a value-added tax should extract a contribution
from all firms, regardless of organization, size, or business type.
In practice, however, more than half the businesses in Michigan
do not have an SBT liability largely because of an exemption for
small firms and the deduction for capital investment; about 75 percent
of the tax is paid by 5 percent of the firms. The SBT's actual effective
rate (after credits, exemptions, and deductions are applied) is
1.57 percent; it rises from 0.2 percent for the smallest firms to
1.98 percent for businesses with a tax base exceeding $100 million.
(These calculations are based on FY 1997–98 data and do not
reflect subsequent revisions to the SBT, but the changes probably
have not substantially altered the tax's effective rate.)
Over the years there have been many important revisions
to the SBT. One concerns the capital acquisition deduction (CAD)—the
SBT deduction allowed for purchase of real and personal property—and
is being challenged in court. To make the CAD more fair to firms
doing business in Michigan but headquartered in other states, multistate
SBT payers are permitted to apportion their deduction using the
same formula they use to apportion their tax base. This is a three-factor
formula involving the portions of a firm's payroll, property, and
sales that are located in Michigan. For tax years after 1998, the
in-state sales factor increased to 90 percent (up from 80 percent)
and the Michigan payroll and property factors each fell to 5 percent
(down from 10 percent). The change has been challenged by an Illinois
corporation that contends that the Michigan CAD burdens out-of-state
businesses and discriminates against interstate commerce. The state
court of claims agreed, but the appeals court ruled in 2001 that
the CAD is not designed to punish multistate taxpayers and it has
not harmed those who choose to increase their Michigan presence.
The case is expected to be appealed to the Michigan Supreme Court.
If ruled unconstitutional, the tax will revert to the old CAD calculation
and the sales-payroll-property apportionment formula will return
to 70-15-15 percent.
The most recent and far-reaching SBT change was enacted
in 1999, reducing the rate 0.1 percent each year until 2021, when
the tax is completely eliminated. The legislation does include a
provision that suspends the phaseout if the balance in the Budget
Stabilization Fund falls below $250 million, which may be the case
by the end of FY 2002–03.
Property Tax
The property tax is Michigan's oldest form of taxation,
dating back to 1893. State government and all local governments
levy taxes on the value of real and personal property owned by commercial
operations; in addition, the state levies a tax on utility property,
which equates to the statewide average property tax rate for commercial,
industrial, and utility property (50.82 mills in 2000). All other
business property, classified as commercial or industrial, is taxed
at varying rates by local government units.
In 2000, for all jurisdictions, taxes on real property
will generate about $8 billion and on personal property about $1.7
billion. Of total business property taxes, about two-thirds are
levied on real property and one-third on personal property.
Real Property
The school finance reform legislation of 1993 and
1994 (Proposal A) changed the manner in which residential and business
properties are taxed. Prior to the reforms, both were taxed in the
same way, but at varying rates, by local government units. Under
the new system,
- a 6-mill statewide education tax on all property
is levied for the state School Aid Fund, and
- an 18-mill school operating levy on business property
is levied for local school districts.
As a result of the reform, the average tax rate for
all property in 2000 was 39.32 mills, down from 56.64 mills in 1993,
the last year under the old system. The average tax rate on business
property in 2000 was 50.82 mills; on nonbusiness property the average
was 32.8 mills. In 2000 business paid just under $4 billion in property
taxes—roughly 42 percent of all property tax paid in the state.
In 1993 business had paid about 28 percent of all property taxes.
All property, other than utility, is assessed by its
local government and equalized by the county and the state. The
annual assessment increase on each parcel is limited to the inflation
rate or 5 percent, whichever is less (in 2001, assessments were
limited to a 3.2 percent increase). When property is sold, it is
reassessed at current market value. Local governments thus must
keep track of two values for each parcel: the taxable value and
the assessed value. The assessment cap is more beneficial to residential
than business property, because the former generally increases more
in value.
Personal Property
Personal property generally is defined as property
not permanently affixed to land: e.g., equipment, furniture, tools,
computers. In Michigan, only businesses pay the personal property
tax (PPT). From 1985 to 2000, personal property taxes grew from
$668 million to about $1.7 billion—an increase of over 150
percent (about 57 percent when adjusted for inflation).
The state levies 6 mills on personal property, the
same as Proposal A established for real property. There are state
and local taxes that are tied to the PPT (i.e., state utilities
tax and industrial facilities tax). The local levy varies from place
to place, depending on what has been approved by local voters. Thus,
if in City A, 12 mills are levied on real property, 12 mills also
are levied on the personal property of those who must pay it.
Reliance on PPT collections varies across the state.
In some rural counties, less than $10 million is raised annually
from it, while in some more populous counties the figure exceeds
$3 billion. In some counties the PPT represents less than 5 percent
of total taxable property value; in others it is significant—in
Midland and Kalkaska counties, 35 percent and 22 percent, respectively
(2001). The statewide average is about 12 percent.
Although Proposal A substantially reduced the PPT
(the average nonhomestead, which includes business property, rate
fell from 56.6 to 48.17 mills, about a 15 percent decline), most
statewide business associations still list PPT repeal as a major
legislative goal.
Thirty-five states levy a PPT and in most, the levy
is similar to Michigan's. Ten, including Illinois, New York, and
Pennsylvania, have no PPT. The remaining five levy a PPT but allow
specific exemptions (e.g., for manufacturing equipment).
Workers' Disability and Unemployment Compensation
In early 2002 the governor signed an executive order
(1) combining the Unemployment Agency and the Bureau of Workers'
Compensation into a new Bureau of Workers' and Unemployment Compensation
and (2) moving the new bureau—along with the Wage and Hour
Division—into the Michigan Department of Consumer and Industry
Services. The objective is to combine functions with a similar purpose
into a single agency: Workers' compensation and unemployment assistance
benefits exist to replace wages lost by workers, and the Wage and
Hour Division collects wages and fringe benefits owed to workers.
Workers' Disability Compensation
Although workers' compensation is a major business
cost, it is not a tax. The law requires that every employer subject
to the federal Workers' Disability Compensation Act provide a way
to assure that it can pay benefits to its workers injured on the
job. Most companies buy insurance to protect them from workers'
injury claims. With state permission, some financially sound employers
are permitted to self-insure for this coverage by paying into a
regulated pool.
The state's assigned-risk pool (a state-managed entity
from which hard-to-insure companies may purchase coverage) cut its
rates every year from 1996 to 2000, but in 2001 rates increased
for the first time in several years largely because (1) a major
insurance writer went out of business, (2) reinsurance rates increased
sharply after the September 11 terrorist attacks, and (3) rates
had been artificially low in the past few years due in part to recent
rate cuts.
According to the Workers' Compensation Research Institute
(Cambridge), Michigan's workers' compensation system is improving,
as indicated by three measures.
- From 1992 to 2000, the annual average total benefits
per worker fell more than 5 percent (adjusted for inflation).
- From 1992 to 2000, the number of lost-time claims
per 100 workers (the claim rate) fell from 2.5 to about 1.5 percent.
- From 1991 to 2001, the interval from the time a
dispute is filed to when a decision is handed down following a
formal hearing fell from 18.1 to 12.6 months.
There are many ways to compare workers' compensation
state by state. The National Academy of Social Insurance (Washington)
has published 1999 state data showing that indemnity and medical
benefits paid in Michigan amount to 0.9 percent of covered payroll.
The national average is 1.05 percent, and Michigan ranks roughly
in the middle of the pack: 28th among the 50 states.
Unemployment Compensation
Unemployment insurance (UI) is a form of social insurance,
administered in Michigan by the state Unemployment Agency (UA).
It is designed to provide money to help workers replace some of
their lost wages after becoming unemployed. Unemployment insurance
taxes are paid by almost all businesses that (1) employ one or more
employees in any 20 given weeks in a calendar year or (2) in a calendar
year paid $41,000 or more in payroll to employees covered by unemployment
insurance.
Michigan's average weekly UI benefit in the 2d quarter
of 2001 was $262, about 37 percent of the $710 statewide average
weekly wage. Nationally, the average weekly benefit was $229 a week
in 2000. Michigan ranks 8th in average wage and 31st in wage replacement.
Employers pay two unemployment taxes: federal and
state. The Federal Unemployment Trust Account (FUTA) assesses an
effective rate of 0.8 percent against the first $7,000 of each employee's
wage. This money goes into the federal fund, which doesn't directly
pay benefits to former workers but does assist the state with administrative
and other costs associated with the program.
The state tax is levied on the first $9,500 of each
covered employee's wages paid each calendar year, and the rate paid
on that $9,500 is phased in over a business's first five years in
operation. The taxes are deposited in the state Unemployment Insurance
Trust Fund, which makes payments to workers who have become unemployed.
Each employer has an “account”—that is, a record
is kept on how much the firm has paid in and how much the trust
fund has paid out in benefits to the firm's former workers.
- Generally, in the first four years of a business's
liability, the tax rate varies according to the type of business
it is and how much in benefits has been paid out in the firm's
behalf (for further detail, readers are directed to Michigan
in Brief, 6th Edition, at www.michiganinbrief.org).
- In the fifth and subsequent years, the firm's tax
rate is based on the full amount of any unemployment benefits
paid out and whether it has built any reserve in its account.
For 2001 tax rates may range from 0.1 percent (for businesses
that have had no layoffs in the last seven years and an adequate
reserve in their account) to 8.1 percent (for firms with high
layoffs and little or no reserve).
Public Act 25 of 1995 made several important changes
in unemployment taxes and the changes resulted in UI taxes being
reduced every year since. Although Michigan's jobless tax sometimes
goes as high as 10 percent, rates normally range from 0.1–8.1
percent. In 2002 some 161,000 employers will receive a 10 percent
across-the-board cut in their unemployment taxes and about 105,000
will qualify for reductions in the account-building component of
their tax rate; each tax cut will save employers a total of about
$100 million. The reductions will apply to employers who are “fully
experience rated”—typically those who have been in business
for at least five years. They will be incorporated into the 2002
tax rate notices that the UA will issue to employers in December.
The average employer tax rate as a percentage of taxable
wages fell from a recent high of 4.46 percent in 1994 and an all-time
high of 5.71 percent in 1985 to 2.78 percent in 1998 (latest data
available). The balance in the UI Trust Fund, which needs to be
substantial as a cushion against recession, was $2.9 billion as
of June 30, 2001.
DISCUSSION
Single Business Tax
The SBT generates controversy mainly for two reasons:
It (1) substantially increased the tax burden of many businesses
that had been paying little or no tax, and (2) requires a tax payment
even when no profit is earned. Some have argued that the SBT hurts
small firms and that a business should not pay a tax unless it earns
a profit. Others contend that because all firms use government services,
all should make a contribution (as with the local property tax)
regardless of whether a profit is reported, that a two-tier tax
structure would be unfair, that moving to a profits tax would make
the SBT more unstable, and that the tax burden on most small businesses
is too minor to have a negative effect on them.
Many observers believe the complete phaseout of the
tax was an overreaction to claims that the tax is too complex, unfair
to small business, and not based on ability to pay. They believe
that many SBT critics lost sight of the levy's original purposes:
to (1) simplify the tax system, (2) increase its stability, (3)
provide a more neutral tax treatment for businesses, and (4) improve
the investment climate.
Supporters of the tax point out that in large part
the goals have been achieved, but they were compromised over the
years by numerous changes in the tax. Currently, the major concerns
are (1) the revenue loss due to the phaseout—about $130 million
annually—and (2) the fact that when the tax is completely phased
out, there will be no major state tax on business, which will shift
the burden to the individual taxpayer.
Phase-out supporters argue that business taxes are
passed on to the consumer, result in businesses paying lower wages,
and result in owners earning lower profits. Some observers believe
that a case can be made to simplify the tax and return it to its
original purpose by eliminating most special provisions and lowering
the rate rather than phasing the levy out.
Property Tax
Prior to passage of school finance reform and the
reduction in property tax rates, Michigan's property tax burden
was about one-third above the national average and 50 percent above
the burden in the adjoining states of Ohio and Indiana, which caused
many to view the tax as detrimental to economic development, particularly
in southeast Michigan, where tax rates are higher than in most other
regions of the state. Since the reforms, Michigan is at about the
national average, although the tax on business still is modestly
higher.
While real property tax is of less concern since the
reforms, the business community still views the personal property
tax on machinery and equipment as a large negative for the business
climate.
Opponents of the PPT argue that it is a major reason
that the cost to locate or expand a business in Michigan is higher
than elsewhere, and business leaders see the tax as one of the top
five anti-competitive provisions of Michigan law. Some analysts
argue that since the nontax costs of production sometimes are higher
in Michigan than elsewhere (labor costs usually are mentioned),
to attract new jobs the tax burden for business actually should
be lower than in competing states.
Opponents also argue that administrating the PPT is
burdensome and unfair. Unlike the tax on real property, personal
property is self-reported by each firm. Each year, every business
must provide the local assessor with a form itemizing each piece
of personal property and its age. The assessor then assigns a value,
using depreciation schedules published by the state, to each item.
This self-reporting, opponents argue, is time-consuming for businesses
and leads to substantial underreporting.
The Michigan Chamber of Commerce's goal is to eliminate
the PPT, and to that end, it supports
- enacting legislation to (1) annually exempt the
first $25,000 in assessed and taxable value per jurisdiction,
(2) remove such intangible costs as sales tax, freight, labor,
and engineering charges from the tax base, (3) define buildings
on leased land and certain leasehold improvements as “unsecured”
real property, and (4) adequately fund the annual updating of
all tangible PPT depreciation tables promulgated by the State
Tax Commission;
- revising P.A. 328 of 1998 to allow all communities,
not just distressed areas, to abate all new personal property
taxes so as to spur economic development;
- providing relief for any taxpayer assessed in lieu
of the general ad valorem (value-added) tax regime, either through
higher or new SBT credits; and
- enacting legislation to end the discriminatory
nature of the assessment and taxation of intangible property owned
by telecommunication and railroad companies (only the tangible
personal property of other property taxpayers is assessed and
taxed).
Some analysts believe that eliminating, reducing,
or reforming the PPT is easier said than done, and they point out
that
- reducing or eliminating the tax would affect the
revenue stream to Michigan government at all levels: city, county,
township, school, and state;
- since the PPT base varies widely across the state,
the effect of reducing or eliminating the tax would be much greater
in some places than others;
- the tax is in large part a local tax that could
be changed or eliminated by state law;
- it is very difficult to quantify the economic
effect of reducing the PPT; and
- there is a long list of technical questions involved
in reform.
Both opponents and proponents of changing or eliminating
the PPT agree that it negatively affects economic development, but
they disagree on how much and in what circumstances. Opponents do
not believe that reducing/eliminating the PPT will increase economic
activity enough to offset the direct revenue loss.
Among the technical problems that would arise in PPT
reform is the fact that personal property never has been tightly
defined in state law. Although some categories of personal property
are mentioned in statute, personal property generally is defined
as all property that is “not real.” Since in Michigan
the tax rates on real and personal property always have been identical,
this vagueness has not been too troublesome, but the statutory distinction
between the two will become very important if personal property
comes to be taxed at a lower rate than real property.
Currently, there are no specific proposals to reduce
or modify the PPT. The state did revise the depreciation schedules
in 1999, the first major revision since 1964, but some jurisdictions
still are not using them for utility property. Based on the property's
age and useful life, these schedules determine depreciation factors
that then are multiplied by the property's original cost; this calculation
establishes the item's taxable value. Many observers argue that
the state's use of only a few schedules results in the actual value
of personal property being misrepresented for many businesses.
A number of reform proposals have been offered in
the past, and one or more of these could reemerge. Readers are directed
to Michigan in Brief, 6th edition, at www.michiganinbrief.org
for a list of these options.
Workers' Disability Compensation Costs
Despite recent cost declines, the business community
still believes legislation is needed to reduce fraudulent and unwarranted
claims. The Michigan Manufacturers Association reports that its
membership surveys show that workers' compensation costs rank among
the matters that most concern manufacturers.
Unemployment Compensation Tax
Unemployment insurance costs long have been viewed
by the business community as a burden and a deterrent to economic
development. Others see UI benefits as essential to keeping unemployed
workers and their families from quickly falling into poverty. In
1998 UI taxes paid by Michigan businesses amounted to $103 per capita,
30 percent above the U.S. average of $79. Since 1996 unemployment
taxes have been cut every year, for a total savings of about $1.2
billion, which has brought Michigan more in line with other states
and reduced the negative effect that UI taxes have on the state's
business climate.
These taxes pay for benefits: In 2001 the average
weekly benefit paid in Michigan was $262 per capita, about 14
percent above the national average (down from 18 percent in 1995)
and the highest in the Great Lakes region. Michigan's maximum
weekly benefit of $300 is the lowest in the Great Lakes states,
however, and 21st lowest among all the states.
The governor has recommended that UI benefits be increased
for the first time since 1996. There is general agreement that the
maximum weekly benefit should be increased from $300 to $415, but
there is serious disagreement on one issue: Republicans want to
establish a “waiting week,” meaning that unemployed workers
would not get benefits for the first week they are out of work.
The waiting week, which 38 other states have, would reduce the amount
Michigan businesses have to pay into the UI fund. Democrats and
organized labor oppose the provision, arguing that a waiting week
unnecessarily penalizes the unemployed. At this writing, a conference
committee is working to resolve differences in legislation passed
by the House and Senate to raise the weekly benefit.
See also K–12
Funding; Highway Funding and Safety; Taxes on Consumers.
FOR ADDITIONAL INFORMATION
Citizens Research Council of Michigan
38777 Six Mile Road, Suite 201A
Livonia, MI 48152
(734) 542-8001
(734) 542-8004 FAX
www.crcmich.org
Michigan Chamber of Commerce
600 South Walnut Street
Lansing, Ml 48933
(517) 371-2100
(517) 371-7224 FAX
www.michamber.com
Michigan Economic Development Corporation
300 North Washington Square
Lansing, MI 48913
(517) 373-9808
(517) 335-0198 FAX
http://medc.michigan.org
Michigan Manufacturers Association
620 South Capitol Avenue.
Lansing, MI 48933
(517) 372-5900
(517) 372-3322 FAX
www.mma-net.org
Office of Revenue and Tax Analysis
Michigan Department of Treasury
430 West Allegan Street
Lansing, MI 48922
(517) 373-2697
(517) 373-3298 FAX
www.michigan.gov/treasury
Workers' Compensation Center
Michigan State University
207 South Kedzie Hall
East Lansing, MI 48824-1032
(517) 432-7721
(517) 432-7723 FAX
www.lir.msu.edu/wcc
Workers' Compensation Research Institute
955 Massachusetts Avenue
Cambridge, MA 02139
(617) 661-9274
(617) 661-9284 FAX
www.wcrinet.org
CONTENT CURRENT AS OF APRIL 1,
2002
© 2002 Public
Sector Consultants, Inc.
Sponsored by the Michigan Nonprofit Association and the Council
of Michigan Foundations
www.michiganinbrief.org
 
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