Businesses, officials concerned about surcharge on new tax
Michigan businesses and officials are expressing their concerns about a 21.99 percent surcharge placed on the Michigan Business Tax.
“I thought the (Michigan Business Tax) was going to help us, not hurt us,” said David Rydzinski, vice president of finance for Service Source Inc. in Adrian.
Legislators say the tax is “a work in progress” and a bill was introduced to make some changes. However, they say they have not heard from many business owners about problems with the tax.
“We’re certainly in the early stages of implementation,” Rep. Dudley Spade, D-Tipton, said.
The Michigan Chamber of Commerce conducted a member survey from March 8 through April 28 to gather responses regarding the impact of the new tax system on Michigan job providers.
More than 30 percent of the respondents said their MBT tax burden “equates to more than a 100 percent increase; 11 percent said more than 300 percent,” according to a news release.
About 690 Michigan Chamber members participated in the poll that included company presidents, chief executive officers, senior executives and business owners from across the state.
With current calculations, Rydzinski said, Service Source has experienced a 77 percent increase with the MBT versus the Single Business Tax.
He suspects a “big chunk” of that amount is due to the 21.99 percent surcharge. One of the Michigan Chamber’s top priorities is to get the surcharge placed on the MBT eliminated, said Tricia Kinley, the organization’s director of tax policy and economic development.
Kinley said the chamber thinks it’s “clearly unnecessary” to have the surcharge because Gov. Jennifer Granholm turned out a 2008-09 budget that proposed $1.3 billion in increased state spending.
June Haas, a consultant to the Legislature in drafting the MBT and a former state commissioner of revenue, is a partner with the Lansing office of the Honigman Miller Schwartz and Cohn LLP law firm.
She said a 6 percent service tax to be placed on certain services was set to go into effect Dec. 1, 2007, to help fill a perceived $700 million budget gap, but it was not well-received. To account for that budget gap, a 21.99 percent surcharge was added to the MBT instead.
With an exception for banks, a $6 million tax payment cap was set in place, Haas said. Banks would be subject to a higher surcharge of 27.7 percent this year and a 23.4 percent surcharge after 2008. Insurance companies are not subject to a surcharge because their tax rates increased with the adoption of the MBT.
The surcharge is not making very many companies happy, Haas said.
The MBT was constructed to be “revenue neutral,” she said, but the addition of the surcharge has changed that.
Michael Mihalich, founder and owner of MJR Theatres, said the company’s taxes went from about $428,000 to $830,000 as a direct result of the MBT.
The money is coming off the company’s bottom line, he said.
Mihalich said he had a couple projects he was looking at, but until the MBT settles, he wouldn’t consider building a new theater in Michigan.
“This thing is far more predatory than the Single Business Tax ever was,” he said.
MJR Theatres has also had to eliminate about 10 percent of its jobs — some of them part-time positions at Adrian Cinema 10 — and the company is constantly looking to be cost-effective with its payrolls, he said.
“Today, if there is any question about scheduling another person, you don’t,” he said.
MJR Theatres “got a double whammy,” as it was also hit with the minimum wage increase, Mihalich said.
“The state has huge financial issues coming up,” he said. “I don’t think it’s the end of it.”
Despite the company’s tax increase, Mihalich said there will be some money spent on renovations at Adrian Cinema 10, including installing a new concession counter and new carpet, replacing old signage, repainting the building and making restroom improvements.
He expects the renovations will be done in September.
Pete Hayes, president of Hayes Insurance Agency in Adrian, said that with the SBT, the agency’s taxes were lower, but now their taxes have increased $150 per month.
Hayes said he thought the tax was going to “stay equal or go down some.” He was under the impression there would be less money owed per month.
“There doesn’t seem to be anything in the current administration that’s going to help us out,” he said.
In an interview prior to receiving the final results of the chamber’s member poll, Kinley said its members indicated they were “shocked and very angry.”
“We’re very concerned about this Michigan Business Tax having dramatic tax increases on thousands of Michigan job providers,” she said.
Kinley noted that people suspected there would be some increases, but are frustrated that those increases are much larger than originally anticipated.
“Despite many good intentions, the MBT is already proving to be a complicated, harmful tax,” Kinley said in a news release announcing the results of the poll. “More than 60 percent of respondents said the MBT is more complicated than the SBT, and 80 percent said they are now worse off. Even more compelling are the numerous comments we received from members who are now finding themselves in dire circumstances and face the possibility of closing or relocating to other states.”
Poll results showed that when job providers were asked how they plan to react to their increased tax liability, “31 percent said they would delay or cancel wage/salary increases; 24 percent said they would delay or cancel capital investment; 15 percent said they would move or cancel Michigan location/expansion; and 14 percent said they would lay off employees. The remaining 16 percent said they would absorb the cost.”
David McCrate, president-elect for the Lenawee County Association of Realtors said the MBT has a devaluation effect on commercial real estate.
“The Single Business Tax had a negative effect, as well,” McCrate said. “We believe the Michigan Business Tax, as proposed, is worse.”
McCrate said the LCAR would like to eliminate the 21.99 percent surcharge, reinstate the 10-year investment tax credit carry-forward, include real estate in the definition of inventory of “purchases of other firms,” allow common area maintenance to be deducted from gross receipts in calculating the new tax and offer a fresh start for allowed depreciation on all commercial real estate beginning Jan. 1, 2008. The position agrees with the Michigan Association of Realtors’ view of the MBT.
“This proposal continues to push business out of Michigan and unfairly burdens property owners,” McCrate said. The LCAR “continues to be proponents and advocates for both commercial and residential property owners’ rights.”
Michigan is going through the first cycle of the tax, Spade said, and he has heard from very few businesses about it.
Spade said there will certainly be some close monitoring of the MBT through its early years. There have already been some technical fixes to clean up any unintended consequences of the tax system, he said, which is not unusual with tax reform.
Sen. Cameron Brown, R-Fawn River Twp., said the MBT is “a work in progress — meaning we will monitor progress through the first year of implementation.”
Brown said he has concerns about businesses computing the tax properly.
A Senate subcommittee has been recently created to review the MBT’s performance, he said, and it will work as a liaison between legislature and the business community. The subcommittee is made up of senators Michael Prusi, D-Ishpeming Twp., Mark Jansen, R-Grand Rapids, and Jud Gilbert, R-Algonac.
“Our goal is to make Michigan more competitive for business,” Brown said. “We want to make sure we’re true to that pledge.”
He later added about the MBT: “It’s the first year of performance. We’re open to making changes.”
Any business within his district that is being adversely affected by the tax should contact his office, Brown said.
Matt Sweeney, chief of staff for Brown, said in an e-mail that the Senate recently passed an MBT “cleanup” bill, SB 1198. According to a policy staff’s analysis, “the bill amends the MBT to expand the number of businesses that qualify for the small-business credit and the ME-2 (Michigan Entrepreneurial) credit.”
The ME-2 is a credit for small businesses that bring jobs and investment to Michigan. It would provide that firms under $25 million in gross receipts “would pay no taxes for up to five years, if the firm meets certain job growth and investment criteria,” according to a Senate Majority policy office bill analysis. “Firms would be required to add 20 new jobs in the previous year and invest at least $1.25 million in capital in the previous year.”
Sweeney said changes to the ME-2 credit would remove the time limit on credit, which was for 2008-10, expand credit from liability attributable to increased employment to all tax liability, reduce the number of new jobs to qualify for the credit from 20 to eight, and reduce the amount of capital investment threshold from $1.25 million to $500,000.
The bill makes changes to the small-business credit by increasing the amount of adjusted business income from $1.3 million to $1.5 million and increasing the amount of compensation and director’s fees that can be received by a shareholder or officer from $180,000 to $250,000, he said. The credit is phased out over the range of $230,000 to $250,000.
According to a bill analysis based on information from the Michigan Department of Treasury, the bill’s proposed changes to the small-business credit would increase the cost of the credit (reducing MBT revenue) by an estimated $120 million in fiscal year 2007-08 and $188.3 million in fiscal year 2008-09.
With these proposed changes to the small-business credit, the proposed changes to the ME-2 credit would increase the cost of this credit (again reducing MBT revenue) by an estimated $41.9 million in fiscal year 2007-08 and $65.7 million in fiscal year 2008-09. The general fund/general purpose budget would be subject to the loss in MBT revenue, and the bill would not directly affect local governments.