More Problems for Michigan

The Detroit Free Press today reports complaints of service industry owners that their business taxes are skyrocketing, often by more than 100%. There’s a fascinating back story.

Years ago Michigan replaced a complex series of business taxes with the Single Business Tax, which was supposed to be simpler and fairer. The SBT taxed labor, capital and profits. Businesses hated it, and fought for years to get rid of it. Taxing labor and capital discouraged investment and expansion, and many have argued that is one of the causes of Michigan’s poor economic performance.

But the structure of the tax hit manufacturing businesses harder than service businesses, and with the slump in manufacturing in Michigan, the SBT hit the state’s revenue base hard, and the legislature finally pulled together enough to change it.

So now, while the majority of Michigan businesses are supposed to pay less under the new tax, the businesses that were treated favorably by the SBT are faced with substantial increases. One the one hand, this seems only fair, as some of these were clearly not carrying their share of the public expenditure load before. On the other hand, with manufacturing’s struggles in recent years, it may be bad policy to hit service industries with a big tax increase, just when they are becoming an increasingly important part of the state’s economy. And with an unemployment rate greater than 10% (that’s the official rate, the real rate is probably over 20%), those businesses may find it hard to pass on their tax increases to their customers through price increases.

I’m no expert on tax policy, and I never did really understand the Single Business Tax (although, apparently, that was true of most business’s accountants, too), nor do I really understand the new tax. But this is one area where I both despise and sympathize with legislators. Too many of them simply think that increasing taxes on business will result in greater revenue, but trying to raise enough revenue to give the public everything it demands while not creating real business disincentives is a task far beyond me, and I can hardly blame them if they don’t get it right.