New business tax gets mixed reviews

TRAVERSE CITY – For 32 years, Michigan's economy has been under the regulation of the Single Business Tax (SBT), an unusual and controversial tax code modeled more after European tax systems than those commonly found in the United States.

For almost as long, the system has drawn fierce criticism from business owners and government officials who've blamed the state's deteriorating economic conditions and lack of competitive growth on the plan's prohibitive "anti-jobs" provisions.

And now, the new Michigan Business Tax, signed into law July 12 by Gov. Jennifer Granholm and taking effect Jan. 1, is generating intense discussion among state business owners.

Shelly Bedford, partner at local accounting firm Dennis, Gartland & Niergarth, agrees with Granholm's assessment that it is a "win for Michigan business, citizens and the economy."

"I think it's a positive move and will help keep businesses going in Michigan," she said. "The MBT offers more new tax credits, and hopefully will attract larger companies to do business here."

The SBT is currently the only tax code of its kind in the United States. Referred to as a "value-added" tax, the system starts with a company's yearly income, makes penalizing adjustments (or "value additions") based on compensation and benefits paid to employees, applies any necessary credits and arrives at the appropriate tax rate. The second step in that process-taxing for employee compensation-has drawn fire from critics for being anti-growth and discouraging employers from creating new jobs.

Under the new MBT, considered a "profit-and-loss" system, employee compensation is removed from the tax base. The plan also relieves businesses that post a fiscal loss from their tax liability. Under the old Single Business Tax, companies who lost money could still face exorbitant tax rates. Also significant are a number of new tax credits, including Research & Development and Entrepreneurial credits.

CPA Curtis Ruppal, a state and local tax partner with Plante & Moran, PLLC, predicts manufacturers will benefit most from the new system.

"Any time you have a significant reduction in personal property taxes, most manufacturers will see a cut," he explained.

Ruppal pointed out that small businesses and corporations with major investments in the state would also come out ahead under the new plan.

While Fred Sorensen, president of Acra, Inc., would like to see personal property tax "removed altogether" in Michigan, he favors any move that "improves the competitive situation that manufacturers are in."

"We have to update our equipment, and yet we also pay tremendous amounts of taxes," Sorensen said.

Such complaints are typical among Michigan manufacturers, who've long felt they were being unfairly targeted by the SBT. For now, Sorenson and others like him are waiting to see if the MBT will bring the long-anticipated relief they've been hoping for.

Special treatment?

Not everyone is happy with the new code. Rep. Howard Walker was one of 34 Representatives-all Republicans-in the Michigan House who voted against the Michigan Business Tax. He argued that serious debate over the bill only began three months ago and that legislators didn't have enough time to study the proposal.

"For a tax that's so important to Michigan's economic future, I felt it was irresponsible to rush through it," he said. "The final product was agreed to behind closed doors and wasn't available for review until a day before the vote. It was my duty as a legislator to know exactly what I was voting on, and because I wasn't afforded that opportunity, I couldn't in good conscience vote in favor."

Rep. Walker criticized the "special tax treatment" given to certain Michigan businesses under the bill, including the Palace of Auburn Hills, Comerica Park, the Detroit Zoo and Detroit Institute of Arts. These and other corporate heavyweights, including Meijer and Spartan, will receive preferred tax credits under the new code.

"I have rarely seen where a tax code was written for a specific entity," he said, adding: "I believe (such) treatment is patently unfair and is inconsistent with how a tax code should work."

While critics of the plan, including Rep. Walker, concede that 70 percent of Michigan businesses will see relief under the new tax, they're quick to point out the flip side of the coin: in order for the plan to stay revenue-neutral, the remaining 30 percent of companies will have to pick up the slack. Insurance agencies, real estate firms and financial service industries are expected to be among the hardest hit by higher rates.

"Perhaps the most unfortunate thing about these tax increases is that the vast majority seeing the (hikes) are industries that are growing and successful, like financial service sectors," Rep. Walker argued. "It's never healthy when a government picks winners and losers-and the losers in the new tax structure are those actually helping to aid in Michigan's economic recovery."

Making the Transition

Regardless of whether business owners may be negatively or positively impacted by the MBT, Ruppal has the same advice for anyone preparing for the transition.

"Take the time to understand what the MBT is going to mean to you," he said. "Learn how the new provisions will affect your organization. If you have any unusual or significant transactions planned, evaluate if they should be accelerated into 2007 or deferred until 2008."

A prime example, Ruppal offered, would be the real estate industry.

"In the cases we studied, it was better to make [real estate] transactions now in '07 than wait until '08. But every case is different. The most important thing is that you talk to your tax planner before making any major decisions for your business." BN