November 1, 2007 at 1:47 pm

Lansing may repeal service tax

Governor, lawmakers look for alternatives after business outcry.

Gov. Jennifer Granholm, with budget director Bob Emerson, agrees the service tax is likely to take on a different form in coming weeks. (Al Goldis / Associated Press)

LANSING -- The just-passed state budget had barely arrived on Gov. Jennifer Granholm's desk Wednesday when the governor and legislative leaders said they are open to repealing the widely unpopular new $725 million tax on services before it takes effect Dec. 1.

Granholm acknowledged that the hastily assembled service tax is likely to take on a different form in coming weeks. The tax was cobbled together under a veil of secrecy, and with no public input, during the mad scramble to raise enough money to avoid a government shutdown a month ago.

"Those discussions have got to begin now and any changes have to be made in the near future," Granholm said.

"I am and have been in discussion with the business community about what that could look like. My criteria for the replacement are that it is revenue-neutral, and bipartisan and it's not temporary."

Oakland County Executive L. Brooks Patterson is to kick off a petition drive today to repeal the levy, which expands the 6 percent sales tax on goods to a mix of services starting Dec. 1.

Patterson represents the business Coalition to Ax the Tax.

"She's wrong on all three points," Patterson said. "We should repeal it and not replace it with any new tax on business, because you can't tax your way to prosperity."

When Patterson talks about launching a petition drive, he's got Lansing's attention. Last year, he spearheaded a petition effort that collected more than 370,000 signatures to repeal the hated Single Business Tax, which had been the primary state commercial levy. Granholm had earlier vetoed legislation to wipe out the tax, but the petition drive allowed the Legislature to pass a veto-proof measure that scuttled the SBT.

The state budget completed by lawmakers before dawn Wednesday includes an 8.5 percent increase in the general fund -- the government's main checkbook -- or about $750 million more than last year's spending. Some believe that by cutting back the new budget, the services tax can be repealed without a replacement.

The service tax would generate about $725 million a year from businesses and consumers. An estimated two-thirds of the total would be paid by businesses.

A strange mix of businesses -- including landscaping, fortune-telling, ski lifts, investment advice and corporate consulting services -- would be subject to the tax.

Patterson is among those who believe the tax can be repealed without a replacement -- or at least a temporary substitute.

"Lansing is awash in cash. The governor wants to have this money in perpetuity. How do you spell greed?" Patterson said.

Tricia Kinley, tax policy expert for the Michigan Chamber of Commerce, agrees.

"The service tax increase is paying to grow the scope and size of government," Kinley said. "The tax is completely unnecessary."

When told of Granholm's criteria for a replacement, Kinley said: "I guess the governor has clearly staked out her position. She wants to extract as much tax revenue from families and job providers as is humanly possible. We simply disagree."

Chuck Hadden, chief lobbyist for the Michigan Manufacturers' Association, said his group is looking at a possible surcharge on the new Michigan Business Tax that takes effect Jan. 1, because it's the fastest and fairest way to go. He said the business tax could easily be altered by the Legislature and out-of-state companies would pick up part of the bill.

"Timing is the element we're most interested in right now," Hadden said. "This has to be done before implementation on Dec. 1."

The association is pushing for a 2011 expiration date on the proposed surcharge, Hadden said. "We're willing to take a hit for the time being, but this burden should not be on business forever," he said.

Detroit Renaissance, an influential group of corporate CEOs from southeast Michigan whose members include the Big Three automakers, this week sent a letter to the governor and legislative leaders saying the new tax "will hurt Michigan's economic competitiveness and add excessive administrative and compliance burdens on businesses and government alike."

CEO Doug Rothwell said Wednesday that Detroit Renaissance hasn't decided whether a replacement tax should be temporary or permanent. But he said the service levy needs to be repealed because "for business it's very important to have predictability of tax liability."

He said the service sales tax slated to take effect next month "is counterintuitive because it places a business tax increase on a sector that is growing and providing some jobs."

The 5,000-member Small Business Association of Michigan this week had 100,000 petitions printed to repeal the service tax. A total of 304,000 valid signatures would be needed to put the issue before voters next November. Todd Anderson, SBA of Michigan's vice president for public policy, said that while he hopes the Legislature replaces the tax quickly, his group would likely move ahead to circulate petitions anyway -- because "it would give legislators more incentive to act."

His group has not taken a position on whether an alternative tax would replace the service tax dollar for dollar. He said that a month ago, the SBA of Michigan would have been opposed to the idea of revenue neutrality. "But we have a new reality and things previously untenable might be a part of a necessary compromise today," he said.

Anderson said he favors a plan outlined by House Republicans to make up for a tax repeal with just state spending cuts, although he added that position "is clearly in the minority."

With the completed 2007-08 state budget just hours old, House Republicans on Wednesday proposed $677 million in additional cuts, along with the tax repeal.

"The service tax is not the only option Michigan has right now, nor is it by any means the best option," said House Republican Leader Craig DeRoche, R-Novi. "Lawmakers have before them a tough choice: Make reforms to state government or kill more jobs."

Senate Republicans hope to move on the issue next week, before the Legislature breaks Nov. 8 for deer-hunting season, which begins on Nov. 15.

"The uproar from the business community over this new tax is apparent and justified," said Matt Marsden, a spokesman for Senate Majority Leader Mike Bishop, R-Rochester. "We need to get working on this as quickly as possible. It will be our priority before the Nov. 8 break."

Some have suggested Republicans might not want to work toward a replacement tax, in part because they could use it against Democrats in next year's elections. The service tax was passed with only a handful of Republican votes.

Rep. Steve Bieda, D-Warren, chairman of the House Tax Policy Committee, will begin hearings on a service tax alternative today. A spokesman for House Democrats said the caucus believes an alternative tax should raise the same amount as the service levy -- $725 million -- but Democrats are open on the notion of permanence.

"We realize the business community does have a number of concerns. We're going to listen to them and see if we can forge a compromise," said Greg Bird, spokesman for House Speaker Andy Dillon, D-Redford Township.

Granholm is looking for a permanent replacement tax.