LINKEDINCOMMENTMORE

Lansing — Democratic Gov. Gretchen Whitmer is proposing a tax increase on some businesses to pay for potential repeal of the so-called pension tax created under a 2011 tax code overhaul spearheaded by her Republican predecessor. 

Whitmer said the plan is a viable way to fund tax relief for seniors, but critics argue it could hurt companies that have been vital to Michigan's economic comeback. It would impact an estimated 150,000 entities.

Presented Tuesday as part of her 2020 executive budget, Whitmer's proposal would tax "pass-through" businesses at the same rate as the Corporate Income Tax they were exempted from eight years ago. 

The 2011 law backed by then-Gov. Rick Snyder exempted S-corporations, partnerships and limited liability companies from the new corporate tax. Earning from those types of pass-through entities go directly to shareholders, who are then subject to the state's 4.25 percent income tax.

Whitmer's plan would create a new 6 percent tax on that business income but provide an income tax credit to avoid the kind of "double taxation" the 2011 law eliminated. The change would generate $280 million to offset the price tag for what would be a $355 million pension tax repeal. 

“I voted against (the pension tax) when then Snyder administration pushed it through to pay for the business tax break that was attached to it,” Whitmer told reporters after her budget presentation. “So I didn’t attach these two issues together. That was done by the Snyder administration."

Some Republican lawmakers are also pushing to repeal the pension tax, and “there’s no question, they’ve got to be able to pay for it,” Whitmer said. “This was a legitimate way to make sure that we pay for that relief.”

But the plan generated swift opposition from the Small Business Association of Michigan.

“This new small business tax will hurt small businesses and undo our economic growth,” said association President Brian Calley, the state’s former lieutenant governor under Snyder. “We should be sending small businesses a thank you note, not a substantially higher tax bill.”

After taking time to review the proposal, the Michigan Chamber of Commerce voiced opposition Tuesday. The measure complicates the tax formula for businesses and results in an overall $105 million tax increase on businesses, said Dan Papineau, the chamber's director of tax policy and regulatory affairs.

"At the end of the day, it’s a tax increase on small businesses," he said.

Pass-through businesses in Michigan — such as partnerships, LLCs and S-corporations — are taxed at the individual income tax rate of 4.25 percent, instead of the business income tax rate of 6 percent. The goal of the 2011 tax code change was to exempt small business owners from being taxed twice via an individual income tax and business income tax.

Whitmer’s proposal would increase the business income tax to 6 percent but allow for an individual income tax credit for business owners, resulting in a total tax increase of 1.75 percentage points. Officials insist it would not amount to a new form of double taxation.

"You're basically going to pay the 6 percent entity-level tax, and then we're going to offset all of what you would have paid in individual taxes on the income from that entity, so you're only taxed the one time," said Chief Deputy Treasurer Jeff Guilfoyle. "Instead of being taxed one time at 4.25 percent, you're now taxed one time at 6 percent."

The tax proposal is designed to help businesses take advantage of federal tax deductions, and some will ultimately "pay less" under the new plan, Guilfoyle said.  The administration estimates the pass-through tax will generate $280 million in state revenue in 2021, but the net tax increase for businesses will be closer to $105 million because of federal deductions.

Pass-through businesses with a marginal federal tax rate of more than 29 percent — $160,000 for a single filer and $320,000 for a joint filer — would “come out ahead,” Guilfoyle said. Companies with less than $50,000 in income would not pay any additional tax because of a proposed deduction the Whitmer administration described as “protection for small businesses.”

The new increase is expected to cost $2 million to administer as well as $10 million in the current fiscal year to cover the one-time costs of implementing the program.

The pension tax repeal, which is expected to result in more than 400,000 households saving an average of $800, would cost the state $259 million in revenue in the 2020 budget year and $355 million in revenue in the 2021 budget year.

Those losses would be offset by the proposed increase in business pass-through tax revenue — an estimated $280 million in 2021 — and create “tax parity” between pass-through businesses and traditional corporations, Budget Director Chris Kolb told legislators Tuesday.

The current dual tax rates have created “an unequal playing field between corporations,” Kolb said.

State Sen. Tom Barrett, R-Potterville, said he supports eliminating the pension tax but is “absolutely” wary of paying for it by raising businesses taxes. The 2011 tax cuts encouraged businesses to invest in the state and hire more workers, he said.

“We don’t want to scare away business investment in our state,” Barrett said. “We’ve captured a lot of business growth in our state that’s led to higher employment numbers and everything else, and I think we need to recognize that’s because of some changes in our tax structure that we put in place.”

Democratic state Sen. Curtis Hertel Jr. of East Lansing backed the plan.

“I think the idea that we tax some businesses and don’t tax others doesn’t make any sense in Michigan,” he said, calling it a “problem” created under Snyder,

Hertel noted that business taxes account for only a small portion of state revenues. Michigan collected $931 million in corporate income taxes in 2018 but paid out nearly $600 million in refundable tax credits to businesses, some issued a decade ago.

“That’s wrong,” Hertel said. “We should actually be making sure they’re paying their fair share. We all know that businesses drive on roads and businesses need an educated and talented workforce. They should pay the costs of actually investing in Michigan."

Snyder's 2011 tax code overhaul eliminated the long-standing income tax exemption on pensions, which he argued should not be treated differently than other forms of retirement income. Legislation that would repeal the pension tax is under review in House committee. 

The proposal, introduced by Rep. Joe Bellino, R-Monroe, would revert to the retirement tax structure in place prior to 2011 by exempting public pensions from being taxed and implementing higher deductibles for state income taxes for other private retirement incomes.

While Bellino is encouraged by the governor's support for the pension tax repeal, he does not believe new taxes are necessary to pay for the changes, said Grant Meade, a staff member in Bellino's office. 

"He believes there is money in the budget to pay for it," Meade said. 

Bellino's bill largely has bipartisan support, but skeptics have questioned both how the revenue generated by the tax would be replaced and whether its fair to tax pensions differently than other forms of retirement income.

State Sen. Aric Nesbitt, R-Lawton questioned that double standard, noting his father, who is a 71-year-old dairy farmer, does not earn a pension and must pay full taxes on his income.

“I just think taxes need to be flat, fair, low and efficient,” Nesbitt said. “And this is the challenge. You’re continuing to make it more muddled, creating new deductions for new credits. I’d rather see overall tax relief for all Michiganders instead of trying to pick winners and losers.”

eleblanc@detroitnews.com

(517) 371-3661

LINKEDINCOMMENTMORE
Read or Share this story: https://www.detroitnews.com/story/news/local/michigan/2019/03/05/whitmer-increase-some-small-biz-taxes-offset-pension-tax-repeal/3068699002/