Projection: Michigan business taxes at a net loss

Jonathan Oosting, and Chad Livengood

Lansing — Michigan corporations will see an overall income tax refund and effectively contribute nothing to the state coffers in 2016, according to new projections now forcing the Republican-led Legislature to cut back spending plans.

For the first time since GOP Gov. Rick Snyder spearheaded a major tax code rewrite in 2011, the state Treasury in 2016 is expected to pay out more in refunds under the old Michigan Business Tax than it will pull in under the new Corporate Income Tax.

Officials are projecting a net loss of $99 million in revenue from the state’s principal business taxes.

“It’s a broken system,” said Sen. Curtis Hertel Jr. of Meridian Township, one of several Democrats who argue the latest revenue figures point to the need to revisit the tax code. “In many ways, we’ve been robbing Peter to pay Paul.”

Massive refunds were anticipated this year as Detroit automakers and other businesses continue to cash in outstanding tax credits, most of them issued under former Democratic Gov. Jennifer Granholm in an attempt to keep jobs in the state during the Great Recession.

But an unexpected drop in Corporate Income Tax collections took analysts by surprise, prompting officials this week to slash current and upcoming fiscal year revenue projections by a combined $333 million. The reduction will force legislators to revise recently approved budget bills.

Michigan Republicans who changed the tax code in 2011 say they did not expect a year where the state would lose money on its principal business taxes, but Senate Appropriations Chairman Dave Hildenbrand, R-Lowell, said he is not overly concerned by the future outlook.

“We were all scrambling to try and save this economy, and that’s why all these credits were put in place,” he said. “Now, it’s pretty tough to go back and take those away when promises were made. I think we try to create stability, with the understanding that in time they’re going to go away and things are going to get a lot better.”

Companies with outstanding credits continue to file under the old Michigan Business Tax, which is expected to drain $1.03 billion from the state Treasury this year.

The 6 percent corporate tax, which was implemented in 2012 and does not apply to many small businesses, is projected to generate $932 million this year, down from $1.08 billion in 2015, due to slumping corporate profits.

Some businesses, such as insurance companies, have additional tax liability, and small business owners pay personal income tax on earnings.

The 2011 tax code revision cut total business taxes but increased personal income taxes on many residents through elimination of various credits and exemptions. Michigan is expected to collect roughly $9.4 billion in personal income taxes in 2016.

The state will collect an estimated $7 billion in sales tax revenue, roughly $950 million in tobacco taxes and more than $850 million from the state lottery, which is pulling in more revenue as large jackpots spur ticket sales, according to House and Senate fiscal agencies.

Fuel taxes and registration fees are also set to increase next year as part of a new road funding plan that critics say does not go far enough to reverse deteriorating conditions.

“It’s a real problem when people are footing the entire bill and still not getting good services,” Hertel said. “We should be frustrated. We should be angry.”

Tax credit legacy

The spike in tax credits — expected to peak this year — is directly tied to rising payrolls at Detroit’s Big Three automakers and other companies still operating in the Michigan Business Tax, a complex 2007 tax law signed then by Granholm that mixed levies on corporate profits and gross receipts.

To retain jobs during the Great Recession, the Granholm administration doled out tax credits to General Motors Corp., Ford Motor Co. and the former Chrysler Group LLC that were last valued at more than $6 billion and can be claimed through 2032.

“Where would the economy be had we not done those things?” said Doug Rothwell, president and CEO of Business Leaders of Michigan. “People forget that back in 2008 and 2009 our economy was imploding.”

Chuck Hadden, president and CEO for the Michigan Manufacturing Association, said the cost of MEGA tax credits is a “good sign” for the paychecks of thousands of auto industry employees.

“They can’t get the credits unless they get the jobs — and that’s what has happened,” Hadden said. “This is a good sign for Michigan. It’s not a bad sign.”

The Snyder administration last year renegotiated tax credits with Detroit automakers in order cap long-term liabilities and provide the state with more ability to forecast refunds.

There have been signs in recent years that the growing annual cost of MEGA credits would eventually cancel out corporate income tax revenue.

General Fund revenue from so-called sin taxes on tobacco, beer, wine and liquor totaled $290.5 million in the 2014 fiscal year, more than twice the $137.6 million net income taxes paid by Michigan businesses after receiving $768.8 million in refunds from tax credits, a Detroit News analysis of tax data showed.

Rich Studley, president and CEO of the Michigan Chamber of Commerce, said lawmakers have a “legitimate concern” about MEGA tax credits chewing away at the state’s budget.

“That’s part of the legacy of the Granholm administration and the Gov. Granholm’s penchant for wanting state government to pick winners and losers,” said Studley, who called targeted business tax credits “a very costly and failed economic development strategy.”

Studley, whose organization is closely aligned with the Legislature’s GOP majority, suggested Democrats are trying to highlight the business tax issue to boost their campaigns this fall.

“It’s always unfortunate when elected officials chose to emphasize the negative in an election year to score political points,” Studley said. “Some Lansing politicians are quick to seize every opportunity to push for higher taxes and more government spending.”

Corporate tax volatility

Revenue from the state’s new corporate tax has proven difficult to predict and is coming in roughly 20 percent below expected levels this year, posing a challenge for budget makers.

Officials are projecting a rebound in fiscal year 2017 and beyond, “but it’s kind of anybody’s guess,” said David Zin, chief economist for the Senate Fiscal Agency.

Forecasts should improve as officials spend more time with the Corporate Income Tax, according to Treasurer Nick Khouri, who said it is still a far superior policy to the Michigan Business Tax.

“There is more volatility in the Corporate Income Tax, but remember what it’s replacing, which is the stupidest tax ever,” Khouri said.

Some legislators want to see more stability in the new tax, including House Appropriations Chairman Al Pscholka, R-Stevensville, who said he is concerned by “large peaks and valleys” in revenue.

“I think once we get done with the budget, we have to look at that,” Pscholka said.

Rep. Sam Singh, D-East Lansing, said some states with similar Corporate Income Taxes have found ways to generate other types of revenue from the business community in order to mitigate volatility.

“I think there’s a number of things we can take a look at, but if we want to continue to make the investments we need to make in infrastructure, higher education and K-12 funding, we’re going to have to really take a look at how we fund government,” Singh said.