LANSING – The proposed $2 million cap to a Michigan Business Tax surcharge that is part of House’s suggestion to eliminate and replace the expanded sales tax on services was in the crosshairs of majority Republican members of the Senate Finance Committee during a hearing on Thursday. The cap unfairly shifts the tax cost to smaller businesses, chair Sen. Nancy Cassis (R-Novi) said.

After nearly four hours of testimony on HB 5408 , Ms. Cassis seemed to clearly imply that there would be changes to the $2 million cap as well as a sunset put to the surcharge when the bill came from the committee.

She did not say when the committee would act on the bill. The Senate is tentatively scheduled to meet on Tuesday, and a spokesperson for Senate Majority Leader Mike Bishop (R-Rochester) has said Bishop hopes to resolve the controversy over the new services tax before Thanksgiving.

Speaking after the hearing, Cassis said the timetable for action on the measure is in the hands of Senate leadership, as is the way the tax proposal would be modified from the House version.

The committee could not act on the bill since it has not yet technically been referred to it. The Senate has not been in session long enough, since the House passed the bill a week ago, to read HB 5408 into the record and refer the measure.

The bill repeals the services tax that was enacted on October 1 and effective December 1, and replaces it with a surcharge on a company’s Michigan Business Tax assessment. Broadly, during the first year the surcharge would be 32.9 percent of the assessment before that assessment is reduced by credits in the tax. The surcharge would fall to 27.3 percent of the MBT assessment in later years and would be capped to $2 million. There are other provisions in the bill affecting banks and insurance companies. And there is no sunset on the surcharge.

Cassis said after the hearing that she was trying to be an advocate for small and medium-sized businesses, which she said, “are getting the shift and the shaft” from the bill, particularly because of the $2 million cap.

But during the hearing – which has been the only formal activity any legislators have taken on the services tax during this week – supporters of the $2 million cap in HB 5408 said with the cap the 37 largest companies in the state will still pay 10 percent of the replacement to the services tax. Without the cap, the auto manufacturers alone will pay $150 million to $200 million of the replacement for the services tax, auto company spokespersons said.

But Cassis said that an analysis of the cap shows that medium-sized businesses – those companies with gross receipts of $20 million to $100 million – would go from paying an estimated 18 percent of the services tax to 28 percent of the surcharge costs to the MBT. Large businesses would go from paying an estimated 43 percent of the services tax to 29 percent of the surcharge.

Charley Pryde of Ford Motor Company said that 10 percent of the tax being paid by just 37 companies was a dramatic fact when considering that thousands of other companies would pay the remaining 90 percent. But Cassis said major automakers were effectively seeing a major tax cut with the cap.

At times the interplay between her and witnesses grew strained, as when she questioned how the Detroit Regional Chamber, with thousands of small businesses as members, could support the cap. Didn’t that create “a conflict of interest” for the chamber she asked Sarah Hubbard, vice president of the Detroit Regional Chamber.

No, said Hubbard, especially when the smallest businesses would continue not to see any tax liability under the MBT or the surcharge.

A number of witnesses argued that they could accept the surcharge if the cap were lifted so the burden was spread more evenly.

Tricia Kinley, director of tax policy for the Michigan Chamber of Commerce, said her organization could only reluctantly support the surcharge proposal if the nearly 33 percent surcharge rate was cut, the tax only collected the amount that would have come from business-to-business transactions (about $544 million) and if it had a fixed date to end. (Those conditions would not meet the demands of Governor Jennifer Granholm that the services tax replacement be revenue neutral – and during a full year the services tax is expected to raise $751 million – and permanent.)

Charlie Owens, state director for the National Federation of Independent Business, said his organization still feels that if the revenue has to be replaced it should be from either a general sales tax increase or through another increase in the income tax.

From the hours testimony it was clear the only thing that the business groups and companies agreed to was that they wanted to see repeal of the services tax before it takes effect. Ms. Hubbard said the Detroit Chamber had conducted a study showing it would cost businesses nearly $900 million to implement the services tax.

Kurt Berryman, legislative director of the Michigan Auto Dealers Association, urged caution, however, in enacting any additional tax on top of the MBT. That tax still does not come into effect until January 1, he said, and therefore officials still do not know how it will actually affect them.

In some of the most striking testimony, John Llewellyn, vice president for the Michigan Bankers Association and a former representative, said tongue in cheek that he was speaking in favor of the Single Business Tax. A contract should be taken out on whomever first suggested eliminating that tax, he said, because it has done nothing but lead to more than a year of rancor, anger and uncertainty among Michigan businesses and policymakers.

This story was provided by Gongwer News Service. To subscribe, click on Gongwer.Com

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