LANSING – The first-year surcharge to replace the sales tax on services on the Michigan Business Tax would be 32.9 percent under a draft that is to be taken up in the House on Thursday, a far higher rate than the range that has been under discussion since the Michigan Manufacturers Association first launched the plan as a way to replace the sales tax on services, Gongwer News Service has learned.

The first glimpses of the details of the replacement came hours after the Senate voted to repeal the service tax and the House Tax Policy Committee approved a bill to delay the implementation of the tax – due to go into effect December 1 – under December 20, but stripping a tie-bar to the repeal bill. The committee plans to take up a single bill repealing the tax and imposing the MBT surcharge Thursday, though whether that makes it to the full House for a vote later that day is not yet settled.

Meanwhile, Senate Majority Leader Mike Bishop (R-Rochester) said the Senate could be brought back into session the week of Thanksgiving to vote on a replacement for the services tax.

He also said he was designating a number of Senate members to negotiate with House members on a bipartisan replacement proposal. Named to negotiate on behalf of Senate Republicans were Sen. Nancy Cassis (R-Novi), Sen. Tom George (R-Kalamazoo), Sen. Jud Gilbert (R-Port Huron) and Sen. Mark Jansen (R-Gaines Twp.).

The developments occurred on a day when the Senate voted on a largely party-line vote to repeal the tax.

The proposed MBT surcharge rate drops to 27.3 percent after the first year, and complies with Governor Jennifer Granholm’s demand that it not be temporary. It would carry a $2 million limit on taxes paid by any one company, an element that helped drive the rate higher.

Earlier in the day, House Tax Policy Chair Rep. Steve Bieda (D-Warren) said the surcharge would be in the 20-25 percent range. “We’re trying to keep it limited,” he said, adding that without the $2 million cap, the tax liability “gets a little dangerous” for some companies.

Initial reaction in some quarters to the 32.9 percent rate was one of alarm.

Matt Marsden, spokesperson for Bishop, said, “At that percentage, that’s replacing a bad tax with a bad tax.”

And Tricia Kinley, vice president of tax policy for the Michigan Chamber of Commerce which has been opposed to any replacement of the service tax but was willing to recognize the political reality of replacement of significant revenues, said, “That’s going to be a little hard to stomach.”

Both Kinley and Marsden also emphasized the importance of making the surcharge temporary.

Granholm has said the replacement tax must cover all the revenue that would be raised by the services tax (some $615 million the first year and over $700 million in a full fiscal year) and that it be permanent.

Chuck Hadden, MMA vice president of government affairs, said the “rate is what it is right now” but discussions are still underway on issues that could affect the rate. The $2 million cap per company and the number of businesses who wind up paying the tax are factors that pushed the rate higher than was initially discussed, he said.

The provisions are in draft 1, and he said a draft 3 that modifies some other provisions will be the bill that the Tax Policy will work on Thursday.

Key features are that the surcharge is calculated before taking into account any credits, that insurance companies are exempt because they pay a higher premiums tax already, that a small business tax credit would reduce the alternative profits tax to a rate equal to 1.8 percent, provide refunds if the tax produces more revenue than projected to all businesses which paid the tax (rather than the current language in law giving refunds only for two years, and keeping half of the excess revenue for the state’s rainy day fund).

Bieda said he would continue to sit down with businesses in crafting a replacement solution, adding, “We’re trying to avoid the unintended consequences we had with the service tax.”

He said the Legislature should work through the planned two-week break that is to begin after Thursday’s session to resolve the problems with the service tax and help companies avert the costs of complying with the tax. He said that is one reason to extend the expiration date.

Scott Schrager of the Department of Treasury said the administration has reservations even about doing that, saying he is having a hard time grasping the concept of delaying the effective date of a tax that under a separate bill would be repealed 20 days earlier. He quoted with approval the view of Senate Finance Chair Nancy Cassis (R-Novi) who said keeping the clock running for required action by November 30 is the way to make sure the tax gets repealed.

But he declined to address what legislative options the administration would support to replace the revenues, referring to the governor’s criteria that the replacement be revenue neutral, be bipartisan and not be temporary.

Bieda said he plans to move through his committee a single bill to repeal the service tax and provisions for replacement revenue, adding that the MBT surcharge is the frontrunner at this point. That avoids blowing a hole in the recently passed budget, and allows legislators with “one vote to either accept it or reject it. It’s a little easier to work on a consensus with one bill than a number of bills.”

Noting the support the surcharge had from several business interests, he said there is no similar consensus to raise some revenue from the income tax. And he said the Legislature always has the opportunity to address the surcharge again, even if it is not explicitly made temporary.

While he said the call on whether to take the bill (HB 5408 ) to a full House vote is one for the speaker, Bieda said, “There is a good chance that it could be done tomorrow.”

A spokesperson for House Speaker Andy Dillon (D-Redford Twp.) said no decision has yet been made, adding that workgroups will continue to discuss the issue with leadership. What to replace the service tax with, the process to use and how to develop a consensus are all matters to be determined before going forward, Greg Bird said.

But he said Dillon does agree with the governor that the replacement tax needs to be permanent, as is the service tax, because “it’s pretty apparent through the projections we see that we’re going to be experiencing revenue problems in the coming years.”

The move to fully replace the revenue, and the backing of some segments of the business community of that concept, spurred impassioned opposition from Tax Policy committee member Rep. John Pastor (R-Livonia), who said to his colleagues, “You guys just don’t get it.”

He said it was “disheartening” to hear those business interests supporting the replacement tax idea, stressing again the need to cut spending first and enact more reforms as businesses have to do when facing downturns.

“They are looking at horrible, horrible death,” he said of businesses looking for any alternative to what many called a job-killing service tax. “This is crazy. We need to live within our means.”

Eric Henning, governmental affairs director for General Motors, said the automaker was looking at paying “tens and tens and tens of millions” more dollars under the services tax, preferring the MBT surcharge that would amount to only a few million.

“It was an ill-conceived tax,” he said. GM officials said they were surprised the state would impose such a tax that affects only instate businesses, and have already found compliance difficult because they do not have the definitions of affected services in their records. Rick Zablocki of GM said replacing all of the revenue with a surcharge is not the company’s first choice, but said, “We had to look at what is politically palatable.”

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