LANSING – Already this year there have been a number of calls for Michigan to revamp its overall tax system, but major proposals to change the tax system are thus far lacking. There is one significant proposal, though, that has started working its way through legislators and interest groups: scrap the already hated Michigan Business Tax completely, and institute a graduated income tax.

The gist of the idea, promoted by leading economist Charles Ballard of Michigan State University, is to give the state a major competitive advantage nationally by making it one just a handful of states without a specific business tax. Such a selling point could help attract new businesses to the state while helping persuade businesses here to stay and expand.

At the same time a graduated income tax could ensure the state continues to have the same level of revenue the MBT brings the state, to prevent the state having to make major cuts to education, especially higher education, which he said is critical to advancing Michigan’s economy.

The idea could also provide a tax break to middle- and lower-income residents since a graduated income tax would likely set a lower marginal rate for those individuals than the current flat 4.35 percent income tax rate.

And while upper income individuals would pay higher income tax – and Ballard said that would include him – even that would be offset somewhat by increased deductibility on the federal income tax.

But the proposal also faces major potential opposition. There is at minimum the current constitutional prohibition, in Article IX, Section 7, against a graduated income tax, meaning the voters would have to be convinced to repeal that provision.

To even get such a proposal to the ballot, either a petition drive would have to be mounted (which means someone or some group would have to fund such a drive) or both legislative houses would have to vote by a two-thirds majority to put the proposal on the ballot. To do that, Republicans would have to be willing to overlook what has been an article of tax faith for the party against a graduated income tax.

However, a spokesperson for Senate Majority Leader Mike Bishop (R-Rochester) said at this time in the state’s history Mr. Bishop would not reject looking at any proposal. Matt Marsden was careful to say that Mr. Bishop, who has not been personally briefed on the proposal, was neither supporting nor opposing it.

But, “the Senate Majority Leader is willing to look at anything to turn Michigan around,” Marsden said.

A spokesperson for House Minority Leader Kevin Elsenheimer (R-Bellaire) said, however, a graduated income tax would make such a proposal a hard sell among conservative Republicans.

Ballard has spoken with several groups about the proposal including the Michigan Prospect and the Michigan League for Human Services. He has also spoken with some legislators, including Sen. Gilda Jacobs (D-Huntington Woods), about the proposal.

John Bebow, a spokesperson for the Michigan Prospect, said via email that while the group had no specific plans in mind and that it backed a “broad rewrite to create a fair, transparent, simple, competitive code.”

Judy Putnam, spokesperson for the MLHS, said the league has long favored a graduated income tax since it considers Michigan one of the most regressive tax states in the nation.

But she also said the group wasn’t sure it was ready to advocate a complete elimination of the MBT either. Nonetheless, the group was glad to work with Mr. Ballard on tax concepts, she said.

Jacobs said the proposal was “very intriguing,” and “very bold.” While not specifically endorsing the idea, she said it was critical the Legislature and the administration of Governor Jennifer Granholm to develop a major revamping of the state’s tax code this year before any chance of reaching an accord is lost in the slog of the 2010 election.

Before anyone could sign off on eliminating the MBT and instituting a graduated income tax, though, some numbers would have to be run, Ms. Jacobs said.

In fact, Ballard readily acknowledges that specific details of how a graduated income tax would work were not developed. Those details could be key to winning support for such a proposal when considering tax rates and margins.

Ballard said, though, that the Kansas income tax structure could be viewed as a model. According to the Jayhawk state’s Department of Revenue, the income tax has three rates and margins; 3.5 percent for joint incomes under $30,000, a tax of $1,050 plus 6.25 percent of all income between $30,000 and $60,000, and then a tax of $2,925 plus 6.45 percent on income above $60,000.

Driving Ballard’s proposal is the idea that boosting Michigan’s economy depends in large measure on improving the education levels of its residents.

At a lecture he delivered at the MSU campus last week, Ballard said statistical data showed that the states with the highest incomes have the highest number of college graduates.

But Charles Owens, executive director of National Federation of Independent Business in Michigan, said he would be interested in polling his members on the idea. While many of them pay no MBT, virtually none of them like the MBT, he said.

Many small business owners would fall into the middle-income brackets that could actually see an income tax cut, Owens said. While generally asking individuals to pay more tax while businesses pay less is a tough sell, “there are some definite pros” to the concept.

It would be better in the end to eliminate the MBT than to keep picking at it with individual credits and special benefits to some companies, Owens said.

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