LANSING ? Michigan Business leaders are reluctantly acknowledging that if the controversial new sales tax on services is repealed before December 1 it will have to be replaced with some other source of state revenues and discussions have been held with state leaders on what those tax options are.

Among the tax possibilities that have been discussed are increasing the rate on the new Michigan Business Tax, another increase in the income tax, and an increase in the sales tax with the idea of both repealing the services tax and lowering the income tax if the voters approve a sales tax increase.

Winning repeal of the tax is part of a two-track strategy the business groups are pursuing (with the second track being creation of a November 2008 ballot proposal repealing the tax). While most business groups would prefer the state cut the budget by the estimated $600 million to $750 million the sales tax on services would raise, they recognize that would not be acceptable to Gov. Jennifer Granholm.

Also the groups are trying to head off any attempt to amend the tax to change which services are taxed or to exempt certain businesses from its effect, worried that to make changes would weaken the effort to repeal it.

On Tuesday, officials from many of the leading business groups working for repeal of the services tax met with House Speaker Andy Dillon (D-Redford Twp.). Among those groups were the Michigan Chamber of Commerce, the Detroit Regional Chamber, the Grand Rapids Chamber of Commerce, the National Federation of Independent Businesses, the Small Business Association of Michigan, the Associated Builders and Contractors, and other groups.

At that meeting, the “dilemma” business groups faced in regards to repealing the tax was clear, one participant who spoke on background, said. That dilemma: legislators, who are now trying to resolve the 2007-08 budget, would not approve a repeal of the tax without another revenue source identified.

While most the business groups would prefer the state increase the income tax again – it was increased from 3.9 percent to 4.35 percent – sources at the meeting said Mr. Dillon said legislators were loathe to go back to that tax.

He then asked if the businesses would be willing to boost the rate on the MBT – which takes effect in January – and the businesses essentially said they were worried about doing anything to the MBT.

There was also little enthusiasm for putting a sales tax increase before the voters, but Mr. Dillon and others said it might be made more palatable if an increase in the sales tax were tied not just to repealing the services tax but lowering the income tax or providing some other kind of tax relief for consumers.

Part of the problem with finding an acceptable alternative, one source said, is that the discussions focused mostly on what was wrong with each proposal instead of how they could be made to work.

There is also no unanimity among the groups over the taxes. Some groups are willing to look at changes to the MBT in order to block enactment of the services tax. Others are willing to look at pushing a sales tax increase.

Michigan Chamber of Commerce Vice President Rich Studley, who has met with the governor to provide detailed problems with the tax, said the potential initiated law will force Ms. Granholm and legislators to go back and do their job correctly. He said the tax on services and the way it came about came as a shock to members of the business community who describe it in Pearl Harbor-esque sneak attack terms.

“There is one solution and one solution only,” he said. “That’s repeal.” He said his first preference is to resolve the issue through the legislative process.

Although Ms. Granholm insists that any alternative be revenue neutral so as to avoid reopening the budget negotiations, Studley said the Chamber stands firm in opposing moves that make some businesses winners and others losers.

He said the business group is developing $600 million in spending cuts and reforms, which he said should not be hard to find in a $42.8 billion overall budget. Subtracting federal funds, the budget is about $28.5 billion. He noted the business group had signaled its willingness to accept a modest, temporary tax increase coupled with reforms.

Whatever course may be adopted, all those interviewed said there is little time to act. If, for example, a sales tax proposal is to go on the ballot on January 15 it would have to be passed by two-thirds of each house before mid-November.

Every day that passes, one source said, the business groups find themselves closer to marching down the second strategic track of trying to win a November 2008 ballot initiative to repeal the tax.

Studley said there is ample precedent for outright repeal, pointing to recent experiences with services taxes in Florida and Massachusetts, and for the business community to lead a petition drive, as it did with the repeal of the Single Business Tax. The fall presents good opportunities to circulate petitions, he said, with thousands attending football games, the beginning of the holiday shopping season and November municipal elections.

The push to repeal the tax before it goes into effect December 1 has drawn a coalition of 39 business groups, trade associations and local chambers of commerce, which calls its movement “Ax the Tax.” It complained in a statement that the tax was passed in the “middle of the night” with no hearings on how it would be implemented or who would pay it.

“It’s not every day that a coalition of this size and scope comes together with a single mission in mind,” Mike Ritsema, owner of i3 Business Solutions and a member of the Grand Rapids Area Chamber of Commerce said.

Initiated laws face a simple yes or no vote in the Legislature, without the opportunity for a gubernatorial veto, and would go to the November 2008 ballot if turned down. The Legislature also has an opportunity at that point to put an alternative on the ballot.

Studley, who said the tax if it stays in effect faces years of litigation, said a lawsuit had also been considered, but called that an expensive alternative which allows the governor and leaders to continue to shirk their responsibilities.

“It’s hard to convey the incredible, tremendous sense of vehement anger and terrible frustration with the governor and legislative leaders,” Studley said. He also said the hardest question to answer is how the tax could have come about without a hearing, something the leaders facilitated by putting shell bills into conference committees whose work was not made public until the issues were primed for floor votes.

He said a large problem is the sense that the services tax falls heavily on corporations with headquarters in Michigan, and that initial analysis shows that 75 percent of the burden falls on businesses. For many, especially manufacturers, that means much of the gains they won through the Michigan Business Tax are wiped out.

Separately, one major manufacturer said the higher service tax more than erases the gains it achieved in the switchover to the MBT from the SBT but expects some tax increase to happen even if the services tax is repealed. Businesses also want anything that is done to be accomplished quickly because of the potentially high implementation costs of complying with the new tax as well as the factoring in the cost of the tax.

Some businesses that are open to looking at a higher MBT rate in exchange for repeal of the services tax are still in the process of analyzing the impact, or alternatively to see how to narrow the impact.

That option is also among the topics of the workgroup pulled together by House Tax Policy Chair Rep. Steve Bieda (D-Warren) as he seeks to pull together legislation to more clearly define what is taxed and what is not. The group has become so large