LANSING – In a meeting marked by alarms over lost revenue and confrontational politics, the Michigan House Tax Policy Committee gave unanimous approval Thursday to a bill easing the tax liability for a wide array of companies under the Michigan Business Tax.

Discussions were to continue over how to replace the lost revenue – some $135 million annually and more than that for the upcoming fiscal year – but the bill could see a vote as early as Friday in the full House.

The bill (SB 1038 ) removes several items from taxation under a business’ gross receipts, the largest of which are sales and use taxes. Also removed are cigarette and alcoholic beverage taxes, bottle and keg deposits and other provisions dealing with hedge funds, bonds and bad debts.

Scott Schrager, director of legislative affairs for the Department of Treasury, said the bill opens a hole in the 2008-09 budget of nearly one quarter of a billion dollars just hours after the administration and leaders agreed to the spending levels for the upcoming year. Without indicating whether Governor Jennifer Granholm would veto the bill, he said adopting the changes in the face of the spending agreement “is a high level of schizophrenia.”

Schrager said the bill is “leaps and bounds” better than the Senate-passed version, but still would cost the state some $231 million in lost revenue in the 2008-09 year with implementation implications, and about $135 million a year in ongoing revenue losses.

He said the department is not opposed to removing taxes from the base in general and said some things in the bill are good, but added, “There are clearly fiscal consequences to doing it. For 30 years under the SBT (the Single Business Tax), taxes were considered as part of the base.”

Committee chair Rep. Steve Bieda (D-Warren) would not discuss other ways the money lost to the general fund could be replaced, other than the one-time funds are available by decoupling the tax from federal treatment of depreciation.

Bieda said another alternative could be to scale back the provisions of the bill somewhat.

Saying moving the bill to the floor will provide additional leverage, Bieda said, “There are serious discussions on how to pay for this.”

Tricia Kinley, director of tax policy and economic development for the Michigan Chamber of Commerce, said the tax on tax and double tax provisions should never have been counted as part of the state’s revenue estimates. “It’s indefensible,” she said. “This solves a major problem for the job providers in this state who think they are being overtaxed. It’s an image issue.”

While taxes may have been considered as part of the taxable base for gross receipts under the SBT, she said that law provided an alternative that retailers could use to calculate their taxes. “We don’t think you have to pay for this in another way.”

Schrager said even if the revenue loss is replaced, some provisions still need to be addressed, notably one that he said opens a loophole to avoid taxes on the sale of assets.

Sen. Nancy Cassis (R-Novi), sponsor of the bill, downplayed the significance of an impact on the budget, arguing the important goal is to repair a structural problem with the MBT that will otherwise “hurt businesses. There is a crisis in Michigan and we need to do something and we need to do something now.”

Saying she hoped members are not swayed by high cost estimates, Cassis said, “This can be skimmed down to $75 million to $125 million. Any other figure is not accurate. It is blatantly not accurate.” She also said removing a link in the MBT to federal depreciation provisions would raise enough revenue to cover the costs in SB 1038.

Rep. Paul Condino (D-Southfield) said blame for a structural problem with the tax and its reliance on gross receipts lies with the Senate. “I do find it ironic, disingenuous and arrogant,” he said to Ms. Cassis. “This House sent to you and the Senate a bill with no gross receipts and told you that gross receipts wouldn’t work.”

He referred to a proposal that the House initially passed to replace the SBT, but Cassis, who said she was embarrassed by the rhetoric by Condino, said the House version was based more on net worth and would have shifted the tax burden to sectors of the business community even more than did the MBT.

Eric Rule of the Michigan Retailers Association had earlier told the committee removing taxes from the gross receipts definitions would correct one of the most “egregious wrongs” of the MBT. “It’s not acceptable any time to (tax a tax), but at a time when the economy is down and with retailers going out of business, it’s the worst time to do it,” he said.

Removing sales/use taxes from the taxable base would cost the state about $75 million in lost revenue, Treasury estimates show. Other losses include $23 million-$28 million by removing bad debts/installment sales, $10 million-$13 million by removing foreign dividends and royalties, $7 million by exempting bonds, and $10 million by changing how partnerships are taxed.

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