LANSING – Michigan’s proposed new business tax will allow the state to compete more effectively with other states, Governor Jennifer Granholm said Wednesday, due to a rate that is among the lowest in the nation and preservation of incentives. In submitting the $2.4 billion plan to the Legislature, the governor continued to draw a hard line on keeping it revenue-neutral and not letting it get caught in negotiations on other issues.

She emphasized the proposal incorporates a $150 million tax cut for Michigan businesses, shifting that burden to out of state firms, and retains a four-year $600 million tax credit for personal property taxes.

The proposal (a copy of the PowerPoint is included with emailed copies of the report) gives a new tax cut worth about $620 million for business property by eliminating 24 mills the state levies for education, and guaranteeing a portion of the new tax be directed to the School Aid Fund to replenish the loss.

Pointing to studies by the Council of State Taxation showing Michigan below the national average in revenue produced from business taxes, Granholm said, “Michigan is very competitive and now we’ll be well below the national average. The broad base allows for the lowest rate in the country. For those who want us to advertise and be competitive with other states, and I am one of them, we can now do that.”

She also said it was the state’s tax structure, more than the amount of revenue raised, that was the problem, and the proposal addresses a key element of that by eliminating compensation – including health care costs – from the tax base. Compensation now accounts for 73 percent of the tax base. In the Michigan Business Tax proposal, assets make up the largest component at 43 percent, followed by sales at 36 percent, and profits at 21 percent (up from 7 percent in the current SBT tax base).

The tax rate on profits would be 1.875 percent, while a rate of .125 percent would apply to gross receipts and assets. The SBT applies a general rate of 1.9 percent that applies to compensation, income and other factors. The tax rate on profits is lower than all but two states, but in those cases, their 1 percent rates only apply to the lowest tier of a graduated system.

Some 17 other states have a version of tax on assets, such as net worth. But it is a new concept in Michigan, and the component that is raising some of the earliest questions, particularly in what is included. The administration lists nine specific items that would be included, such as cash, trade notes and accounts receivable, loans to shareholders, mortgage and real estate loans, other investments, buildings/other depreciable assets, depletable assets, real estate, and amortizable intangible assets.

Other elements include retention of economic development incentives under the current SBT (brownfield redevelopment, Michigan Economic Growth Authority and historic preservation), as well as current commitments made to businesses for their investments in the state.

The MBT bases taxes on 100 percent of sales in Michigan, eliminating a disincentive for companies in other states to locate facilities in the state. The SBT has a sales factor of 92.5 percent of sales in Michigan, plus 3.75 percent each on payroll and property in the state.

Granholm said a majority of businesses in every business sector will pay fewer taxes under the proposal than under the SBT, and overall, that covers about 77 percent, or 110,000, of the state’s businesses. That is even more than under the governor’s 2005 SBT restructuring proposal or any other proposal on the table, the administration says. Manufacturers will be among the big winners.

The slack will be picked up by insurers and others who are among the 34,000 businesses that would pay more. Insurers would see their premium tax increase to 1.25 percent, from 1.07 percent, but officials say that will only move the state from having the 3rd lowest such tax in the country to the 6th lowest. The national average is 2 percent.

“There is no way you can design a replacement tax that does not result in some businesses paying more,” Treasurer Robert Kleine said. But officials said the new proposal has fewer businesses in that category than do the plans of either the Michigan Chamber of Commerce or the Grand Rapids Area Chamber of Commerce, which both had minimum tax obligations for nearly all businesses.

The agricultural sector has the largest ratio of winners to losers, with 90 percent seeing tax cuts compared to 10 percent paying more. The closest ratio is in the communications and utilities sector, with 52 percent getting a cut and 48 percent paying more. For manufacturers – the main target for tax relief in the governor’s prior plan – 83 percent would get a tax cut while 17 percent would see a tax hike.

The governor also said it will close so-called loopholes that have been carved in the SBT, such as for water softener companies, but that only a relatively few companies that pay no tax will find themselves taxed now.

Small businesses continue to be exempt from taxes with the continued tax threshold of $350,000 in gross receipts, but unlike the SBT where they face full taxation once they cross that level (a so-called cliff), the MBT provides gradually higher taxes tied to higher gross receipts, with full taxation hitting at the $700,000 mark. Even then, businesses with gross receipts up to $10 million could use an alternative tax at 1.8 percent, giving them lower taxes than larger businesses.

Kleine, who said he has been working on the concept since summer, said, high tech businesses will see a tax cut of $125 million, and the state would provide businesses with research and development credits of up to $500,000 for each project, giving an estimated annual benefit of $12.5 million.

The governor called the proposal simple, fair and stable, though administration officials acknowledged it will be more volatile in terms of revenue provided to the state because of a heavier reliance on profits.

Officials say businesses can easily pull every element of the tax from current information, unlike the SBT that establishes five different ways of calculating the tax.

The governor said it is critical to replace all the revenues because already the state has seen its general fund revenues decline since 1999 because of tax cuts. The administration said adjusted for inflation, the $8.4 billion in general fund revenues are some $3.4 billion below what they were eight years ago.

Kleine said he has done no modeling on how much state revenue grows as the economy grows with the new tax, but said it likely would be at similar rates to the SBT.

We’ve been at this for two years,” the governor added. If it does not get passed in lame duck, she said it will be renewed in the 94th Legislature with its Democratic-controlled House, but with 36 new members in the Legislature, the governor said, “It will take a much longer time.”

As for whether she would listen to priorities, such as revising school health care, as a trade for taking up this plan, Granholm said, “This should stand on its own. It is a good proposal.”

She said the lame duck is the time that gives the business community the greatest leverage.

Five bills are to be introduced to implement the plan: one for the new tax that would kick in on January 1, 2008, amendments to the school code, amendments to the state education tax act, amendments to the property tax act and amendments to the industrial facilities tax act.

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