LANSING – Third time was the charm for the House approving a Michigan Business Tax surcharge that replaces the revenues lost from repealing the service tax. The final touches were put on the latest crisis resolution when the House gave a 66-42 vote of approval to HB 5408 in emergency session Saturday afternoon following hours of negotiations Friday and action by the Senate in the predawn hours.
The action came 15 hours after the service tax went into effect and left in its wake tens of millions of dollars in costs to businesses to comply with the now-dead tax.
Governor Jennifer Granholm, who initiated the push for a service tax earlier this year, quickly signed the bill, which she had described as a “fair and responsible compromise.”
Although the service tax repeal is immediate, the surcharge will go into effect when the MBT does on January 1, 2008.
While the measure had received overwhelming support in the Senate with a 33-4 vote, the House vote attracted just 10 of the 52 Republicans and was opposed by one Democrat.
And both Democrats and Republicans promised to get right back to fixing what they see wrong with the new tax provisions.
While House Democrats said the final agreement to the bill was fair and it does keep the promise of funding things like revenue sharing and education, they were not happy the surcharge effectively reduces the effectiveness of MBT credits for equipment, compensation and research and development and puts more burden on in-state businesses paying the tax than their goal of having out-of-state companies shoulder more of the tax.
Senate Republicans insisted the formula be that way, said House Speaker Andy Dillon (D-Redford Twp.), adding that more dialogue is needed between both chambers to accomplish the Democrats’ goal of boosting the credits back to their original intent. He said Democrats are committed to increasing the credit and lowering the effective rate of the surcharge.
House Minority Leader Craig DeRoche (R-Novi) said Republicans would still pursue repeal of the surcharge, to get the state’s priorities back on track with reforms to government.
“Thank God we have a Senate in the state of Michigan,” he said, adding while several House Republicans didn’t vote for the bill, they are unified with the improvements the Senate made to the legislation. He argued it’s not fair to say the bill has support from the business community because those people really think that given the state’s economy, businesses shouldn’t be paying more in taxes.
Dillon criticized Senate Republicans for taking the Legislature over the brink of a deadline to repeal the service tax before it took effect because they didn’t sit down with the Department of Treasury to crunch numbers early enough. And Dillon again repeated the House had acted swiftly on a repeal and replace plan in early November that had support from the business community.
“We have to get some urgency in the Legislature,” he said. “If we had engaged sooner we wouldn’t be in this crisis.”
His comments were a rejoinder to the criticism from Bishop, who accused the House, which adjourned Wednesday after passing an earlier version, of ducking out of work early while the Senate “rolled up its sleeves and worked until the job got done.”
Still, Dillon said six out of 10 businesses would be paying less under this plan than they do under the Single Business Tax. When the MBT first became law, that statistic was seven out of 10 businesses.
Dillon said he does understand the argument that some businesses with lower compensation and not much research and development wouldn’t have benefited from a higher credit system in the first place, but if that was the issue in the Senate, everyone should have been at the table earlier to figure out a better formula for those folks, while keeping the full credit system alive for everyone else.
DeRoche said the state should pay back companies who, according to the Detroit Regional Chamber, were paying $14 million a day to comply with a tax that was only in effect for less than a day.
But Rep. Paul Condino (D-Southfield), one of the lead Democratic negotiators on the bill, said Republicans can make that type of claim, but when it came down to crafting a solution, they weren’t there from the get-go.
More House Republicans were on board with the final version of the bill than they had been previously, with 10 of those members supporting it: Rep. Fran Amos (R-Waterford), Rep. Dick Ball (R-Bennington Twp.), Rep. Brian Calley (R-Portland), Rep. Ed Gaffney (R-Grosse Pointe Farms), Rep. Goeff Hansen (R-Hart), Rep. Dave Hildenbrand (R-Lowell), Rep. Mike Nofs (R-Battle Creek), Rep. David Palsrok (R-Manistee), Rep. Tory Rocca (R-Sterling Heights) and Rep. Lorence Wenke (R-Richland).
Rep. Matt Gillard (D-Alpena) was the only Democrat not to vote for the bill.
The House did approve a substituted SB 845 as well on Saturday, which provides amnesty to businesses that did not collect the tax while it was in effect and requires those that did collect the tax to refund it to the customer. Companies can also submit the tax to the Treasury and people can apply to get their money back that way.
Senate Majority Leader Mike Bishop (R-Rochester) said he supports an amnesty bill and expected it would move next week in the Senate. Bishop, after the Senate had voted, also said the agreement helped end a “job-killing tax.”
After the vote, Bishop also said in a press release that the House had “ducked out of work early this week, (but) the Senate rolled up its sleeves and worked until the job got done.”
Granholm said the agreement protects the state’s budget and critical services with replacing the service tax. She also praised business groups for helping reach the accord.
The effective surcharge rate under HB 5408 is 21.99 percent (the House had proposed 32.9 percent and 25.7 percent, while the Senate wanted a 13 percent rate) and the cap on any one company’s liability for the surcharge is $6 million.
However, unlike previous versions of the bill, the rate would not be reduced each year starting in 2009.
The Legislature will have to review the surcharge in 2017 to determine whether the previous three fiscal years showed a growth in personal income. The surcharge will then sunset if that is the case.
The surcharge replaces the roughly $614 million the service tax would have collected in the first year and the $750 million it was to produce in a full fiscal year. The revenue neutrality was a strict requirement from Granholm for signing the bill. She had also insisted it be permanent, but fell short of that goal with the triggered sunset.
Business taxpayers would also be rebated if the MBT collects more than is expected that totals the Consumer Price Index plus .75 percent. The way it works out is that 40 percent of the extra money would be placed into the Budget Stabilization Fund and the other 60 percent would be split in rebates to business taxpayers.
Originally, the MBT called for revenues of 5 percent in excess of $1.9 billion to be split evenly between the BSF and business taxpayers.
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