Friday, November 30, 2007

Michigan Service Tax Recap


It's December 1 and it's time to start collecting 6% of service revenues. Not sure if that applies to what you are doing as a businessman or the services for which you are paying as a customer?

Don't worry, the state government will get around to clarifying that. Trust them.
But, first, how about a recap of what has been posted here during the past year regarding the Michigan Service Tax. For those of you who are interested in the full versions, the links to the right are to previous posts [newest on top] about this shining example of Michigan government.

For those of you who would like the "Cliff Notes" version, here are some excerpts:
January 21 - Rather than creating a whole new tax structure with whole new administrative burdens for both businesses and the state (don't you think there will be a whole new department just to administer this new tax?), perhaps a simple way is this:
Implement a two-year special, non-renewable, 1% increase in both the sales tax and income taxes. The government would have two years to work out a new budget and structure based on significant reductions in revenue (if the economy doesn't recover).
January 24 - [after giving this more thought] It's time for the state to do the same with less or simply do less. Increasing taxes will only exacerbate a bad economic situation for residents and businesses. Options will vary depending on the expenditures. They include:
  1. reducing operating and staffing budgets
  2. eliminating operating and staffing budgets
  3. eliminating new projects
  4. extending timelines for existing projects (such as road construction)
  5. privatizing some functions where feasible
The usual response is "we can't" and the appropriate response is "you must."

February 9 - Besides ignoring the will of the voters with regard to taxes, the Governor has proposed a tax that is likely to be a source of a giant accounting and administrative mess. Are the taxes only applicable to retail transactions or also applicable to business-to-business services? Sales taxes can be audited through inventory records. How do you audit the number of lawns cut or heads of hair cut? The "proof of transaction" disappears in a few weeks.

This seems like a natural incentive to move toward a cash-transaction marketplace. Rather than be satisfied with taxes on the incomes of service providers, the Governor thinks that they ought to collect a fee for the service provider's privilege of earning that taxable income. More than likely, some part time service providers will "go out of business" as far as the state is concerned rather than deal with honestly reporting those extra-hours dollars.

September 21 - The philosophy of the governor and her friends that "all perceived needs of special interests must be met by the state regardless of consequences" is driving out businesses and people. This is pretty much the same approach used the Detroit's city government as the first million people left town. Now there is just fighting over scraps.

The governor and her friends have talked about revitalizing the state for the past 5 years... or was it the state government?
The inability of the governor and her friends to face the reality that business-as-usual left the state and government-as-usual must follow, leaves the state in pretty much a sad state.
September 30 - However, as reported by Nolan Finley of The Detroit News, not all government in Michigan feels the need to expand continually. An examination of the differences between the State's government and Oakland County's [biggest county government] comes up with these differences:

The state begins anew each year with a revenue estimate, budgets spending to consume every dime and then adjourns to watch everything fall apart in short order.

Oakland budgets two years at a time and works with five-year revenue projections. Right now, [Bob] Daddow [Oakland County] sees a $10 million deficit in 2010, so he's building in cuts over the next three years to wipe it out before it becomes a crisis.

... Why bother to plan ahead or take help when you can just take the taxpayers money?
The difference between a badly run business and Michigan state government is that the business goes out of existence.
October 2 - It's amazing that so many people... and government officials(?)... believe that just the state government must continue to expand while the economy of the state shrinks. By some strange accounting logic, a $2 billion increase in the budget offset by a $440 million cost reduction is considered good management... and a reduction in government.
What seems to be the case is that some believe a reduction in the rate of increase is a reduction. What taxpayers want is an absolute year-to-year reduction in government spending. Cut the damn budget by 5% and learn to live with it.
October 7 - The state's economy has badly affected the business climate and now our governor and legislators have enacted an onerous business service tax that has me seriously thinking about shutting our business down. After 25 years, it just doesn't seem worth the time or effort to be a Michigan business anymore.

October 12 - In today's Detroit Free Press website, Tom Walsh posted an article implying that people were over-reacting to the new service tax and taxes in general for Michigan.

One of those "over-reacting" readers wrote the following: see Michigan Service Tax Anger
October 17 - If you have someone help you on a project where their work is integrated into a product you are selling, then you pay a tax for the service and pass the cost on to the customer who is buying your product. Currently, if that customer is another business who will sell your product as a retail item, then he is exempt from the sales tax, but ends up paying it as a hidden service tax.
The state effectively revokes the sales tax exemption and makes the product cost 6% more from a Michigan retailer than a retailer in another state.
October 30 - Well, I'm going out on a limb here, but I'm predicting that 1) the Democrats will do everything they can to make sure the service tax sticks and 2) the service tax revenues will be far less than the Democrats predict which will bring them back to the trough for increases in other taxes. [It should be noted that the income tax is increasing, too]. The turnip is drying up and the Democrats are still trying to squeeze it.

November 1 - As I said earlier, the process was "Fire, ready, aim."

November 7 - The Michigan Senate voted to repeal the service tax before it begins reports The Detroit News. That may turn out to be only symbolic.
The Democrat party controls the House and governorship. Therefore, it is unlikely that the service tax will be repealed without a pound of flesh being taken elsewhere.
Although businesses do it all of the time, when is the last time you saw a state or federal budget reduced from one year to the next... even when it is appropriate to do so?
Sadly, it's just too easy to predict the way our Governor's gang operates.


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... and one could add "not all human problems really are."
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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)