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Michigan Service Tax Concerns

Michigan Service Tax

The day after newspapers' headlines announced the consideration by the State of Michigan for a new tax on services, Pfizer, a huge pharmaceutical firm, announced that it was closing its Michigan research facility in Ann Arbor. 2,400 employees would be either laid off or moved to other Pfizer locations outside of Michigan.

This was stunningly bad news on the heels of massive job losses in the automotive industry. The tax base was taking yet another hit.

I had written to the Citizens Research Council of Michigan that had been involved in the budget crisis analysis and had been part of the process that came up with the notion of the service tax.

A simpler and more manageable approach would be a one-time, two-year increase in the sales and income taxes by one percentage point each. The sales tax increase could be effective by July 1 and the income tax increase effective January 1, 2008. While these might not be popular, they could be implemented with no additional staffing or changes in business burdens.

This two-year period would give the State sufficient time to develop and implement a restructuring plan similar to the efforts by General Motors and Ford Motor Company. The State cannot afford to be a generous "sugar daddy" under current conditions; especially when it does nothing except redistribute incomes while incomes in total are declining.

I'm not a fan of increased taxes, but the economic downward spiral has left the state budget in disarray... primarily because the state government has not been willing to take the measures to "resize" in the way that businesses have had to.

I received a reasonable and measured response:

There is no question that, if a sales tax on services were adopted, certain firms would experience an increase in administrative costs associated with reporting and collecting such a tax. Many businesses that primarily sell services, however, also sell goods, so their increased costs would be negligible because they are already set up to collect a sales tax. The state would also experience marginal increases in administration, but it would be a tiny fraction of the revenue involved.

There is no such thing as a perfect tax system and any tax will create economic problems. The best a state can do is to attempt to maintain a tax system that treats all sectors of the economy equitably, so that each sector pulls its weight in supporting public services.

With respect to your specific proposal regarding temporary increases in the sales tax and the income tax, I have a couple of comments. First, the Michigan Constitution would have to be amended for the current sales tax on tangible personal property to be increased. It is capped at a 6 percent rate and it could not be increased until the voters approved such an increase and voter approval of tax increases has been rare. Even Proposal A in 1994, which produced the current 6 percent rate, brought about a large decrease in the property tax in exchange.

I'm not so sure that adding a new tax system would have "negligible" impact on business, but given that the state has certain limits with regard to raising taxes on sales and property, I can only say this:

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."

The state cannot continue to pretend that there is this vast reservoir of potential tax revenue in a state where businesses are retrenching or relocating elsewhere, where unemployment levels are high while employment opportunities are dwindling, and where housing values are falling rapidly and many owners are facing the loss of their homes.

My oldest son commented that if you put Michigan's conditions into one of those "Sim" games, you get a collapse. Hopefully, the reality won't end up being that dire.

It is time for the state to recognize that "business as usual" in no longer feasible.