From Worst to First: The Best Business Tax is None

According to the nonprofit Tax Foundation, Michigan’s Single Business Tax is America’s worst state corporate tax. Fortunately, this job-killer will expire on Dec. 31, 2007. Many state politicians believe that we must craft a replacement tax because they claim the government cannot do without the $1.9 billion in SBT revenue. The governor has proposed a new tax that takes just as much money.

But if the SBT dies before politicians approve a new tax, Michigan will join three other states that the Tax Foundation says do not have any general corporate tax. Judging from what has been happening to those and other states at the top of the Tax Foundation’s corporate tax ranking, our politicians should consider "failure" an option in their search to replace the SBT.

Michigan’s historical high-water mark for jobs was April 2000. From then until October 2006, the number of jobs in the United States (excluding Michigan) increased 6.8 percent. Michigan lost more than 207,000 jobs in those six years – a decline of 4.2 percent, while the five states ranked by the Tax Foundation as having the lowest general corporate taxes have increased their job total by 14.3 percent over the same span. These statistics, from the U.S. Department of Labor, also show that the three states listed as having no general corporate tax at all – Nevada, Wyoming and South Dakota – combined for a 17.6 percent job growth.

What if Michigan had eliminated the SBT six years ago, and had added jobs since then at a pace comparable to the other 49 states? In this hypothetical, Michigan would now have an additional 545,000 jobs. Assuming that state income and sales tax collection per job had remained constant, just these two taxes would today bring in an additional $1.6 billion in state revenue per year – nearly all of what is now brought in by the SBT. Even more striking, if our job growth had paced the three states that have no general corporate tax at all, then the additional income and sales taxes would be more than $3.2 billion – making up all of the "lost" SBT revenue and tacking on an extra $1.3 billion.

Of course, no one can know exactly what would have happened to Michigan if its tax structure had been different. But remember that the calculation above considers only the additional income and sales taxes from those extra jobs. It does not account for a potential increase in the billions of dollars now collected for property and real estate taxes, "sin" taxes, motor fuel taxes, insurance taxes, licenses, fees and other sources of revenue. Unless those half-million to 1 million extra workers were all homeless and didn’t drink, smoke, gamble, drive or buy insurance, it is quite possible that the increased revenue estimates above are conservative.

Admittedly, Michigan’s economy did well in the late 1990s, even with the SBT in place. But given the magnitude and persistence of Michigan’s current problems, there is little point in subjecting the state’s economy to the ongoing burden of the SBT. For every dollar that employers must pay in corporate taxes to the state, they have one dollar less to disburse as wages to workers or as investment in growth. It is perhaps no surprise that the state with the worst corporate tax is losing the most jobs, while the rest of the nation is rapidly creating them.

Returning Michigan job growth to the national average or better will not happen overnight, regardless of what the tax changes may be. A trimming of expenses will be necessary, and here it is important to bear in mind that the SBT only accounts for about 5 percent of the total money spent each year by the state.

Just as Michigan businesses have cut back their budgets during this prolonged one-state recession, state government has cost-cutting that can still be done. An audit of public school health insurance purchasing revealed reforms that could save $200-400 million each year. Another $40 million could be saved annually if Michigan joined the other states that impose a lifetime limit of four years for welfare benefits. These and other common-sense reforms should be used to "pay" for the SBT revenue that is "lost" in the short run.

Nearly all of the plans that have been proposed to replace the SBT with other taxes come with assurances that they will provide tax relief for some Michigan businesses (though often at the expense of tax hikes for others). There is thus a bipartisan understanding that tax cuts create jobs. The politicians need to take the logical next step in their thinking and realize that all of Michigan’s job providers need tax relief. Replacing the SBT with nothing is a reasonable option. The policymakers should dare to "fail" — and help Michigan succeed.

Kenneth M. Braun is a policy analyst specializing in fiscal and budgetary issues for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.