From Worst to First: The Best Business Tax is None

According to the 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 politicians believe that we must craft a replacement tax because they claim the government cannot do without the $1.9 billion in SBT revenue.

But if the SBT dies and politicians fail to approve a new tax, we 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.

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. The three states that have no general corporate tax at all combined for a 17.6 percent job growth, according to the U.S. Labor Department.

What if Michigan had eliminated the SBT six years ago, and had added jobs 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.

We cannot know for certain 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, this is a tax that we can do without. 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 state budget.

Michigan businesses have cut back their budgets during this prolonged one-state recession, and state government has cost-cutting that can still be done. An audit of public school health insurance purchasing revealed reforms that could save $200 million to $400 million each year. Another $40 million could be saved annually if Michigan joined other states that impose a lifetime limit of four years for welfare benefits (as opposed to recent legislation that appears to impose this limit, but grants a multitude of exceptions). These and other common-sense reforms should be used to "pay" for the current budget deficit and any 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. For Michigan to succeed, policymakers should dare to "fail."

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.