The repeal of the Michigan Single Business Tax.

• Author: Gandhi, Lynn Arsht

The Republican-led Michigan Legislature voted on August 9, 2006, to repeal Michigan's Single Business Tax (SBT), which generates approximately $1.9 billion in tax revenue for the state from business taxpayers. The vote means that the tax will sunset next year, on December 31, 2007, two years ahead of schedule of its previously approved repeal of December 31, 2009. Democratic Governor Jennifer Granholm, who opposed the early end of the tax without a revenue replacement, has argued that lawmakers should specify how they will replace the foregone revenue, but she was powerless to veto the SBT repeal, because the repeal was started through a voter-initiated petition drive.

In response, the Legislature created a bipartisan committee--the Joint Committee on Economic Growth (1)--to develop an alternative business tax. The Joint Committee is to provide its recommendations by December 1, 2006, which of course is after the November gubernatorial election.

Michigan adopted the SBT in 1975, as a replacement for several taxes--Michigan Corporate Income Tax, the Corporate Franchise Fee (which was based on corporate net worth), the Financial Institutions Income Tax, the Savings and Loan Association Privilege Fee, the Domestic Insurance Company Privilege Fee, local government property taxes on business inventories, and the State Intangibles Tax on business. Hence, the name "Single" Business Tax. At that time, the SBT was levied at a flat rate of 2.35 percent. The concept behind the SBT was to impose a form of value-added taxation permitting companies to deduct 100 percent of their investment expenditures, which in turn would encourage business investment. The SBT was also intended to provide a more stable source of revenue to the state. The levy of a Single Business Tax was a new concept in state taxation; at the time, all but five U.S. states taxed corporate income. (2) While the SBT is levied on adjusted gross receipts (which is the sum of business profits, compensation, depreciation and interest expense), it is not comparable to other corporate taxes, because its base is unique and because the State has held that the protections of Public Law No. 86-272 do not apply to it because it is a value added tax. (3) In addition, Michigan levies the SBT on all forms of business entity, including partnerships, S corporations, and limited liability companies. (4)

The passage of the original SBT was followed soon by amendments to provide targeted relief, either by reducing a taxpayer's adjusted tax base (5) or redefining the definition of "business activity." (6) In addition, relief was granted to small business entities, as Gwell as to entities deriving a large proportion of their business income from service activities; the amendments also exempted from taxation agricultural production revenues and small business revenue and limited the taxation of financial institutions. The restrictions on the SBT base were substantial. For example, the cap...