What is good and bad about Michigan's Single Business Tax?

• Author: O'Connell, Frank J., Jr.

Michigan's Single Business Tax (SBT) is a modified "consumption type" value-added tax (VAT) that applies to all businesses, regardless of how they are organized. The drafters chose an additive VAT (as opposed to the European-style subtractive VAT), because of the controversy surrounding the Michigan Business Activities Tax, a subtractive VAT, levied from 1953-1967. The drafters thought they could overcome the administrative complexities by switching to the additive VAT, a calculation more like an income tax calculation.

The SBT calculation resembles the income tax. Federal taxable income is modified with additions (e.g., employee compensation and benefit payments, tax depreciation and interest and royalty expenses) and subtractions (e.g., interest and royalty income). The modified tax base is subject to apportionment, using a three-factor formula. Originally equally weighted, the three-factor formula has evolved (along with many other sections of the tax) to 90% sales, 5% payroll and 5% property factors, or 90-5-5.

Another example of how the SBT evolved is the change in the capital acquisition deduction (CAD). The earliest CAD was a deduction from the SBT tax base after apportionment. It was calculated by adding the apportioned purchases of personal property (wherever located) to current-year purchases of real property located in Michigan, and multiplying that by an equally-weighted payroll and property apportionment formula. Caterpillar challenged the CAD method in court, and the Michigan legislature uncharacteristically reacted too swiftly, by modifying the CAD to include all real property and subjecting it to the same three-factor apportionment used to apportion the SBT base. (Eventually Caterpillar lost; thus, there was no reason for legislative action.)

To offset part of the SBT revenue loss due to the phase in of the 90-5-5 apportionment, beginning in 1996, only property located in Michigan (i.e., site-specific CAD) was eligible for the deduction. The Michigan Court of Claims, in Jefferson Smurfit, 11/24/99, declared this iteration unconstitutional. Beginning in 2000, an unapportioned investment tax credit (ITC) of 0.85% replaced the CAD. To parallel the reduction in the SBT rate and avoid giving businesses too much of a tax break, the ITC rate is being reduced every month, based on the phaseout of the SBT tax rate.

Why Adopt the SBT?

Over the past 20 years, at least a dozen states have seriously considered adopting a tax modeled...