Mich. Lawmakers Deadlock on Efforts To Recoup Tax Cut

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The Michigan House and Senate were deadlocked last week over efforts to recoup a court-ordered business-tax cut that is costing the state hundreds of millions of dollars and forcing a delay in state payments to schools.

The state lost $100 million in the first quarter of this year and is expected to be deprived of a total of $500 million by 1992 as a result of a Michigan Court of Appeals ruling in February that essentially freed many corporations from having to pay any of the state's business tax, treasury officials said.

State Treasurer Douglas B. Roberts announced this month that he was delaying $800 million in state payments by two to six weeks to deal with the cash crunch. About 45 percent of the money is for school districts, with the rest earmarked for local units of government and higher-education institutions.

At least 70 percent of the districts in the state are expected to either borrow money or not make planned investments as the result of the payment delay, according to Thomas E. White, director of governmental affairs for the Michigan Association of School Boards.

But attempts to repair the business tax appeared last week to be mired in the state's longstanding debate over tax reform.

The Senate this month passed a bill responding to the court decision, but leaders of the Democrat-majority House have criticized the plan as an attempt to shift the tax burden from corporations to homeowners.

The Republican-controlled Senate, meanwhile, has rejected House tax proposals as likely to hurt business and discourage investments in the state, which has been hit hard by the current recession.

"There seems to be little agreement on the proposals out there at this point," observed Representative H. Lynn Jondahl, chairman of the House Taxation Committee.

Negating the Business Tax

The appeals court ruled in a suit brought by Caterpillar Inc. that a capital-acquisition deduction allowed under the state's "single business tax" was geographically discriminatory, and thus unconstitutional, because it allowed companies to take deductions only for capital investments made within the state.

Ruling that the deduction was unfair to multistate corporations that have significantly more property in other states, the court struck from the tax code any provisions limiting the deduction to property purchased within Michigan.

As a result, companies operating in Michigan have been able to take deductions for investments made anywhere. The impact has been to virtually negate the state business tax, state officials said.

"Until we get a new system in place, all of the major corporations in the state have stopped paying taxes," said John T. Truscott, a spokesman for Gov. John M. Engler.

State officials plan to appeal the ruling to the Michigan Supreme Court.

Although the impact on Michigan has been severe, the court decision is not likely to have much significance elsewhere, according to Ronald K. Snell, fiscal-program director for the National Conference of State Legislatures. The structure of Michigan's single business tax is unique among the states, Mr. Snell noted, while adding that other states have considered taxes modeled on it.

Governor Backs Senate Plan

Governor Engler has endorsed the Senate bill, which would eliminate the capital-acquisition deduction and replace it with a property-tax credit of just over 100 percent of the cost of depreciable property placed in Michigan during a tax year.

The bill also would require fewer firms to pay the single business tax by gradually raising to $100,000 from $40,000 the minimum level of gross receipts below which no payments are required.

In addition, the measure would reduce the single-business-tax rate to 2.3 percent from 2.35 percent.

House members favor dropping the capital-acquisition deduction without providing businesses with significant additional tax breaks, explained Bob Swanson, staff director of the House tax panel.

A proposal to eliminate the capital-acquisition deduction passed the House this spring as part of a much larger property-tax-relief bill, but has since languished in the Senate.

Vol. 10, Issue 36

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