New tax shocks business owners

1. New tax shocks business owners JOHN GALLAGHER • FREE PRESS BUSINESS WRITER • April 20, 2008 http://www.freep.com/apps/pbcs.dll/article?AID=/20080420/BUSINESS06/804200667

2. How things evolved to this point • Some history: In 1976, the State of Michigan replaced seven business taxes with the Single Business Tax. The tax consisted of levies on three components: labor, capital and profit. • Businesses hated the SBT: There were a number of reasons. Among them, the SBT taxed compensation, so the more people businesses hired, the more they paid. Many businesses complained that they were being penalized for hiring Michigan workers. The SBT was also hard to calculate, and because it relied less on profits, businesses paid whether they made money or not. • Change came in 2007: State lawmakers replaced the SBT with the Michigan Business Tax, which gives companies credits for hiring people: The more they hire, the less they pay.

3. What else is different? • The MBT also shifts some of the burden away from manufacturers and onto the fast-growing service sector, which includes insurance companies, restaurants, travel agencies and accounting firms. The MBT relies more on a firm's profits to calculate taxes. • In addition, the MBT significantly cut the personal property tax on equipment that businesses paid under the SBT. That helped manufacturers and large commercial businesses.

4. Impact of Michigan Business Tax • Wayne Bronner, president of Michigan's iconic Bronner's Christmas Wonderland in Frankenmuth, doesn't feel much Christmas spirit these days for the new Michigan Business Tax. Compared with what his company paid under Michigan's hated Single Business Tax, Bronner's will pay about 500% more now under the Michigan Business Tax. • The increase includes a surcharge approved late last year so the state wouldn't go broke. The shock to businesses looking at their new tax liability could reopen the political debate over the state's business tax system and, even more broadly, Michigan's budget and fiscal policies as a whole. • "We've always been more than willing to pay our fair share of taxes here," Bronner said. "But it seems like a disproportionate amount has hit industries like us." • James Jenkins, a Southfield accountant, said last week that he's facing an even stiffer bump in his business taxes, from $1,000 a year under the SBT to $14,000 a year under the MBT. • "I've got clients that can move" out of Michigan, Jenkins said. "I suspect that some of them absolutely will if this becomes too penal."

5. Too much of a burden? • The increases stem in part from a shift in part of the tax burden from manufacturing firms to the state's growing service sector. • As part of Michigan's bitter, drawn-out debate last year on replacing the Single Business Tax, lawmakers in Lansing created the Michigan Business Tax to spread the tax burden more evenly. Manufacturers got some relief, while service firms were expected to pay more. • This spring, tens of thousands of firms are calculating their MBT bills to make estimated tax payments as required by law. "People are getting the first dose of the shock wave," Jenkins said. • State Rep. John Proos, R-St. Joseph, said Michigan could lose firms to other states, including nearby Indiana. The Hoosier state has begun to target Michigan firms with a marketing campaign to entice them to a less-taxing environment.

6. To some, a cautionary tale • Even state authorities said they're surprised about some of the increases that business owners are reporting. • One company, Ansara Restaurant Group of Farmington Hills, which owns 20 Red Robin restaurants in Michigan and northwest Ohio, will see a 62% increase in its payments, from $323,875 under the SBT to $526,020 under the MBT. • Ansara's real estate arm, which owns the restaurant buildings, will experience an even more dramatic leap, from $21,662 to $128,199. • Ken Ankli, president of the Benton Harbor-based Brammel Supply, said his industrial supply firm will pay 226% more under the MBT than under the SBT. He declined to give actual dollar figures. • Ankli said he complained about the SBT, which he and many others found too complicated and not based on actual profits. Now, facing problems with the MBT, he said, "It's one of those be-careful-what-you-wish-for stories."

7. An improvement? • Despite the complaints, the MBT remains an improvement, said Terry Stanton, of the Michigan Department of Treasury. He said state calculations show that of about 158,000 Michigan firms, 62% will pay less under the MBT than they paid under the SBT, 29% will pay more and 9% will pay about the same. • State officials question whether some companies are giving accurate estimates to the news media and whether these early estimates take into effect all the tax strategies that may reduce tax bills. For example, a small firm might distribute more profits as salaries, thus incurring more personal income tax for the owners but paying less under the MBT's profits tax. • There could be other reasons for the increases. "Some companies experienced what you might call 'generous treatment' under the SBT, and given the different structure under the MBT, their liability has changed," Stanton said. "Others may have a higher liability because the MBT is more profit-sensitive than the SBT was." • And firms that are based outside Michigan pay higher taxes under the MBT than locally headquartered firms.