MICHIGAN BUSINESS TAX ACT
House Bills 6676-6680
Sponsor: Rep. Dianne Byrum
Committee: Tax Policy
Complete to 12-13-06
A SUMMARY OF HOUSE BILLS 6676 AS INTRODUCED 11-30-06
The bill would implement Governor Granholm's proposed replacement for the Single Business Tax, which is set to be repealed effective December 31, 2007. Main features of the Michigan Business Tax (MBT) are:
· The tax base of the MBT would consist of (1) gross receipts, (2) assets, and (3) business income.
· The tax rate would be 0.125 percent on gross receipts and assets, and 1.875 percent on business income.
· The tax base for multi-state businesses would be apportioned to the state based entirely on the sales factor.
· The bill would retain the alternative tax on small businesses currently provided for in the SBT, but would reduce the rate from 2.0 percent to 1.8 percent.
· The bill would retain the current SBT filing threshold of $350,000 in gross receipts, but would eliminate the so-called "cliff" for businesses with gross receipts greater than $350,000 by phasing in tax liability for businesses with gross receipts between $350,000 and $700,000.
· The bill would increase the premiums tax imposed on Michigan based insurance companies from the current effective rate of 1.07 percent to 1.25 percent.
· The bill would retain many of the current economic development credits against the SBT, including those related to the Michigan Economic Growth Authority, brownfield redevelopment, and historic preservation. The bill would also create a new credit for research and development activities.
The other main feature of the tax plan is a 24-mill reduction in personal property taxes for commercial and industrial property. (This is the 6-mill State Education Tax and the 18 mills levied for school operating purposes.) The revenue loss associated with this would be made up by earmarking a portion of MBT revenue (24.4 percent) to the School Aid Fund. The property tax cuts are found in House Bills 6677-6680. Those bills are described later in the summary.
The bills are all tie-barred to one another meaning none can take effect unless all are enacted.
FISCAL IMPACT:
The table below describes the estimated fiscal impact, as analyzed by the Michigan Department of Treasury, of the Governor's proposed SBT replacement plan. These bills would effectively be revenue neutral to taxpayers. However, on a fiscal year basis, the estimated net change in revenue would be a gain of $206.1 million for FY 2007-08 and a minimal decline for FY 2008-09. The one-time revenue gain in FY 2007-08 is due to the timing of the collection of the new MBT and the reimbursement of the 18 mills to the School Aid Fund (SAF). Essentially, the increased revenue from the MBT would begin in FY 2007-08 (quarterly payments would be collected in April 2008), while the reimbursement to the SAF would begin in FY 2008-09 (October 2008).
|
Estimated Fiscal Impact of Governor's Proposed SBT Replacement Plan |
||
|
millions of dollars |
||
|
Taxpayer Estimated Impact |
CY 2008 |
|
|
SBT Repeal |
(1,915.5) |
|
|
Net Michigan Business Tax |
2,445.5 |
|
|
Insurance Premiums Tax Increase |
90.0 |
|
|
State Education Tax (SET) Reduction |
(138.1) |
|
|
Industrial Facilities Tax Reduction |
(67.0) |
|
|
18 Mill Reduction (Local Tax) |
(414.3) |
|
|
Total |
0.6 |
|
|
Estimated Impact on State Revenue and Expenditures |
FY 2007-08 |
FY 2008-09 |
|
SBT Repeal |
(1,188.0) |
(1,958.2) |
|
Net Michigan Business Tax |
1,559.0 |
2,484.3 |
|
Insurance Premiums Tax Increase |
40.2 |
91.7 |
|
State Education Tax (SET) Reduction |
(138.1) |
(139.6) |
|
Industrial Facilities Tax Reduction |
(67.0) |
(67.4) |
|
18 Mill Reimbursement |
0.0 |
(414.3) |
|
Total |
206.1 |
(3.5) |
|
Net Impact By Fund/Category |
||
|
General Fund/General Purpose |
20.8 |
11.6 |
|
School Aid Fund |
175.3 |
(15.1) |
|
Treasury FY 2007-08 appropriation |
10.0 |
0.0 |
|
Total |
206.1 |
(3.5) |
|
Source: Michigan Department of Treasury |
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The estimated fiscal impact by fund would increase FY 2007-08 GF/GP revenue by $20.8 million, SAF revenue by $175.3 million, and would provide for an appropriation of $10.0 million to the Department of Treasury to implement the new Michigan Business Tax. For FY 2008-09, GF/GP revenue would increase by $11.6 million and SAF revenue would decrease by $15.1 million.
DETAILED SUMMARY OF HB 6676:
Tax Base (Sections 9, 47, and 48)
With certain exceptions, the base of the tax would be gross receipts, plus assets, plus 15 times amount of business income. Gross receipts are generally the total receipts a business receives for goods sold and services provided. Assets include cash, trade notes, accounts receivable, mortgage and real estate loans, the value of buildings, equipment, and land, and intangible assets. For financial institutions, assets are the average value of real and tangible property held throughout the year. It would not include inventory, securities, or tax exempt obligations. Business income generally means federal taxable income (profits) plus the federal domestic production activities deduction. The current definition of business income within the SBT Act does not add the amount of the deduction.
The bill would retain alternative tax base calculations for firms whose business activities consist of transportation services (MCL 208.56 and 208.57) and transportation of oil and gas by pipeline (MCL 208.58).
Tax Rate (Section 20)
The tax rate would be 0.125 percent of each component of the tax base. With business income being a weighted component of the tax base, the effective rate on that would be 1.875 percent (.125% × 15).
Apportionment Formula (Sections 40-46, and 50)
To determine their tax liability, businesses that have business activity in Michigan and other states must calculate how much of their total business activity is apportioned to Michigan. Historically, the apportionment formula has been based on three factors: payroll, property, and sales. A weighted average of those three factors is used to determine the business activity attributable to Michigan. The bill would eliminate the payroll and property factors and base apportionment entirely on sales. However, firms that do not have sales within the state would apportion their businesses activities using the average of the payroll and property factors. Under the SBT Act (MCL 208.45a), the apportionment formula for tax years beginning after December 31, 2007 is 95 percent sales, 2.5 percent payroll, and 2.5 percent property.
The bill would retain a provision (MCL 208.54) permitting a spun off corporation (Delphi and Visteon) to exclude from Michigan and total sales, for the purpose of calculating the sales factor for apportioning business activity, sales to its immediately preceding former parent corporation. The bill would also retain a provision (MCL 208.69) providing that apportionment "fairly" represent the extent of taxpayers' business activity in the state. The tax base of multi-state financial organizations would be apportioned based on the ratio of gross business in Michigan to gross business elsewhere.
Filing Threshold (Sections 37 and 72)
Currently under the SBT Act (MCL 208.39a), businesses with gross receipts of $350,000 or less are not required to file a SBT return. The bill retains the current filing threshold.
The bill also phases in the tax for firms with gross receipts between $350,000 and $700,000, by providing a credit against the tax equal to the firm's tax liability after application of the small business credit (and before application of any other credit) multiplied by a fraction, where the numerator is the difference between $700,000 and the firm's gross receipts and the denominator is $350,000. However, for taxpayers that are members of an affiliated group, controlled group of corporations, or an entity under common control whose gross receipts are between $100,000 and $200,000, the credit is equal to firm's tax liability after application of the small business credit (and before application of any other credit) multiplied by a fraction where the numerator is the difference between $200,000 and the firm's gross receipts and the denominator is $200,000.
Small Businesses (Section 25)
The bill would retain the alternate rate calculation for small businesses currently provided for in the SBT Act (MCL 208.36), which permits firms to calculate their tax liability as 2 percent of adjusted business income. The bill would lower the rate from 2 percent to 1.8 percent. Firms eligible to use the alternate rate must meet the following criteria: (1) have gross receipts not exceeding $10 million; (2) have adjusted business income not exceeding $475,000; and (3) have individual or officer-allocated income not exceeding $115,000.
Insurance Companies (Section 21)
Under current law, insurance companies are liable for the SBT or the so-called retaliatory tax (if applicable) levied under the Insurance Code, whichever is greater. The SBT Act (MCL 208.22a) provides that the tax base and adjusted tax base of an insurance company is 25 percent of the company's adjusted receipts, subject to any apportionment. Adjusted receipts generally include, among other items, gross direct premiums, rental and royalty receipts, and receipts from business activity other than the business of insurance. In addition, insurance companies are subject to a "surcharge" under MCL 208.22b equal to 1.26 times the company's tax liability. The total tax of an insurance company under the SBT calculates out to be 1.0735 percent of the company's adjusted receipts, less certain industry-specific credits and other credits.
House Bill 6676 would impose a tax on insurance companies of 1.25 percent of gross direct premiums written on property or risk located or residing in the state, but not including premiums on policies not taken, returned premiums on canceled policies, receipts from the sale of annuities, and receipts on reinsurance premiums if the tax has been paid on the original premiums. The tax would be in lieu of all other privilege or franchise fees or taxes imposed by any other law, except taxes on real and personal property, sales and use taxes, and except as otherwise provided in the act and in the Insurance Code. Also, as with current law, insurance companies would be subject to the MBT or the retaliatory tax imposed under the Insurance Code, whichever is greater.
[Under the Insurance Code's retaliatory tax (MCL 500.576a), when an insurer's state of incorporation imposes a larger aggregate tax burden on a Michigan insurer doing business in that state than Michigan imposes on a company from that state doing business in Michigan, the foreign insurer must pay Michigan a tax equal to the difference in the aggregate tax burdens.]
Exemptions (Section 23)
The bill would retain exemptions from the SBT (MCL 208.35) for the following: (1) the U.S., the state, other states, and political subdivisions; (2) charitable and educational institutions exempt from federal income taxes; (3) nonprofit cooperative housing associations; (4) the production of agricultural goods; (5) farmers' cooperative corporations; (6) activities under the Agricultural Commodities Marketing Act; (7) services provided by an attorney-in-fact; and (8) multiple employer welfare arrangements (MEWAs) providing dental benefits.
Retained Credits
The bill retains the following credits (with the appropriate section of the bill and the SBT Act in parentheses):
· Start-up businesses (MBT Section 24/SBT MCL 208.31a)
· Venture capital investment (MBT Section 26/SBT MCL 208.37e)
· Charitable contributions (MBT Section 27/SBT MCL 208.38)
· Worker's compensation credit (MBT Section 28/SBT MCL 208.38b)
· Community foundations (MBT Section 29/SBT MCL 208.38c)
· Homeless shelters (MBT Section 30/SBT 208.38f)
· Alternate energy (MBT Section 31/SBT MCL 208.39e)
· Michigan Economic Growth Authority (MBT Section 32/SBT MCL 208.37c & 208.37d)
· Renaissance zones (MBT Section 33/SBT MCL 208.39b)
· Historic preservation (MBT Section 34/SBT MCL 208.39c)
· Brownfield development (MBT Section 35/MCL 208.38g)
Eliminated Credits
The bill would eliminate the following credits (with the appropriate section of the SBT Act in parentheses):
· Research and Development (MCL 208.32)
· Capital investment (MCL 208.35a)
· Industrial personal property (MCL 208.35g and 35h)
· Personal property related to transferred jobs (MCL 208.35i and 35h)
· Investments in minority venture capital companies (MCL 208.36b)
· Unincorporated businesses/S-Corporations credit (MCL 208.37)
· Enterprise zones (MCL 208.37a)
· High technology activity (MCL 208.37b)
· Donated automobiles (MCL 208.37g)
· Apprenticeships (MCL 208.38e)
· Public utilities (MCL 208.39)
· Low-grade hematite (MCL 208.39d)
· Pharmaceutical research and development (MCL 208.39f)
Research and Development Credit (Section 36)
The bill would create a new credit for research and development activities generally equal to half of the amount of an "eligible contribution" (the transfer of pecuniary interest in the form of cash for the purpose of research and development and technology innovation) in an business engaged in research and development that, together with any affiliates, employs fewer than 50 employees or has gross receipts of less than $10 million and no prior financial interest with the taxpayer claiming the credit. The credit would be capped at $500,000 per taxpayer. The Michigan Economic Growth Authority would approve of the credit, and could not grant more than 25 credits in any one year.
The current research and development credit, which would be eliminated, basically eliminates the tax on compensation paid on research and development employees. Because the tax base of the MBT does not include compensation, the credit is no longer applicable.
Miscellaneous Provisions
Chapter 4 of the bill generally retains Chapter 4 of the SBT Act, which concerns the following (with the appropriate section of the bill and the SBT Act in parentheses):
· Estimated returns (MBT Section 70/SBT MCL 208.71)
· First year computations (MBT Section 71/SBT MCL 208.72)
· Annual returns (MBT Section 72/SBT MCL 208.73)
· Furnishing copies of federal returns (MBT Section 73/SBT MCL 208.75)
· Information returns (MBT Section 74/SBT MCL 208.76)
· Consolidated or combined returns (MBT Section 75/SBT MCL 208.77)
· Consolidated returns, tax base, and apportionment of two corporations (MBT Section 76/SBT MCL 208.78)
Revenue Distribution
The bill provides that 24.4 percent of the revenue from the tax would be deposited in the School Aid Fund, with the remaining balance being deposited in the General Fund.
Appropriation
The bill would appropriate $10 million to the Department of Treasury in FY 2007-08 to carry out the requirements of the bill. Any remaining unexpended balance at the close of FY 2007-08 would be carried forward in a work project account in accordance with the provisions of the Management and Budget Act.
Severability
The bill provides that if a court of competent jurisdiction determines that any provision of the bill providing a deduction, credit, or exemption with respect to employment, persons, services, investment, or other activity that is limited to the state is unconstitutional or applies to similar activity outside of the state, that credit, deduction, or exemption would be severed from the bill and the other provisions of would remain in effect.
Also, if a court determines that any provision of the bill is subject to the limitations of federal Public Law 86-272 or that the application of the apportionment provisions to the asset and business income components of the tax base is unconstitutional, the assets and business income would be removed from the tax base, and the tax rate (applied, then, to gross receipts only) would be 0.375 percent. (The bill states that assets or business income would be removed from the tax base, this is understood to be a typographical error and should be construed to mean "and.")
SUMMARY OF OTHER BILLS:
House Bill 6677 would amend the Revised School Code (MCL 380.1211) to exempt commercial and industrial personal property from the 18 school operating mills, for taxes levied after December 31, 2007.
House Bill 6678 would amend the State Education Tax Act (MCL 211.903) to exempt commercial and industrial personal property from the 6-mill State Education Tax for taxes levied after December 31, 2007.
House Bill 6679 would amend the Plant Rehabilitation and Industrial Development Act (MCL 207.564 and MCL 207.564a), commonly known as P.A. 198. Under that act, local governmental units may provide new, renovated, or expanded industrial facilities with property tax abatements for up to 12 years. Eligible facilities are issued an industrial facilities certificate, exempting them from general ad valorem property taxes, and subjecting them, instead, to a specific industrial facilities tax. Renovated facilities are taxed at the same local property tax rate, though based on the taxable value of the facility (excluding land and inventory) during the immediately preceding tax year (meaning, prior to the renovation). For new facilities, the tax rate is the half the total mills (other than the State Education Tax) plus the State Education, based on the current taxable value of the new facility.
House Bill 6679 provides that for the personal property tax component of the industrial facilities certificate or a new facility or speculative building the industrial facility tax would be the product of the taxable value of the facility (excluding land and inventory) and half of the total mills levied by all taxing units other than 24 mills for the State Education Tax and local school operating taxes.
House Bill 6680 would amend the General Property Tax Act (MCL 211.9k) to specify that commercial and industrial property would be exempt from the 6-mill State Education Tax and the 18 school operating mills, for taxes levied after December 31, 2007.
Legislative Analyst: Mark Wolf
Fiscal Analyst: Rebecca Ross Jim Stansell
■ This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.