Single Business Tax: it's time is up; In the Chamber's opinion, the SBT is the big chill to economic development in Michigan.

Since its inception in the mid-1970s, the Single Business Tax has been a stable, yet much reviled, source of revenue for Michigan's General Fund. When originally designed, the SBT was hailed as a tax that would be copied by other states and would put Michigan at the forefront of a new wave of business tax policy. However, Michigan's SBT remains the only one of its type in the nation over 30 years later.

Michigan's SBT resembles a European-style "value-added" tax. It taxes businesses on their income, compensation to employees, rent payments and other types of business activity. Credits are granted for things like in-state business investment.

Value-added taxation is a completely different approach to raising tax revenue. Advocates of value-added taxes point out that they provide a good measure of business activity and thus of government services a firm consumes over the tax year. Rather than taxing companies on their profits, thus penalizing them for being profitable, value-added taxes are based on the theory that businesses should pay for "services consumed."

While this theory may seem equitable and has proved to be a very stable source of revenue over the years, many believe that the SBT, in its current form, is a disincentive to create jobs. Currently, the SBT is based primarily on payroll. Many businesses are required to pay an SBT liability even if they've lost money during the year. Common sense would tell you that basing a business tax on payroll would do little to entice companies to create jobs in Michigan.

But while the SBT is equitable and stable, it is definitely lacking in user-friendliness. As a result, the SBT was recently ranked 50th among U.S. corporate state taxes by the widely respected Tax Foundation. And the Foundation's State Business Tax Climate Index, a measure of how each state's tax laws affect economic performance, currently ranks Michigan 36th in the nation.

The Detroit Regional Chamber has long advocated in favor of plans that would reduce the SBT burden on members. The Chamber's primary recommendation is to completely eliminate the SBT in order to truly spur economic development in Michigan.

In January, Gov. Jennifer Granholm proposed "revenueneutral" changes to Michigan's Single Business Tax that would primarily reduce the tax burden on manufacturers and many small businesses while increasing the burden on insurance companies and other kinds of businesses. In June, the Michigan Senate Finance Committee passed legislation that would phase out the SBT over 18 years, and in the interim would provide for a 100 percent sales apportionment formula. Also in June, a group of state representatives proposed legislation that would provide for a 25 percent credit for Personal Property Tax against the SBT, move to a 100 percent apportionment formula, close $100 million worth of "tax expenditures" and reduce the rates of the overall SBT and the alternate SBT tax.

We fully expect the Legislature and governor to reach consensus regarding reforms to the SBT this year. The Detroit Regional Chamber will be providing input to legislators and staff throughout the process.

Sarah Hubbard is vice president of Government Relations at the Detroit Regional Chamber. For more information on this and other legislative issues, e-mail: [e-mail].

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RELATED ARTICLE: State Business Tax Climate Index

How Michigan compares with the top 5 and bottom 5 states:

     STATE          TOTAL SCORE

 1.  South Dakota   7.4
 2.  Florida        6.9
 3.  Alaska         6.8
 4.  Texas          6.8
 5.  New Hampshire  6.6
     U.S. average   5.0
36.  Michigan       4.7
46.  Rhode Island   4.2
47.  West Virginia  4.2
48.  Minnesota      4.0
49.  New York       4.0
50.  Hawaii         3.7

SOURCE: Tax Foundation, 2004