Gimme Your Money This article is a re-printed from the February 2010 edition, as approved by the UP Business Today
By David Saint-Onge Here we are in early 2010 and not much has changed in the last 12 months. Unemployment remains high, the economy is stagnant, the Democrats and Republicans hate each other, Iraq and Afghanistan persist, and fingerpointing is at an all-time high. Most disturbingly, however, is that there appears to be no end in sight. America has always been the land of the free, the home of the brave. Perhaps we’ve lost focus with this aspiration or perhaps we simply do not care anymore. Regardless, our ability as a nation to move forward is not a function of circumstance; it is a function of happenstance. Jim Collins, author of the bestsellers Built to Last, Good to Great and How the Mighty Fall was once quoted, “Greatness is not a function of circumstance, as it turns out, it is largely a matter of conscious choice and discipline”. Much like a Fortune 500 company whose leadership becomes misaimed only to see its profits and commensurate share price tumble, America has forgotten what it is good at and has lost its vision. I am not referring to any specific issue like health care, environmental stewardship, or serving as world peacekeeper; I am referring to America’s mission. Do we want to be a capitalist society, letting the laws of supply and demand dictate where money is made and lost; or do we want to lean toward a more socialistic economy where the government decides who wins and who loses? An increasing number of citizens across the country seem to be concerned about the growing federal deficit, yet programs involving nationally operated health care, private business bailouts, and economic stimulus packages add fuel to the deficit debate. With regard to the floundering economy, I have repeatedly written about the promise and benefits small business brings to America. Businesses can only be successful if they live in an environment which is well-defined. Critical issues like enforced property rights, low taxes and regula-
tions, sound legal and monetary systems, proper contract enforcement, and limited government intervention are necessary if we expect our economy to turn around and flourish over the long haul. Given our current state of national uncertainty regarding a prescriptive remedy to get our economy back on-track, it’s no wonder the economic engine of small business has stalled. Uncertainty kills intuition, invention, and investment. Here in Michigan our ageold business plan was to ride the coattails of the Big 3, wear our blue collar proudly, and pronounce ourselves as the manufacturing state surrounded by water. We have never really been a ‘business friendly’ state in my opinion, given the historic red tape associated with high insurance demands and applicable costs, suffocating environmental regulation, a predominant union mentality, and a penchant for taxation. Government seems to truly believe that successful businesses are merely a means to additional tax revenue. The Michigan business tax climate has been radically altered with the recent enactment of the new Michigan Business Tax (MBT). By replacing the Michigan "Single Business Tax" (SBT), the MBT was intended to be tax neutral. However, under the MBT significant shifts in tax liability are expected to occur among various industries and types of taxpayers. For most types of businesses, the MBT is essentially a dual tax. First, a tax is imposed on the net income of the business (referred to as the "Business Income Tax"). Second, a tax is imposed on the modified gross receipts of the business (referred to as the "Modified Gross Receipts Tax"). A significant change from the SBT is the inclusion of a unitary business concept, whereby affiliated taxpayers with certain business relationships must file a combined return. In an article written by Jared Wadley for The University Record Online (University of Michigan), the MBT does not meet
the three criteria of a good tax system: reliability, equity and efficiency, according to a new report from the Center for Local, State, and Urban Policy (CLOSUP). CLOSUP, which is part of the Gerald R. Ford School of Public Policy, analyzed the MBT and other tax options, and reviewed the public debate in Michigan regarding business taxation. It determined that the MBT generates inconsistent revenue year to year, making it less reliable than the SBT. Additionally, the report goes on to say that the tax does not require taxpayers with similar income to pay the same amount. MBT also is complicated, which leads to high administrative and compliance costs, making it inefficient. As Mr. Wadley accurately points out, economists say a good tax system should be assessed to minimize market distortion, which occurs when taxes affect businesses' decisions on how to allocate resources, such as hiring vs. investing in capital. It should come as no surprise then that Michigan business owners are essentially employing one of two strategic options to cope with the MBT: 1.) hold off making any major capital or labor investments until the impact of the MBT is better understood, or 2.) relocate to low-tax states to escape the inconsistent tax burden in Michigan. As if the situation couldn’t become worse, with an approaching fiscal 2011 state budget that could see a $1.8 billion budget gap (based on a December 22, 2009, Michigan Senate Fiscal Agency report), Michigan has its work cut out for itself. The outlook projects a $1.5 billion imbalance in the state general fund and $339 billion shortfall in the state School Aid Fund, for the fiscal year that begins October 1, 2010. The report by Senate Fiscal Director Gary Olson and economist David Zin says that “absent significant increases in state taxes, very significant additional appropriation reductions will have to be made” in both the general-fund and
school aid budgets, and the debate between spending cuts and tax increases “is likely to be the major issue” surrounding the fiscal 2011 budget. In contrast to Michigan’s confusion, other states have understood that regulatory and fiscal uncertainty is the straw that breaks the camel’s back. When Research in Motion (the maker of Blackberry phones) wanted to construct its new 100,000 square foot, 1,000 employee U.S. headquarters, it selected Texas. In 2007, Comerica left Detroit for Dallas. What puts Texas first? It has a pro-business tax climate that ranks third in the nation, a low cost of living, and a litigation environment that ranks 10th. Recently, companies such as Toyota and Caterpillar have also relocated portions of their business in Texas. Simply put, Texas, unlike Michigan, understands that a defined business climate is often times the key ingredient to a successful economy. It should come as no surprise that businesses will do business where they can prosper. Business needs an environment of certainty to be profitable. Profits are then used to invest in new technology, employee compensation and training, and necessary infrastructure. It takes money to make money; without profits, businesses go away. Bureaucrats tend to think money comes from heaven. It doesn’t. Money comes from people and businesses that are successful and profitable. If you take away one’s ability to be profitable, who then pays the taxes? Michigan cannot tax itself to solvency.