Taxable Talk

Michigan is in a recession. In fact, it has been in a recession for several years. So what do you do to attract businesses in a down economy? Do you (a) lower taxes and cut government spending, (b) do nothing, or (c) raise taxes and continue to increase government spending?

Well, since I have a cynical outlook on how government works I wasn’t surprised with the outcome. Michigan raised taxes and continued to increase government spending (albeit at a reduced rate of increase). Michigan imposed a business services sales tax of 6% effective December 1st.

That tax met with universal scorn among Michigan business owners and residents, and Michigan’s legislature repealed it. Well, I should say they replaced it. Now Michigan has a 21.99% surcharge to Michigan’s business tax.

The surcharge is supposed to bring in $600 million this fiscal year and $750 million next year. It’s unlikely to generate that revenue. The natural reaction when a tax is imposed is to do whatever behavior you can to lessen the tax’s impact. And one obvious impact will be for businesses that can to shift tax-generating activity out of Michigan and into other states.

Assume you’re a business owner and have two manufacturing plants: one outside of Detroit and one outside of Phoenix. You need to expand operations. Will you do that in your Detroit plant and pay extra tax? In fact, might you not consider closing your Detroit plant and shifting all of your operations to Phoenix?

Michigan has slapped a Band-aid on a very leaky wound, and in the long-term it won’t work. Businesses that can will still flea the state and Michigan’s long-term recession will continue. The only solution is to make Michigan attractive to businesses, and that means lowering taxes. Cutting tax rates increases tax revenues—something Arthur Laffer discovered.

This entry was posted on Monday, December 3rd, 2007 at 11:18 am and is filed under Michigan. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.