The Citizens Research Council of Michigan recently published 2009 Tax Revenue Comparison: Michigan and the U.S. Average, an analysis of state and local government finance data recently released by the U.S. Census Bureau for 2009. The report shows that with corporate income tax revenue of $2.12 per $1,000 of personal income Michigan ranked 38th highest in the nation. Since four states do not levy a corporate income tax, there were only 9 states with lower corporate income tax burdens than Michigan. Michigan corporate income taxes were 45 percent below the U.S. average relative to personal income in 2009.
However, the 2009 corporate income tax burden as reported by the Census Bureau is misleading. Since the Michigan Business Tax (MBT), the direct business tax in Michigan in 2009, was comprised of both an income component and a modified gross receipts component, the Census Bureau assigned a majority of MBT revenue in 2009 to its general sales tax designation instead of the entirety of revenue to its corporate income tax designation. Seventy percent of MBT revenue was assigned to the general sales tax and 30 percent was assigned to the corporate income tax to mirror the revenue generated by the gross receipts component compared to the income component, respectively.
The Census Bureau assignment of 2009 MBT revenue resulted in an inflated general sales tax burden and an undervalued corporate income tax burden. If 100 percent of MBT revenues had been assigned to the corporate income tax category, Michigan would have ranked 6th highest instead of 38th highest in corporate income tax revenue per $1,000 of personal income in 2009; that adjusted ranking reflects a corporate income tax burden 83 percent above the U.S. average (compared to 45 percent below the average using the Census data).
The Census Bureau report is instructive in estimating future comparative tax burdens resulting from changes in tax policy and their estimated effect on revenue. In Michigan, the MBT was replaced in January 2012 by a state corporate income tax (CIT) that taxes a narrower base and fewer firms and is expected to generate substantially less revenue than the MBT. The Senate Fiscal Agency estimates a loss of roughly $1.6 billion in fiscal year 2013 once the CIT has been fully phased-in. With this substantial reduction in corporate income tax revenues, even a 100 percent assignment of CIT revenues to corporate income taxes by the Census Bureau instead of the 30 percent assignment of MBT revenue will not prevent Michigan’s corporate income tax burden (as reported by the Census Bureau) from decreasing significantly in 2013.
If estimated CIT revenues in fiscal year 2013 were substituted for MBT revenues in 2009, Michigan would rank 46th highest in corporate income tax revenue per $1,000 of personal income (62 percent below the U.S. average) and 47th highest in corporate income tax revenue per capita (67 percent below the U.S. average and last among states that levy a corporate income tax), down from 38th and 41st in 2009, respectively. Only Hawaii would have a lower corporate income tax as a percent of personal income than Michigan among states that levy the tax.
If the CIT was enacted to place Michigan’s corporate tax climate in a more competitive position compared to the rest of the country, the Census report data and SFA revenue estimates show that it will accomplish that and then some by fiscal year 2013.