In a nutshell
- The Tax Outline has been updated with 2017 and early 2018 changes.
- The state avoided tax incentives during the Snyder administration, which ends this year.
- 2017 reversed that course with two tax incentive programs.
A software hiccup unexpectedly extended tax season by a day, but the deadline to file individual tax returns is finally behind us. But if you still haven’t had your fill of tax season (or, more likely, if you have questions about how Michigan’s taxes work), you’re in luck.
On Tuesday, the Citizens Research Council released the 2018 update to our popular Outline of the Michigan Tax System. This handy reference document provides a description of all 64 taxes authorized to the state and local governments, and reports on recent revenues collected from each. We’ve tracked the evolution of the state tax system through this report since 1963, including the addition of new taxes (we documented 41 total taxes in the inaugural edition) and major reforms to existing ones (Proposal A of 1994 or the several business tax overhauls, like the recent implementation of the Corporate Income Tax in 2011).
This year’s update saw fewer changes to the tax landscape than most. While 2017 was fairly slow overall, a few noteworthy changes were made. Also, 2018 started with two major pieces of tax legislation (a fix to the state’s personal exemption and speeding up the phase-out of the “tax on the difference” provision).
Backing Away from Tax Incentives
In addition to the specific tax changes themselves, our recent update documents a fairly significant shift in policy, specifically, a return to specified tax credits for certain businesses.
Prior to Governor Rick Snyder’s election, the state provided several incentives to specific industries through “certified tax credits” under the Michigan Business Tax (MBT). These credits (which include things such as the Michigan Economic Growth Authority (MEGA) credits, the Film Production credit, and the Farm Preservation credit) were provided to incentivize the development of specific industries in the state.
Not everyone was a fan of the way these credits worked. Governor Snyder campaigned against them, in fact. He argued that the way these credits operated had the government in the business of picking winners; instead of lowering the tax rate for all businesses, incentives were targeted to specific industries at the legislature’s discretion. Governor Snyder also felt that part of what made the credits seem necessary was the MBT itself; that a restructure of the state’s corporate taxes would likely spur economic growth.
The end result was that the legislature and governor created the Corporate Income Tax (CIT), which replaced the MBT. The CIT is levied on a smaller base than the MBT had been at a lower rate. Along with this reform, the state eliminated several of the credits against the MBT, though many businesses were allowed to file their taxes through the MBT to claim credits that were already negotiated. In addition, the state has ended a few of these programs since the CIT was implemented.
In lieu of using tax benefits to incentivize certain business activity, the state shifted its focus to grant-based economic development programs. A number of programs, such as the Michigan Business Development Program and the Community Revitalization Program, were created in in 2011. Using grant programs funded through the annual budget allowed the state to better control the types of assistance given out, allowing more targeted influence. Further, because they are directly outlined in the budget, they are generally more transparent.
Reverting to the Past: Two New Programs
Laws enacted in 2017 started a shift back towards targeted tax incentives. Following a trend started in 2016, when lawmakers exempted equipment used in a data center from the state sales and use tax, the state has enacted two additional tax incentive programs in 2017: the Transformational Brownfield Plan and the Good Jobs for Michigan Program. These programs allow the Michigan Strategic Fund to enter into tax capture agreements, similar to ones enacted under previous tax capture programs, with businesses that develop on brownfield sites or create a certain number of “good jobs” (respectively).
The Good Jobs program (Public Act 110 of 2017) allows the Michigan Strategic Fund to make agreements with 15 businesses a year in 2018 and 2019 in an effort to attract new, high paying jobs to the state. Businesses that enter an agreement can capture 50 percent of income tax revenues if they create at least 500 new jobs in the state at the Prosperity Region average income level, or 100 percent if they create 3,000 jobs at the region’s average or 250 jobs at 125 percent of the region’s average. The sum of these agreements are capped at $200 million over the life of the program.
The Transformational Brownfield Plan (Public Act 47 of 2017) aims to provide local governments with the ability to incentivize construction on environmentally contaminated, blighted, or similarly unusable sites. Brownfield locations typically cost significantly more to clean up and reuse than developing a different location. The state is providing tax capture incentives to incentivize development on several sites across the state. The Strategic Fund can enter an agreement with local governments that allows them to provide tax capture revenues from construction and use of brownfield development sites. The total amount of incentives allowed under the program is capped at $1 billion, with an annual cap on spending set at $40 million.
While these programs do not cost the state anywhere near what MEGA credits (which reduce revenues by nearly half a billion dollars a year) have, they add a significant chunk to the state’s tax credit liability moving forward. Excluding the liability due to MEGA credits, the Michigan Treasury estimated that the remaining legacy MBT credits have a total state liability of $438.3 million between now and 2032. The Good Jobs program has a larger cap than the remaining liability on any of the individual credits remaining, while the Transformational Brownfield Plan has a potential liability of more than twice the levels of those programs. In effect, the Good Jobs program and Transformational Brownfield Plan are a large reversal to the way the state conducts business development policy.