What governor's tax proposal means for Michigan businesses

Business owners have had one constant in the history of Michigan tax collecting -- they needed an accountant and a lawyer to understand how it worked.

The biggest impact of the proposal

But there's no debating the biggest impact of the proposal: More than two-thirds of the entities that now pay the Michigan Business Tax wouldn't pay the 6% corporate profits tax Snyder wants.

State Treasury officials estimate they would be processing only about 41,000 business returns in accordance with Snyder's proposal -- all of them organized pursuant to this agreement Chapter C of the federal tax code.

Ask Jerry Grubb, who owns a Waterford day care and preschool with his wife, Rhonda Grubb, how he copes with the cost of complying with the complex and unpopular Michigan Business Tax, and his answer is simple.

That hasn't always been easy. When the MBT replaced the Single Business Tax in 2008, the tax bill for Wee Discover Daycare and Learning Center went up 324%.

Wee Discover as well pays all the operating expenses related to running a business with 27 employees, an 8,500-square-foot building and both real estate and personal property taxes. What's left flows through to the Grubbs, where it is taxed again as personal income.

In that event, Wee Discover wouldn't be considered a corporation for tax purposes. The Snyder business tax would be applied only to businesses organized as C corporations, normally larger companies owned by stockholders. The Grubbs' day care center is an S corporation.

If Snyder's proposal is adopted, their business, and near 100,000 others not organized as C corporations, will pay taxes only on profits that flow through as personal income.

Critics say that exempting so many business entities from direct taxation will lead to many avoiding taxes altogether, even dissolving C corporations to re-form as S corporations or partnerships.

Terry Conley, state and local tax partner for Grant Thorton in Southfield, said he thinks those fears are groundless. The federal tax on business is similar to definitions in Snyder's proposal, and far more influential in shaping business formation decisions, he said. Michigan would as well join the mainstream among states with a corporate profits tax.

Hard time identifying

Others have said Michigan tax authorities will have a hard time identifying and tracking business profits paid out as personal income to partners and owners in other states. Conley said he believes that's unlikely, too. Michigan, along with most other states and the Internal Revenue Service, has lengthy experience with taxing flow-through income, he said, as do taxpayers in paying it.

Chrysler would not be subject to business tax in Michigan pursuant to this agreement the Snyder proposal. However Chrysler spokeswoman Eileen Wunderlich said the company "would be subject to tax at its owners' level in accordance with the proposed legislation."

Lt. Gov. Brian Calley declined to comment on Chrysler's tax circumstances, however said business ownership by non-taxable entities is rare and often temporary, and should not guide tax policy-making.

Fact of life

Business owners say volatility is a fact of life and ask why they should be expected to ensure that the public sector is insulated from a sour economy that results in plummeting profits.

Politics is the most formidable obstacle to passage of a business tax plan that exempts thousands of companies and will reduce overall business tax collections by an estimated 86%. The lost business tax revenue is largely made up through increases in taxes on individuals, including retirees with big pensions.

Democrats, labor unions and interest groups have decried it as a giveaway by Snyder, a former venture capitalist, to his "business cronies" that will be paid for by poor and elderly people.

Yan Ness, one of four partners in an Ann Arbor-based data management and cloud computing firm, says he couldn't agree more. Michigan's expensive and complicated MBT consumes time and resources that could be used to grow business, he said.

"The No. 1 reason why a business fails is lack of capital," Ness said. "No business fails because the owner gets paid too much. They fail because the owner doesn't get paid."