The Michigan Single Business Tax (SBT) has outlived its usefulness. The brainchild of many wise politicians, practitioners and business people years ago, the SBT was touted as a simplification to the overburdened business tax community.

It was also suppose to be a non-cyclical revenue stream – a key benefit to the Michigan tax revenue base, which has historically been tied to the automotive industry’s ups and downs. Apparently, the Michigan SBTs non-cyclical nature does not seem to help our state government balance its budget any better now then it did almost 30 years ago prior to the SBT. A better argument for a tax is that it is a progressive tax, and it is fair and simple to understand for those that are required to pay it.

Furthermore, with the globalization of the economy, including the automotive industry, Michigan cannot and should not tailor its tax base to historical trends, which may not hold true in today’s economy.

Based on personal experiences with the diverse Michigan and non-Michigan business community subject to this tax, the SBT, in my opinion, may have outlived its efficacy. 

Generally, a tax may be effective if it is progressive and practical. The SBT was never meant to be truly progressive, but for the few small companies that were/are exempted because of their gross receipts. 

However, a theory for progressive taxes would argue that an arbitrary gross receipts exemption does not accurately measure one’s proper answerability for a tax burden. For a simple example, a company with $300,000 in gross receipts and a profit margin of 20 percent is in a much different position (profitable, but not subject to SBT) than a company with $400,000 in gross receipts and losses (potentially subject to SBT). 

The SBT’s weakness on its progressiveness is not the decisive factor for its failure because many taxes are regressive, i.e., the Michigan Sales/Use Tax is disproportionately more burdensome to lower income taxpayers. 

In practicality, the SBT has become too much of a mess for taxpayers, tax administrators and tax practitioners. In its purest form, a value-added tax (like the SBT was meant to be) may have some merit. However, the existing SBT has become a piecemeal tax that barely resembles the simplicity of a value-added tax. 

Instead, the SBT today takes the base concept of a value-added tax, but perverts it by, among other things: a) trying to incorporate numerous special tax breaks for particular industries; b) trying to use corporate income tax concepts for many portions of the tax; and c) by using non-corporate income tax standards for taxability determinations. 

These three factors are, among others, key to understanding why and where the SBT has failed the business community and Michigan citizens. 

A Unique Option That Should Be Considered – Eliminate The SBT Now
Currently, Michigan’s Democratic Governor Jennifer Granholm has the difficult task of balancing Michigan’s budget with a Republican Michigan Legislature.

According to press coverage, very little is off the table when it comes to cutting back on government expenditures to balance the budget. Another item that is potentially on the table is revamping Michigan’s existing tax system, especially the SBT, to increase revenue.

Thus, the dilemma the Governor and Legislature will inevitably face is what, if anything, can be done to fix or replace the SBT’s shortcomings. Options discussed include, but are not limited to: a) a revival of a corporate income tax and/or net worth tax; b) a pure gross receipts tax; c) headcount or employee tax on business; d) elimination of the compensation/healthcare cost add-back to the SBT; and e) increased credits/incentives for the existing SBT.

Unfortunately, most of these options are temporary fixes and may not be good for Michigan in the long-term.

Furthermore, many of the proposals are counter-intuitive to existing revenue shortfalls.

An alternative to a SBT replacement/fix that should receive serious consideration is the complete elimination of the SBT now, without a replacement business tax. This will likely have an immediate impact on Michigan’s economy by increasing business investment and activity within the state. 

Any existing revenue short-falls the Governor and Legislature are grappling with should not be made up by jeopardizing Michigan’s future economic growth and prosperity with a new or revamped business tax scheme.

Currently, Michigan individuals and businesses are taxed at every point of our personal and business life cycles. For example, we are taxed on everything we earn, on most of what we save, on much that we inherit, on much that we buy at every stage of the manufacturing process and on the final purchase. For Michigan’s economy, the taxes are punishing, crippling and demoralizing.

These Michigan taxes act as a serious disincentive for many businesses to locate or invest in Michigan, and the SBT is, arguably, a primary culprit. A long-term analysis of what may be good for Michigan will require some sacrifice now, but it may let Michigan be an immediate leader in attracting and retaining business and jobs in Michigan.

My guess is that the SBT has survived this long probably more because of the pure bewilderment it creates; and it has been maintained in a manner so bizarre and intricate the ordinary taxpayer requires significant help understanding their liability.

I believe most, if not all, in the Michigan and non-Michigan business community would support the complete elimination of the SBT without a replacement or a limited “fix.”

About the Author
Talha A. Zobair, J.D., LL.M is senior manager, Ernst & Young LLP, Detroit.

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