Gov. Rick Snyder on Wednesday signed a bill drastically cutting business taxes while raising taxes on individual taxpayers, putting in place the biggest tax restructuring move since voters in 1994 fundamentally altered the way Michigan pays for public schools through Proposal A.
"It's going to make us competitive, it will create jobs, it will keep our young people in this state," Snyder declared before signing the measure into law. Lt. Gov. Brian Calley called it "a game-changer for Michigan," noting the state now will be among the 20 states with the lowest business and individual taxes.
Union leaders expressed skepticism that the changes will lessen Michigan's 10.2 percent unemployment rate, saying that businesses nationwide are sitting on healthy cash reserves but not hiring.
Michigan AFL-CIO President Mark Gaffney noted that demand for more of a company's products or services is what leads to more workers being hired, "not the fact that there's more money being poured into corporate coffers."
The new law will raise more revenue from individual income taxes -- including those paid by retirees and the working poor -- which "could potentially be an economic drag as the consumer has less money to spend," he said.
On Jan. 1, the state will switch from the existing Michigan Business Tax to a 6 percent income tax mostly on large corporations that have shareholders. Overall business tax revenue will shrink by about $1.1 billion in the fiscal year that starts Oct. 1 and $1.7 billion the following year. Some large companies will pay higher taxes under the change, but about two-thirds of businesses will be exempt from the new tax.
Meanwhile, individual taxpayers will pay $559 million more next year in taxes under the new law than they did before, an amount that rises to an extra $1.4 billion in 2012-13. Much of that will come from seniors who will have to pay taxes on retirement income that was largely or entirely exempt under current law, although many individuals likely will pay more after losing tax breaks such as the $600-per-child exemption.
Low-income workers will see the Earned Income Tax Credit drop from 20 percent of the federal credit to 6 percent. A typical qualifying family that now gets about $430 from the state credit will get $130 to $140 instead.
Mary Roszel, co-founder of Biggby Coffee, was among the business owners and lobbyists watching Snyder sign the bill. The East Lansing-based company currently has more than 130 stores under contract in Michigan, Ohio, Wisconsin, Illinois, South Carolina and Texas employing around 1,500 people.
The company hopes to franchise dozens more stores next year, each hiring 15 to 20 people. She said that's likely since Biggby stores in Michigan no longer will have to pay a corporate tax.
"It gives money to our current franchisees to invest in opening more stores" and could it easier for new owners to open one, she said.
The Small Business Association praised the law, calling it "literally a once-in-a-generation step forward toward creating a business climate that encourages business owners to grow their companies, create jobs and revitalize their communities."
According to the Michigan Economic Development Corp., about 136,000 businesses pay the Michigan Business Tax, but Treasury officials estimate only 41,000 will pay the 6 percent corporate income tax.
The lost revenue will hit the School Aid Fund hard, but Snyder said he plans to make sure public schools and universities are adequately funded in the years ahead. Universities will get 15 percent less in the next academic year under the budget being wrapped up in the Legislature, while public schools will be cut by 3.5 percent or more, receiving at least $370 less per student.
House Democratic Floor Leader Kate Segal of Battle Creek and other Democratic lawmakers said the law makes a mockery of the Republican governor's call for "shared sacrifice."
"This new tax structure puts the weight of that sacrifice solely on our residents by imposing new taxes on the pensions our seniors worked for all of their lives, permanently ending a major source of funding for our children's education and slashing the state's Earned Income Tax Credit," Segal said in a release.