Service tax replaced by surcharge to business tax

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Steve Mitchell saw this coming.

Mitchell, chairman of Washington- and East Lansing-based Mitchell Research and Communications Inc., said he predicted the 6 percent service tax would be repealed. With the Big Three automakers scheduled to lose hundreds of millions of dollars in taxes to consulting firms under the service tax, Mitchell said the initiative was doomed.

When the service tax was axed Saturday, Mitchell was proven right.

The service tax was killed two months after it was introduced to alleviate the state budget deficit. The tax will be replaced by a 21.99 percent surcharge to the Michigan Business Tax, or MBT, which will be implemented Jan. 1.

“Who did this bill benefit the most? The Big Three,” Mitchell said. “You look at GM, who was standing to lose over $100 million. Now they’re capped at $6 million under the new business tax.”

While GM will likely reach the $6 million cap under the MBT, many East Lansing businesses will remain unaffected by the surcharge, said Rep. Mark Meadows, D-East Lansing.

The surcharge only affects businesses that earn gross receipts of more than $350,000 annually, which leaves most local businesses untouched. Additionally, the MBT is designed to hit out-of-state businesses the hardest while rewarding companies that create new Michigan jobs with tax credits.

The 21.99 percent surcharge, however, will produce $600 million this fiscal year and $750 million in the 2008-09 fiscal year as the state attempts to eliminate its $1.8 billion deficit. The surcharge will last until 2017.

The service tax would have affected businesses such as downhill skiing sites, tanning salons and travel agencies.

A bulk of the tax, though, included a $230 million hit on business consultant services, $98 million on office administration services and $50 million on janitorial services.

“I appreciate the spirit of compromise to repeal a tax that would have devastated Michigan business,” said Senate Majority Leader Mike Bishop, R-Rochester, in a statement.

Michigan congressmen negotiated for weeks about a surcharge between the Democrat-proposed 33 percent and Republican-proposed 13 percent. The two sides agreed early Saturday morning on 21.99 percent.

Even with the 21.99 percent surcharge, Meadows said the MBT is better than the alternatives.

“It isn’t as good a tax as it was before primarily because of the provisions the Senate insisted on in the repealing of the service tax,” Meadows said.

“They did impact Michigan businesses through that, but it was a minimal impact.”

Meadows explained that although the surcharge raises the original MBT, businesses will still save money compared to the Single Business Tax.

“The Michigan Business Tax is a benefit for all Michigan-based businesses. It impacts the out-of-state businesses with out-of-state headquarters,” Meadows said.

“We’ve got a system set up now that should benefit most businesses in the state of Michigan.”

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