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Corporate Tax Revenue Declining: Historical Context and Modern Implementations of Tax Breaks for Business

The last of the three presidential debates has concluded, and, arguably, for the first time both businessman Donald Trump and former Secretary of State Hillary Clinton shared a stage that briefly touched on their tax policy recommendations. Clinton promises to raise taxes on those who make more than $250,000 a year, while Trump, holding true to conservative tax policy and his business background, advocates for alleviating the burden of taxes on businesses.

Corporate tax breaks are a hotly contested topic in any politically-inclined circle, especially when that circle is in Michigan, a state led by a self-proclaimed pro-business advocate Gov. Rick Snyder. As this election cycle has been suffused with Trump’s history in business, and Clinton’s proposed plans to levy higher taxes on corporations to alleviate the burden on individuals and families, a concern for the effects of business tax credits affects a state’s General Fund.  In the context of Michigan government, talk of corporate tax changes is once again on the table.  While politics begets policy, it is valuable to examine the historic intentions for tax breaks and incentives for corporations and how these decisions have shaped the decisions policymakers are left with today.

Tax breaks have been a Michigan policy go-to since the deindustrialization and departure of major auto companies and their suppliers. From 1890-1940, Michigan, arguably, had a progressive tax policy until these companies left the major cities.  Detroit implemented property taxes to raise revenue, rather than taxing income or sales. This eased tax burdens on small businesses and working people, while simultaneously supporting hardy public services, attracting migrants and working people from around the country.

In attempts to soften the blow of the state’s greatest profit-producing industry, tax handouts have been the norm in Detroit, Flint, Lansing, and other former automobile production hubs in Michigan. Detroit lost 130,000 manufacturing jobs from 1948 to 1967 and from 2000-2010. Michigan lost 48 percent of all its manufacturing jobs. The state of Michigan, in its hopes to retain the manufacturing industry, incentivized manufacturing businesses to stay. In the 1970s when Chrysler Corp. threatened to abandon rehabilitation efforts of their plant on Detroit’s east side, state officials responded with Public Act 198, an industrial property tax abatement law allowing a local government to create a district of rehabilitation or industrial development enabled to levy taxes. From 1980 through 2001, 721 of Michigan’s 1,773 local governments granted at least one PA 198 tax abatement. As a result, a business culture developed that was expectant of tax relief in exchange for their presence and contribution to the state’s well-being. This culture has influenced tax policy in Michigan for more than 50 years.

The pro-business tax culture has continued in modern Michigan politics with the implementation of the 2012 Corporate Income Tax standard (CIT) which replaced the Michigan Business Tax (MBT). With the MBT gone, a 6 percent flat rate tax on corporations took hold, bringing Snyder’s 2011 campaign promise to eliminate the MBT to fruition. More of the state’s revenue burden was placed on individuals through their income taxes, while corporate tax revenue declined. In May of 2016, Anderson Economic Group ranked Michigan’s tax burden 20th in the nation, improving the state’s ranking from 21st in 2015. The chart here, from Michigan's House Fiscal Agency, shows a steady decline in business tax revenue that contributes to the state’s General Fund.

The House Fiscal Agency predicts business tax revenue will continue to fall this fiscal year by 1.7 percent.  Advocates for corporate tax policy reform in Michigan call for an increase in the CIT or for an expansion of the tax base to include businesses not accountable to the CIT. They cite the state’s tax burden shift to individual income tax payers as harming low-income households. This policy also dictates the manner in which revenue sharing for localities have been diverted to account for the loss in net business taxes collected. Even with this diversion, the overall General Fund has decreased enough to cause the Snyder administration to hold off on increasing spending for programs in 2017.  For example, the Healthy Kids dental initiative would have been expanded to all Michigan counties, but it may only be instituted in a select few. The 85 additional Michigan State troopers that were to be funded, most likely won’t be, and fewer officers will be trained.

There are those, however, who see this established precedent of development incentives as a necessary contribution to redeveloping the city of Detroit. They cite tax breaks as a catalyst for revitalization. Tax credits or abatements and the establishment of tax financing authorities have mostly encouraged businesses and developers to establish their bases in the once manufacturing-driven city. Midtown, also known as the Cass Corridor, has an established financing authority, Midtown Inc., and has experienced development and growth from the increased business presence there. It would be difficult to imagine a revitalization of Detroit and a return of clean drinking water in Flint that does involve a sufficient tax base from which to pull. While corporate tax credits influence businesses to stay, or locate to Michigan, there are the consequences of increased individual burden, and the loss of general funding that would be utilized in public initiatives for the safety and well-being of Michigan residents.

The initial impetus for establishing a pro-business climate in the mid-20th century arguably requires reform. Without it, we will see a continuous decrease in the share of taxes that businesses contribute to the state’s General Fund.