The dust has settled in Michigan’s budget battle, and the outcome is dramatic: a state that has spent billions on economic development subsidies is ending a number of its core programs like MEGA tax credits and reducing spending in others like film tax credits. The new budget put forth by Gov. Rick Snyder (R) consolidates many programs, requires subsidies to undergo the annual appropriations process, and limits new subsidy spending to $125 million for the next fiscal year. At the same time, however, the state is completely revamping its business tax system bringing about significant reductions in corporate tax revenue.
Gov. Snyder’s Republican colleagues initially balked at the idea of ending corporate subsidies , but they liked what went along with it: replacement of the state’s hybrid gross receipts-corporate income tax, the Michigan Business Tax, with a low 6 percent corporate income tax rate. The Michigan League of Human Services estimates that the overall changes to the tax code will result in a $1.8 billion reduction in taxes paid by businesses.
So who makes up the difference? Taxes were increased for individuals, especially low-income families (the state Earned Income Tax Credit was slashed) and retirees (pensions were taxed for the first time). The whole package also includes deep cuts in education spending.
Although subsidy programs were eliminated, corporations that have already been awarded tax credits will be allowed to continue receiving those benefits by filing their taxes under the old Michigan Business Tax system. One result of this is that state revenue losses from the existing credits will actually increase for a number of years. It is estimated that in FY 2012-2013, grandfathered subsidies will cost the state a half-billion dollars.
Among the state’s largest subsidy programs, two were eliminated: MEGA tax credits (which cost $106 million in 2010) and Advanced Battery Credits ($200 million in 2011). Film tax credits survived but will be reduced from $155 million to a maximum of $25 million.
These are all remarkable changes for a state that has used subsidies so profusely for so long. During former Gov. Jennifer Granholm’s (D) eight years in office, 500 companies received $3.5 billion in economic development subsidies. While it is encouraging to see large reductions in corporate subsidy spending in a time of fiscal crisis, it’s dismaying that these reforms are accompanied by an overall shift of the tax burden from business to families, especially those of limited means.