Snyder’s First Michigan Budget: One (Tax) Rate to Rule Them All

2/17/11Follow @xconomy

[Corrected 2/18/10, 10:04 am.] When Rick Snyder emerged victorious in last year’s gubernatorial election, Michigan’s entrepreneurial community buzzed with excitement. Snyder, a former corporate executive and venture capitalist based in Ann Arbor, MI, had the business smarts to revitalize the state’s sluggish economy, supporters said.

The first test of Snyder’s leadership would be crafting a budget that could close Michigan’s nearly $2 billion deficit and encourage job creation.

Today, Snyder unveiled his budget proposal and from what I can tell, it largely reflects his preference for markets, not government, to pick winners and losers in Michigan’s emerging high tech economy, a philosophy one would expect from a former VC.

In some ways, Snyder’s budget attempts to restore order to the state’s byzantine tax system and its haphazard, frenetic stabs at economic development.

Gone are the maze of targeted tax credits Michigan has employed to develop specific industries like clean energy, advanced batteries, biotechnology, computers and medical devices.

“Michigan’s business taxes have traditionally been very complex, including an intricate web of incentives, credits and deductions that unfairly favor some businesses or industries over others,” according to Snyder’s budget report. “Governor Snyder believes this complicated tax structure hurts Michigan businesses and constrains job growth.”

“He proposes a simple, fair and efficient Corporate Income Tax that will even the playing field and enable all businesses and industries, large and small, to grow and create jobs,” the report says.

Under Snyder’s proposal, the state would eliminate hundreds of millions dollars of tax credits awarded by Michigan Economic Growth Authority (MEGA).

Led by an eight-member board, MEGA is currently slated to distribute $768 million in credits to companies that create well-paid, high-tech jobs over the next five years. Much of that will go away under Snyder’s plan. [An earlier version incorrectly said NextEnergy, a private non-profit research and development organization for clean energy, distributed tax credits. We regret the error.]

Snyder, though, says Michigan will honor the $500 million the state has already committed to companies under the current tax system.

Instead, Snyder wants to replace the Michigan Business Tax with a flat corporate tax of 6 percent. S-Corporations, companies with less than 100 employees that pass through profits and losses to investors (essentially small entrepreneurial firms), will be exempt from the corporate tax. [An earlier version incorrectly said S-Corps were mostly venture-backed startups. We regret the error.]

Snyder’s budget essentially says this: only a favorable, broad-based tax structure will key an economic recovery versus using tax credits to spur specific industries.

The state still has plenty of weapons to stimulate the economy other than tax credits, Mike Finney, Snyder’s top economic development official, says.

“The [Michigan Economic Development Corp.] is much more than the incentives related to the Michigan Business Tax,” Finney said in a statement. “We employ many more tools and tactics for successful economic development than the incentives that will be replaced by this simpler and fairer flat corporate tax.”

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  • Chris

    Good article Thomas, but there were two mistakes:

    1. S Corporations are basically the opposite of venture backed companies. Venture funds invest almost exclusively in C Corps, in part because they don’t want the annual pass through tax treatment. S Corps are usually family owned or small entrepreneurial business that do not have angel or venture backing.

    2. NextEnergy does not distribute tax credits and never has. It is not an arm of the state. It is a non profit company that is involved in research, market development and policy. But it does not have any State tax credit authority.

  • http://www.xconomy.com/author/tlee/ Thomas Lee

    Thanks Chris for the corrections. I updated the piece.