Asked and Answered:Lynn A. Gandhi

By Jo Mathis
Legal News

In May, Michigan legislators passed a business-tax cut of about $1.7 billion, ending the Michigan Business Tax and replacing it with a 6 percent income tax on "C" corporations. All other business entities, including sole proprietorships, limited-liability companies and other individually owned businesses, will pay only individual income tax instead of both MBT and individual income taxes.

A portion of the lost revenue will be made up in personal taxes.

The new Michigan tax law goes into effect on Jan. 1, 2012.

We talk to tax attorney Lynn A. Gandhi, a partner in the Detroit firm of Honigman, Miller, Schwartz, and Cohn LLP, about the changes.

Mathis: Who will be happy these changes are going into effect? Who will not?

Gandhi: All Michiganders will benefit from these changes. Instead of looking to the short term of who may pay more and who may pay less, it's really about how do we share, as citizens, in the cost of running and improving our state, while making our state more attractive to live and work, while attracting businesses. We all need to contribute to improving our roads and bridges, educating our children, retraining our workforce, while protecting the beauty and natural resources, which we are so lucky to have. We shouldn't overlook that while some businesses may pay less under the CIT than under the MBT, all businesses will still pay real and personal property taxes, sales and use taxes, annual registration and filing fees, payroll taxes as well as a myriad of miscellaneous excise taxes.

Mathis: Will the changes affect the complexity of tax forms for better or for worse?

Gandhi: The actual tax forms for individuals and business will be simpler, though a short form does not necessarily dictate a lack of complexity in preparing. I think we will see some initial complexity under the new withholding regime for flow-through entities doing business in Michigan, and I know the Administration is working hard to get the pension withholding forms out by October 1, 2011, in order to facilitate those withholding changes for employers and retirees.

Mathis: Starting next year, the state will tax pensions except for those 67 and older, raising about $343 million in the process. Won't this be hard on many low-income seniors? And does it seem fair to tax the very modest pensions at the same level of much larger ones?

Gandhi: Don't forget that there is a liberal exclusion provided for retirees who will be subject to tax -- $45,120 for individuals and $90,240 for joint filers born before 1946, and public pensions and social security remain exempt from tax. For individuals born between 1946-1952, the exclusion is $20,000 for individuals and $40,000 for joint filers, and again, social security is exempt. Add to this Michigan's flat income rate tax of 4.3 percent, which is scheduled to reduce in 2013, and you do get a safety net for those seniors truly in need. We cannot tax larger pensions at a higher rate due to Michigan's constitutional prohibition on a graduated income tax.

Mathis: Those of us who do not own our own businesses will pay more in personal income taxes to make up for the loss of the Michigan business tax. Our payback, hopefully, is a healthier economy. Is that realistic to expect?

Gandhi: I think it is, but it will not occur overnight. We also need to spend our dollars smarter, and figure out how to do things better, like reducing repetitive layers of administration and services at the city, township, county and state level. Keep in mind that the increase in personal income taxes was not a dollar for dollar replacement for changing from the Michigan Business Tax to the Corporate Income Tax. Michigan was among only 5 states that provided a full exemption from tax for retirement income, so many of the changes we saw were to bring Michigan into alignment with the majority of other states.

Mathis: Do you agree with the governor that the Michigan business tax was a job killer?

Gandhi: Just like the Single Business Tax, which was repealed based on a public referendum, the Michigan Business Tax was a unique tax, levied only by one state and without regulations to provide the clarity needed to comply with the tax. The compliance with the tax was burdensome to all businesses, especially those family businesses that do not have tax attorneys on staff. Literally hundreds of hours went into preparing returns, and that work does not add value to what most businesses do -- either make a product or provide a service. Moving to a corporate income tax structure without a gross receipts tax will not penalize businesses for moving to Michigan or growing its operations in Michigan. Corporate income taxes are also the norm in the global economy, and it was very difficult to explain to foreign companies interested in investing in Michigan why the state had a tax that was so different than any other state in the country.

Mathis: House Democratic Floor Leader Kate Segal, D-Battle Creek, said in a statement that the changes are "nothing more than a massive giveaway to businesses with no accountability and no guarantee of new jobs." And Mark Gaffney, president of the Michigan State AFL-CIO, has said that the bill signing "is a shameful wealth transfer from working people to CEOs."

Do such critics have a point?

Gandhi: I think the point is that folks in Michigan are frustrated with the state of recession we have been living in since 2003, and the inability of our past state legislators to come together to move the state forward. Many companies opposed the CIT because of the number of credits they had built up under all the credit provisions of the MBT. The state has tried to address this, and I am not sure that what is currently provided is adequate. Regardless, what we need to do is to demand accountability by measuring results, and not be tempted to pass short-term fixes. It is just like being on a diet, its not going to happen overnight, but staying the course every day makes a big difference the next time you get on the scale.

Mathis: Leaders for Michigan President and CEO Doug Rothwell has called the business-tax changes "the single biggest improvement to Michigan's job climate in almost two decades." Was the MBT unfair? Will its elimination be the boon that's expected?

Gandhi: Again, the term "unfair" selects winners and losers, and depends on who you're rooting for. The MBT was a unique, confusing, complicated and detrimental tax, both for large companies and family owned businesses. The elimination of the tax will provide a significant tax benefit to every family owned business in the state, but keep in mind that these business owners will pay tax at the personal level, as well as real and personal property taxes, sales and use taxes, payroll taxes and other miscellaneous taxes that will run our state. I think the change in tax regimes sends a more important message that Michigan is serious about fixing its problems and not continuing the bickering that has slowed us down for so many years. I certainly hope so.

Published: Thu, Sep 22, 2011

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