by Tom Shields
October 16, 2007
My father used to say that the only thing that happens after midnight is trouble. Too bad he wasn’t around to warn the governor and Michigan Legislature before they cut their budget deal in the wee hours of October 1.
In an effort to avoid a government shutdown and stay below some mystical number on the income tax increase that would make them “recallable,” the legislature bit on a new service tax to fill a political gap in the budget. However, no one reminded them that good politics doesn’t necessarily make good policy — it’s usually the other way around.
You have to wonder why they picked a service tax. Public opinion polling showed the voters were strongly opposed. In fact, the only budget balancing solution that voters seemed willing to support was an equal balance of cuts and taxes. Since when is 20 percent in cuts and 80 percent in tax increases equal?
Leon Drolet and his pink pig brigade of recallers were going to file recall petitions no matter the level of the income tax increase. It didn’t make any difference if it went up to 4.1 percent or 4.8 percent. The anti-tax team was just waiting to fill in the number on the petitions and insert the name of the legislator to be recalled for casting a vote in favor of an increase.
By adding the service tax on 57 varieties of business services, the governor and legislature may have just given Mr. Drolet all the volunteers he needs to successfully carry the petition and to finance the campaign.
As the dust settles on the service tax, everyone is now realizing that this is more than a tax on tarot card and psychic readers, massage parlors and dating services. Treasury is saying that the 57 categories only affect around 16,000 businesses, but they are only looking at businesses that classify their main business under the North American Industry Classification System (NAICS) codes that Treasury used to calculate the net effect of the tax.
Many businesses offer services that will be taxed even if their primary business was left off the tax hit lists. The lobbyist for accounting firms worked hard to make sure that accounting was not taxed. But many accounting firms offer business consulting and payroll services that now will be taxed.
As more lawyers, businesses and accountants take a good hard look at the new tax and advise their clients of their tax obligations, the number of businesses charging it and passing it along to consumers will continue to grow. It’s likely this tax is going to be paid by 100 percent of businesses and will probably bring in a whole lot more revenue than anticipated.
That is, of course, if this tax makes it in its current form past the December 1 start.
As it becomes more and more apparent that the service tax is just bad tax policy, pressure will mount on the legislature to either fix it or repeal it altogether.
The service tax is doing something the rewrite of the Michigan Business Tax couldn’t do — bringing together large and small businesses to say, “this tax stinks!” While their suggested fixes may differ, they could easily join forces to take a repeal to the ballot in 2008. And while they may not win, just imagine next year’s budget battles with a repeal hanging over lawmakers’ heads.
It seems like the best policy and political solution is to fix the tax, or toss it out and start all over again. The governor needs to suck it up and admit the administration blew it. The numbers are wrong and the unintended consequences of this tax could have a very real and detrimental effect on Michigan’s already gloomy economy.
Senate Republicans are already taking up repeal measures. The governor and Democrats would be smart to join in fixing the problems. Just ask the psychics and tarot card readers — this issue will not go away by its self.
If and when lawmakers find a solution, hopefully they will find it in the bright of daylight, through a committee hearings process, with real and bona fide numbers and a truly public discussion. Because nothing but trouble seems to happen to deals cut after midnight.
Tom Shields is founder and president of Marketing Resource Group, a Lansing-based political marketing and public relations firm.
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