Michigan Repeals Service Tax Hours After It Takes Effect

CHICAGO — After weeks of partisan debate and pressure from business groups, the Michigan Legislature repealed a controversial new service tax just hours after it took effect Dec. 1. The roughly $700 million in lost revenue — key to eliminating a $1.75 billion gap in the fiscal 2008 budget — will be replaced with a new 22% surcharge on the Michigan business tax. Both chambers had passed separate repeal bills in the last month, but a final measure was stalled over disagreements over how to replace the revenue, which Gov. Jennifer Granholm said was necessary to win her approval. The repealed tax would have raised $614 million in 2008 and about $713 million annually after that by imposing a 6% tax on a wide swath of services, the majority of which were business-to-business transactions. The new surcharge is expected to raise $750 million annually, according to legislative fiscal analysts. “This agreement protects health care, public safety, and education while replacing revenue from the service tax. I applaud the members of the business community and the legislators who worked with us to craft this fair and responsible compromise,” Granholm said in a statement. Approved by the Senate during an all-night session Friday and by the House and Granholm late Saturday, the final bill puts the business tax surcharge at 21.9%. The measure expires in 2017 or earlier, depending on the state’s economic performance. The lawmakers also agreed to pass a bill later this week giving amnesty and rebates for those who paid the tax during the 17 hours it was law. The surcharge is capped at $6 million for any one business. Many of the state’s smallest businesses will not be affected because they do not pay the Michigan business tax. “When the tax was passed, the Legislature and Gov. Granholm were swamped with complaints,” said Rich Studley, chief lobbyist with the Michigan Chamber of Commerce, one of several business groups that was opposed to the service tax. “It would have raised a lot of money but it would have had a negative impact on economic development and it was bad tax policy, and would have generated years of litigation about what was taxable and what was not.” The compromise bill was passed after an all-night session, similar to the all-night sessions held in late October as lawmakers struggled to pass a balanced 2008 budget before a government shutdown.