At the close of 2007, a troubling chapter in Michigans history comes to an end. The Single Business Tax (SBT) lands in the dustbin of the states tax policy.

But a fierce debate now focuses on how Michigan can replace the $2 billion raised by the SBT. Unfortunately for Michigan taxpayers, the SBTs death may lead to a worse scenario.

A leading plan for recouping revenue pushed by several interest groups and Gov. Jennifer Granholm involves increased reliance on gross-receipts taxes. This would foist taxes upon businesses located out of state.

Researchers at the Tax Foundation recently analyzed attempts to replace the SBT. The reports states:

Funding programs by taxing residents of other states and cities is something economists call tax exporting. In general, tax exporting makes state and local governments less accountable to voters and encourages overspending on projects that are not really economically sensible. That overspending occurs because tax exporting severs the link between the demand for public spending and the cost of that spending it is like dining out, but having the bill paid by the next table.

The analysis states that the appeal of gross-receipts taxes is twofold. First, since it taxes business, compliance costs are believed to be lower. Second, since the tax is essentially hidden from taxpayers consumers dont see the tax in their payroll deductions or their retail-purchase receipts the tax contains significant political benefits for incumbent politicians.

Kentuckys small-business operators already know the costs of a gross-receipts tax. While hidden away in Gov. Ernie Fletchers tax-modernization plan of 2005, Kentuckys levy on gross receipts part of Kentuckys Alternative Minimum Calculation punishes businesses that arent earning profits.

But the best way to replace Michigans SBT is the same as solving Kentuckys gross-receipts tax. Instead of trying to find sneaky ways of replacing foregone revenues, both states should institute large-scale discretionary spending cuts. Its the only reasonable price to pay for killing ill-conceived taxes.

Sources:

Tax Reform in Michigan: Replacing the Single Business Tax by Chris Atkins and Jonathan Williams, Tax Foundation Special Report No. 149, January 2007.

Stop Punishing Michigan Investors by Jack McHugh, Mackinac Center for Public Policy, Jan. 1, 2007.