GRAND RAPIDS — If the petition drive for the Fair Tax collects enough valid signatures to put the measure on the November ballot and if voters approve it at the polls, State Rep. Fulton Sheen believes Michigan will get back on its business feet again.
“We can lower the cost of doing business here. We’ve got to give people a reason to come here,” said Sheen, a Plainwell Republican and member of the House Committee on Tax Policy.
“If you create a favorable atmosphere for businesses, they will come here. We’ve got to have a vibrant private sector,” said Sheen at last week’s meeting of the Grand Valley Metro Council. “I believe many of those businesses that busted out for other states would come back.”
Sheen, a financial planner by trade, has been working on the Fair Tax for the past three years. The levy is a sales tax of 9.75 percent on goods and services sold, except for business-to-business transactions. But exempting purchases by businesses is not the only benefit that Sheen sees coming from his proposal for the private sector.
He said the Fair Tax would replace the personal property tax, the 6 mills school education tax that businesses pay, the 4.35 percent state income tax, and the highly controversial and still being adjusted Michigan Business Tax that replaced the Single Business Tax last year.
“It isn’t any simpler. It isn’t any better. It isn’t more competitive. I don’t think one business group is taxed the same,” said Sheen of the MBT when compared to the SBT.
Sheen noted that the gross receipts segment in the MBT allows the state to tax a product at every creative step, which means an item could be taxed three or more times by the time it’s purchased. In contrast, he said the Fair Tax only taxes goods and services when these are bought or delivered.
Sheen also wants to see the personal property tax go away because he feels it penalizes business expansion by raising a company’s tax burden when it buys more equipment and furniture.
“Every state around us has gotten rid of the personal property tax. We’re the only state in the Midwest that has a personal property tax,” he said, while adding that changes to the personal property tax base would still have to be recorded for municipal bonding agencies.
“We’re going to keep all those parameters the same. We’re just changing the revenue source.”
The Hillsdale Policy Group did an analysis of the fiscal effect the Fair Tax would have on the state. The report showed the state would gross about $24 billion in revenue annually, an amount higher than the income the state now receives from the taxes the Fair Tax would eliminate. But a prebate provision in the Fair Tax would make monthly refunds to every qualified Michigan resident that would total $6 billion each year and would reduce the tax’s net to $18 billion, the amount the state now gets from the taxes the Fair Tax would replace.
“Our analysis indicates that the MI Fair Tax rate of 9.75 percent would, even allowing for the prebate, generate enough revenue to replace Michigan’s income tax, business tax, personal property taxes and insurance premium taxes as they were levied in the most recent fiscal year,” concluded the Hillsdale Policy Group report.
“While we’ve made no attempt to incorporate behavioral effects into our projections, we think it’s very reasonable to project an increase in the tax base due to the switch to the MI Fair Tax given the experience of other states that do not levy taxes on income.”
Sheen said nine states in the country don’t levy an income tax, and residents in those states are able to deduct a portion of their sales-tax payments on their federal income-tax returns. He also said the Fair Tax would be likely to capture roughly 75 percent of the $2.5 billion in tax revenue the state can’t collect each year. And, he said, the Fair Tax collects revenue from everyone, including visitors to the state and illegal immigrants that reside in Michigan.
Sheen said the prebate in his proposal keeps the tax from being regressive to low-income households and seniors living on a fixed income. The prebate is similar to an income-tax deduction, but actually is a refund all Michigan residents would have deposited into their accounts each month. A single individual would receive $84.50 each month or $1,014 a year to cover the higher sales tax, according to current federal poverty standards, and a family of four earning $26,000 a year would not pay any tax.
Sheen said the biggest criticism he has heard about the Fair Tax is it would leave the state with only a single revenue source. But he said if revenue from the tax looks like it will fall 5 percent short of the previous year’s take, then the tax rate would rise, for that year only, to 10 percent to make up the difference. He said the reverse is also true. If revenue is expected to rise by more than 5 percent, then the tax would dip to 9.5 percent for that year only.
Sheen also said the Fair Tax proposal guarantees revenue sharing to counties, townships, cities and villages — soothing words to Metro Council members.
The goal of the petition drive is to collect at least 400,000 valid signatures, as 381,000 are needed by July 7 to get the proposal on the November ballot. If approved then, the measure would change the state’s taxing structure by amending the Michigan Constitution.