'Sin taxes' yield more than double business taxes in Mich.

Lansing — Smokers and drinkers paid more taxes last year than Michigan companies paid in net business income taxes — a new development that's likely to inflame a raging legislative debate about the fairness of the state's tax code.

Revenue from so-called sin taxes on tobacco, beer, wine and liquor totaled $290.5 million in the 2014 fiscal year, more than twice the $137.6 million net income taxes paid by Michigan businesses after receiving $768.8 million in refunds from tax credits, a Detroit News analysis of tax data shows.

Since Gov. Rick Snyder and lawmakers delivered sweeping tax relief for businesses in 2011, net business income taxes dropped 90 percent, depleting the state's main operating fund of $1.33 billion, according to state revenue data.

The percentage of general fund revenue from business income taxes also has plunged as tax credit payouts to companies have soared. Tax data show business income tax receipts declined from 21 percent of the general fund revenue a decade ago to about 2 percent last year.

"The fact that wealthy corporations are contributing less to the state budget than those subject to an excise tax on tobacco should be a real wake-up call to how little corporations are currently paying in taxes," said House Minority Leader Tim Greimel, D-Auburn Hills.

"I think the pendulum has swung too far," said Rep. Jim Townsend, D-Royal Oak. "The fact that businesses are paying less than smokers and drinkers tells you something about our priorities."

Republican lawmakers and business groups are quick to note corporations large and small pay other state taxes on property, fuel, utilities and supplies, while some business owners pay the 4.25 percent personal income tax on their profits, which is harder to track.

"I've heard companies argue that they're paying more than they should now," said Senate Majority Floor Leader Mike Kowall, R-White Lake Township. "Some would have you believe we raised everybody's taxes to give these corporations a big tax cut. That's not the fact at all."

The Anderson Economic Group pegs small business pass-through taxes at about $800 million of the $8.9 billion in personal income taxes collected in 2013.

"We're paying more than our fair share," said Charlie Owens, state director of the National Federation of Independent Business. "We're not getting sweetheart (tax credit) deals, we're not getting carve-outs."

Michigan's 2 percent business tax share of revenue for funding state government is below the 3.5 percent national average, said Jared Walczak, a policy analyst at the Tax Foundation in Washington, D.C.

"Increasingly, they are not a major part of the state's revenue picture," Walczak said of business income taxes.

Tax policy is taking center stage in the Legislature this month, after voters rejected sales and gas tax increases as part of a complex plan to raise $1.3 billion more annually for road repairs.

Democrats blame the lower portion of general revenue coming from taxes of business profits on a Republican-authored $1.8 billion business tax cut in 2011 that was largely paid for by the elimination of income tax credits and exemptions for individuals, which generated about $1.6 billion in new revenue.

"We're giving away money at an alarming rate in this state to people who are already rich, and we're saying that's good public policy," said Sen. Bert Johnson, D-Highland Park.

Last year, the balance of business income taxes as a share of general revenue began to turn when companies holding tax credits triggered a surge in refunds, from $75.8 million in 2013 to $723.3 million in 2014. The Democratic administration of former Gov. Jennifer Granholm was responsible for most of the state's surge in handing out tax credits to businesses.

The Senate Fiscal Agency projects business tax credits will deplete general revenue by more than $680 million this fiscal year and $807 million in 2016.

Robert Kleine, state treasurer under Granholm, said GOP lawmakers and Snyder "went a little too far" in extending tax relief for businesses in 2011.

Kleine called the net business income taxes amounting to 2 percent of general revenue "just ridiculous."

But Doug Rothwell, president and CEO of Business Leaders for Michigan, said the decline in business income tax revenue comes after decades of Michigan having an "extremely high business tax rate."

"I think the 6 percent corporate tax rate is a fair rate," Rothwell said.

The Tax Foundation ranks Michigan's corporate income tax as the 10th most competitive among the 44 states that levy an income tax on business profits. Michigan's overall business taxes are ranked 13th best in the country by the Tax Foundation.

Not all businesses are paying the corporate income tax.

The Legislature's 2011 tax code changes freed 95,000 small and medium-size businesses from paying a state income tax on profits through the Michigan Business Tax.

Most of those business owners and investors were once subject to both the MBT and the personal income tax. Now they just pay personal income taxes on their profits, said David Zin, chief economist at the Senate Fiscal Agency. "They were essentially double-taxed."

The trend of sin taxes outpacing business income taxes is expected to continue. Taxes from the Michigan Business Tax and Corporate Income Tax are projected to total $244 million this year, while beer, liquor, wine and tobacco taxes will total about $280 million, according to Senate Fiscal Agency data.

For the 2016 fiscal year budget, which lawmakers are debating, sin taxes are projected to top $278 million, while business taxes will net $159 million after more than $800 million in tax credits, recent tax data show.

To combat a perception that wealthy business owners aren't contributing enough to the state's coffers, Townsend has introduced a constitutional amendment to eliminate Michigan's flat income tax in favor of a "graduated" system that levies a higher tax rate on higher earners.

Townsend's proposal, co-sponsored by 35 House Democrats, calls for a dozen income tax rates ranging from 3 percent for couples earning $25,000 or less to a 5.08 percent rate for couples earning more than $250,000 a year. Individuals would be subject to a different set of 13 tax rates starting at 3 percent and topping out at 6.14 percent for $250,000 or more of taxable income.

Individuals earning more than $80,000 and joint filers earning more than $160,000 annually would get a tax increase under Townsend's plan.

Nine states, including Michigan, have a single flat income tax, while seven states have no income tax, according to the Tax Foundation. The remaining 34 states and the federal government levy gradually higher tax rates as an individual or couple earns more money.

"This reckless talk recently about a graduated income tax would be tax policy suicide," said Rich Studley, president and CEO of the Michigan Chamber of Commerce.

Studley said Democrats are pushing the graduated income tax proposal to wage "divide and conquer politics" and a "class envy" strategy for the 2016 elections.

"It would be a giant tax increase for many small business owners, many farmers and many entrepreneurs who are not incorporated and pay their income tax through the individual income tax," he said.

clivengood@detroitnews.com

Twitter.com/ChadLivengood