ANN ARBOR—A new report from the University of Michigan indicates that the Michigan Business Tax does not meet the three criteria of a good tax system: reliability, equity and efficiency.

That is the finding from U-M’s Center for Local, State, and Urban Policy. CLOSUP, which is in the Gerald R. Ford School of Public Policy, analyzed MBT and other tax options, and reviewed the public debate in Michigan regarding business taxation.

The MBT?which replaced the state’s Single Business Tax in 2007, but took effect in January 2008?generates inconsistent revenue year to year, making it less reliable than the SBT, according to the report.

The tax does not have the equity requiring taxpayers who have similar income to pay the same amount in taxes. MBT is also complicated, which leads to high administrative and compliance costs, rendering it inefficient, the report states.

Several plans have been proposed for reforming MBT so that it benefits all businesses. Some include phasing out the 21.99 percent surcharge, instituting a graduated income tax and eliminating the MBT.

Economists say a good tax system should be assessed to minimize market distortion, which occurs when taxes affect businesses’ decisions on how to allocate resources, such as hiring vs. investing in capital.

“Distortions, in effect, drive up costs for consumers and businesses,” said Tamara Wilder, a research fellow at CLOSUP.

Michigan’s Business Tax consists of a business income tax, a gross receipts tax (a tax on total receipts from goods and services sold) and the surcharge. Wilder said the surcharge, which was added to reduce the state budget deficit, has been considered a burden for many firms.

The report also noted that MBT critics say owners of capital might relocate to low-tax states to escape the tax burden. Proponents of the state tax point to greater relief for some small businesses and manufacturers, and rewards for putting employees and property in Michigan.

CLOSUP helps scholars conduct policy-relevant social science research. It functions as an information resource for academics, policymakers, the media and the public. The center works to foster effective communication between academic researchers and the policymakers dealing with today’s state, local and urban policy problems.

The business tax analysis is one of a series of research briefs that will be published this summer. Other topics include transportation funding, corrections expenditures, economic development and college scholarships, and the individual health insurance market.

CLOSUP