Nancy Kaffer: 'Trust me' legislation lets companies control taxes

Nancy Kaffer

Detroit Free Press Columnist

If the state required every business to rebate a percentage of its revenues to employees, they'd call it socialism.

But a bill package that passed the state Senate on Tuesday promises a different redistribution of wealth: Instead of paying taxes to state government, employees at up to 15 Michigan companies could pay as much as $250 million in taxes directly to their employers.

As currently configured, businesses slated to receive tax rebates or abatements — economic development incentives doled out by the state to companies that meet certain criteria — pay taxes to the state. The state calculates how much money each abatement or rebate is worth, and cuts a check to the company.

Companies involved in the new program would circumvent that system.

It bears repeating: This legislation would allow a business that creates jobs to keep the taxes it withholds from employees' paychecks. The taxes employees pay to fund government services like roads, schools, public safety and social services would be diverted directly into their employer's pocket.

Over the last six years, Republican Gov. Rick Snyder and the GOP-led state Legislature have shifted much of the burden of paying for government services from businesses to individuals, as the share of taxes that businesses pay has decreased, and the share that people pay has increased. But this newest scheme is an irresponsible abdication of the centuries-old duties of government, and a naked nod to state government's concern for profits above people.

The word that keeps coming to mind here is "serfdom." That's the feudal economic arrangement in which serfs, the bottom rung of the medieval social ladder, worked for the lord of the manor, who collected the benefit of their labor. In return, the lord was obliged to provide some level of protection and justice, along with the chance to do a little subsistence farming for their own benefit.

The logic behind this legislation — and this is a really generous use of the word — is apparently to whoop up economic development, in part by cutting out the middleman and streamlining the abatement process.

But sometimes, the middleman exists for a reason.

As detailed in Senate Bills 1153, 1154 and 1155, the Michigan Strategic Fund would strike an agreement with businesses: If certain job-creation targets are met, companies could retain between 1% and 100% of the taxes they're withholding from employees' checks. Companies would pay to the fund 5% of the employee pay they've withheld, for administrative costs.

From a practical standpoint, it's hard to understand how lawmakers — or Michigan taxpayers — can reasonably expect to ensure business are paying what they ought.

The legislation includes a requirement that companies directly subsidized by their employees' taxes deliver periodic reports to the Michigan Strategic Fund, explaining what tax payments they've made and why. Thanks to state freedom of information laws, documents and records created by governments are accessible to the public. But because the businesses in question belong to the private sector, neither those reports nor the business' accounts would be subject to public — or legislative — scrutiny.

"It’s a piece of 'trust me' legislation, and I’m just not very trusting," said Mitch Bean, former director of the nonpartisan state House Fiscal Agency, now of Great Lakes Economic Consulting. "Employees have to file W2s, but if it doesn’t match up to what you actually collect, how do you know if the business is doing what it's supposed to do?"

And then there's that other thing: "The notion that we’re going to pay our taxes to our employer, rather than to the state? ...Taxing is one of the roles of government, so we’re just going to turn everything over to the private sector? Philosophically, it doesn’t make sense, and practically, it doesn’t make sense," Bean said.

And that's not even considering the relative value of tax incentives, something Snyder has called a budgetary heroin drip to job creation.

But it can be difficult for businesses to estimate exactly how much they'll pay in wages, and thus how much employee pay they'll withhold as taxes in any given year. A boom may mean payroll swells; a recession may mean jobs lost.

Snyder has said that because the value of abatements is prone to change, it's difficult for government to account for them. That's doubly true of this scheme — and if the payroll of a company making a partial withholding decreases abruptly, said Eric Lupher, president of the nonpartisan Citizens Research Council, the state could be left in the lurch.

Economists and analysts disagree about whether economic development incentives actually lead to more jobs, or more big business relocations, or more anything — except dollars drained from the state and local governments that can't be used for roads, schools and cops.

"Generally, we’ve not been big fans of the sort of tax capture that this uses," Lupher said. "They currently exist at the local level to fund development authorities, brownfield authorities, tax increment finance authorities. The issue at the local level is that you're taking taxes voters approved for libraries and public safety, and diverting them to economic development."

Courts have ruled, Lupher said, that local new developments have an economic benefit that effectively reimburses local governments for taxes lost, with no net harm.

"The question at the state level with these things is: Would these developments occur but for the use of these economic development tools? That remains to be seen."

The bill package now moves to the House, where it's expected to pass, barring a public outcry.

So let's work on that, shall we?

Contact Nancy Kaffer: nkaffer@freepress.com