Report: Most Michigan businesses pay $0 corporate income tax

Form 1120 Corporate Tax Return

A majority of Michigan businesses do not pay corporate income tax, according to a new report from the Economic Policy Institute, a progressive Washington D.C.-based think tank.

Relying on information from the Michigan Treasury Department and other states’ data, the report claims that 63 percent of Michigan corporations paid an average of zero in corporate income taxes over four years.

That’s largely because many for-profit companies aren’t technically classified as corporations, so they’re exempt from paying the flat 6 percent corporate income tax rate, according to state Rep. Yousef Rabhi, D-Ann Arbor, and Josh Hovey, a partner at Lansing public relations firm Martin Waymire.

Rabhi, who requested the information from the Treasury Department and then shared it with EPI, argues that businesses are underpaying and “exploiting loopholes” to avoid state tax liability.

“A lot of that gets back this idea that the average individual does not have the resources to hire armies of attorneys and CPAs to help them avoid paying taxes,” said Rabhi. “So most of us pay our taxes, and corporations invest in attorneys and CPAs that can help them shield their liability.”

For example, Fiat Chrysler Automobiles, one of the largest U.S. auto manufactures, is technically classified as a limited liability company, Rabhi said. LLCs in Michigan pay 4.25 percent income tax rather than 6 percent. Other large Michigan companies such as Carhartt and Rock Ventures likely pay less in taxes through similar classifications, according to Hovey.

A Corp! Magazine analysis tells a slightly different story. Although it’s not as high as 63 percent (as the EPI report claims), a letter from the state Treasury Department to Rabhi shows that about 24 percent of companies that filed a Michigan corporate income tax return from 2016 to 2019 paid on average zero corporate income taxes to the state.

That’s, on average, only 16 companies filing CIT returns in Michigan during those years, the Treasury document shows. The letter said the number is also lower because of the way such taxes are paid and other technicalities. And that is by design.

Pro-business lobbying groups like the Grand Rapids Chamber of Commerce backed the 2011 effort to replace the Michigan Business Tax with a lower, flat 6 percent corporate income tax. The Legislature approved the policy change, and then-Gov. Rich Snyder signed the bill into law.

For proponents, the plan helped the state business climate, and reducing the number of business paying corporate income taxes was a key policy goal. In its 2011 committee testimony, the Grand Rapids chamber whote that the 6 percent flat rate would “dramatically reduce the business tax liability by $1.8 billion” and result in “95,000 fewer businesses paying a business tax” by limiting CIT payments to only c-suite corporations.

The 2022 letter from Treasury Legislative Affairs Director Aaron Keel to Rabhi also noted that “some of Michigan’s largest employers do not file CIT returns because they are eligible for certified credits under the Michigan Business Tax.”

The Grand Rapids Area Chamber of Commerce and other proponents of the change argued about a decade ago that the change would help create “a competitive tax structure,” stimulate economic growth and reduce the use of tax incentives.

“This will end the double taxation of small and mid-sized companies, provide fair, simple and efficient tax reform and create a business tax climate conducive to job growth,” the testimony said.

Michigan Chamber of Commerce Tax Policy Director Leah Robinson and spokeswoman Sarah Wurfel didn’t respond to a request for an interview or comment about the report Tuesday.

But for advocates of a more progressive tax structure, Michigan businesses aren’t paying their fair share.

“Because of politicians allowing wealthy special interests to rig the tax system, the people who clean office buildings, maintain our roads and care for our elderly and children pay their taxes every year while billionaires and their corporations are getting a free ride,” said Jennifer Root, executive Director of SEIU Michigan, the state’s largest health care workers union, said in a statement.

The previous business tax cuts resulted in Michigan corporations contributing virtually nothing to state tax rolls after income tax refunds in 2016, the Detroit News reported then. The change resulted in a net loss of $99 million to business taxes after large refunds stemming from tax credits were claimed, issued under former Democratic Gov. Jennifer Granholm to Detroit automakers, according to the newspaper.

The April EPI report comes after the Legislature voted in February for a $2.5 billion tax cut that would further lower corporate tax rates. Gov. Gretchen Whitmer proposed a more modest $757 million in tax cuts for retired individuals and people who earn lower wages, Bridge Magazine reported.

According to the Tax Foundation, a conservative-leaning Washington, D.C.-based think tank, the GOP plan would give Michigan “one of the nation’s most competitive tax climates” by reducing the corporate income tax rate from 6 percent to 3.9 percent and the individual income tax rate (which many Michigan businesses pay) from 4.25 percent to 3.9 percent.

“While the changes outlined in SB 768 would reduce state revenues considerably, Michigan is in a good financial position to provide tax relief,” according to the Tax Foundation.