Michigan Developments
Eric Rule,
Director of Governmental Affairs

Leaders reach budget agreement
The administration and legislative leaders reached a tentative budget agreement for the fiscal year beginning October 1. At press time the budget process was nearly complete, as appropriations conference committees met in mid-July to vote their budgets out of committee and onto the floors of the legislature.

The legislature is scheduled to return on July 26 for one day to wrap up the budget process with an up-or-down vote in both the House and Senate. Other important issues that are still unresolved, such as the minimum wage “fix it” bill (see below), may also be taken up then.

Retail pharmacies were hoping for a $0.62 increase in the Medicaid dispensing fee for fee-for-service patients, but did not receive the increase in the conference committee report. The increase had been inserted into the House language but was cut out as a result of the overall budget target negotiations.

Minimum wage ‘fix it’ bill in limbo
Legislation seeking to return overtime exemptions to the “status-quo”—before the minimum wage was increased and inadvertently extended overtime to more employees—was returned to the Senate. Republican leaders pulled back the “fix it” bill to prevent the governor from vetoing it, as she indicated she would.

MRA participated in a press conference at which business groups interested in fixing the exemptions problem put pressure on the governor to sign the bill and urge Democrats to grant it immediate effect.

The overtime issue will probably not be solved on its own merit, because Democrats see no need to help the Republicans and business groups who created the overtime problem by boosting the minimum wage to head off a more severe wage-hike ballot proposal. Instead, Democrats may use the issue as a bargaining chip to trade for other issues they want but cannot get.

Democrats have been offering a trade-off on the issue that involves undoing a Michigan Supreme Court 2004 ruling in the case of Kreiner v. Fischer, which has dramatically altered the state’s no-fault insurance law. However, Senate Majority Leader Ken Sikkema (R-Grandville) has flatly refused to negotiate on the Kreiner ruling, stating that he did not want to re-open the state to frivolous lawsuits that would increase the cost of insurance and lead to judicial dockets being overwhelmed.

With this issue apparently off the table, it remains to be seen what issues might be traded to entice Democrats and Governor Granholm to sign off on immediate effect on the minimum wage “fix it” issue. If a deal cannot be worked out by July 26, businesses affected by the overtime changes will probably be forced to change the way they operate.

MiPC program draws more scrutiny
Senate Labor and Commerce Committee Chairman Jason Allen (R-Traverse City) held another committee meeting to grill Department of Information and Technology (DIT) Director Teri Takai on the state’s efforts to implement a group purchase program to put computers in more households. On several occasions Director Takai had to either refuse to comment on components of the program or claim she did not know about them.

It became clear throughout questioning by the committee that there are several unanswered questions and serious concerns about the initiative—including the legality of DIT putting forth a request-for-proposals for the contracts.

The effect of the hearing may have been to throw cold water on the program. Or, the Granholm administration may be waiting until the legislature is gone for the summer to roll out the program and avoid that intense scrutiny. MRA will remain vigilant on the issue.

Swanson confirmed as DLEG director
Bob Swanson was confirmed by a Senate committee as the new Department of Labor and Economic Growth director. Swanson had been acting as interim director since former director David Hollister resigned in February to move to the private sector.

The committee unanimously confirmed Swanson, who had served with Hollister, a former Lansing mayor, at DLEG and the City of Lansing.

Update from Washington
James Goldberg,
MRA Washington Counsel

Estate-tax solution may be near
Hard-line House Republicans seeking to generate an election-year issue have set aside their ambition to permanently repeal the federal estate tax and instead approved a compromise that will keep the tax in place, at least for some wealthy individuals.

Under current law, the estate-tax relief provided in the Economic Growth and Tax Relief Reconciliation Act of 2001 will end in 2010. In 2011, unless Congress acts, the estate-tax exemption will drop to $1 million per person and the maximum estate-tax rate will increase to 55 percent.

The compromise bill, which now goes to the Senate, would increase the estate-tax exemption to $5 million effective January 1, 2010. Future exemptions would be indexed for inflation.

Estates of $5–25 million would be taxed at the capital gains rate (currently 15 percent, set to increase to 20 percent in 2011 unless extended). The rate of tax on estates of $25 million or more would be set at twice the capital gains rate.

The House-passed bill would also simplify estate-tax planning by allowing married couples to take full advantage of the $5-million exemption by carrying over any unused exemption to the surviving spouse.

Given the compromise by House Republicans, the Senate is expected to look favorably on the permanent “fix” for the estate tax, since it’s a measure strongly supported by the small business community, including MRA, and election-year tax cuts are always good politics.

IRS repeals telephone excise tax
After fighting and losing a series of lawsuits claiming that the federal excise tax on long-distance telephone calls is illegal, the Internal Revenue Service has finally caved in and announced that carriers will no longer be required to collect the tax on bills sent after August 1.

The tax, currently at 3 percent, is levied on long-distance charges computed on a time and distance basis. Since virtually all long-distance service is currently charged on a flat-rate basis, several organizations have sued the IRS in recent years seeking to have the tax declared invalid.

According to the IRS, taxpayers may request a credit or refund of the tax that was billed between February 28, 2003, and August 1, 2006, but only on their 2006 federal income tax returns.

The instructions on the tax form will provide additional guidance, and taxpayers will not be required to review old telephone bills in order to compute the amount of tax credit or refund they claim.

Additional information can be found in IRS Notice 2006-50, which is available on the agency’s website, www.irs.gov.

Independent contractor issue returns
The Treasury Department has launched a study to review the standards used to distinguish between employees and independent contractors for purposes of withholding and paying federal employment taxes.

Results of the study won’t be available for several months, but one possible recommendation will be for companies that hire independent contractors to withhold a portion of their payments.

This so-called “backup withholding” is designed to insure that the independent contractor pays at least some taxes. It’s part of a broader government effort to close the “tax gap,” that is, the difference between the amount of taxes owed the government under current law and the amount which is actually paid.

The issue of determining whether an individual is an independent contractor (not subject to withholding or benefits eligibility) or an employee (for whom taxes must be withheld) has been vexing the IRS and employers for years.

Another idea that Treasury is floating as part of the “tax gap” closing effort would be to require credit card issuers like banks to report to the IRS on the amount of sales made by each merchant honoring their cards. If the merchant’s tax ID number did not match IRS database records, the credit card issuer would have to withhold taxes from the merchant’s credit card settlement payment. Thus far, Treasury has not found any takers for this idea.

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