Michigan Developments
Eric Rule,
Director of Governmental Affairs

Governor calls for new taxes, cuts
Governor Jennifer Granholm unveiled her proposed budget and Tax Restructuring Proposal in early February. Her plans call for a controversial mix of new taxes, budget cuts and investments in key areas.

In her budget, Granholm calls for creating 17 new state programs, even though the current budget is $819 million in the hole.

$1.5 billion of her plan to replace the Single Business Tax, which expires later this year, would be funded by a new 2-percent tax on services.

The governor also is proposing a doubling of the current tax on so-called other tobacco products, which she estimates will raise an additional $36.6 million. By adding another $.05 to the cigarette tobacco tax, her plan is expected to raise another $21 million.

Always popular with Granholm is the closing of certain tax “loopholes” that she believes will bring in approximately $84 million more.

Other provisions of the governor’s plan call for a 10-percent increase in the tax on liquor, from 65 percent to 75 percent, generating about $29 million, and a federally decoupled estate tax generating about $119 million.

According to the governor, her new Michigan Business Tax does the following:
• Creates a business tax with the broadest base and the lowest tax rate possible
• Provides substantial personal property tax relief to industrial and commercial taxpayers
• Eliminates the tax on payroll, benefits and health care
• Preserves economic development tools to help attract new jobs and investment
• Spreads the tax fairly to all types of business organizations while maximizing the number of businesses receiving a tax cut
• Represents a $480 million tax cut from revenue-neutral SBT
• Makes the tax simpler

Overviews of the proposals are available online at www.mi.gov/budget. Members are encouraged to study the broad strokes that have been made available in order to assess what impact the changes could have on their businesses.

New law requires notification of security breaches
In the event of a security breach of a database containing personal information, businesses, state agencies and individuals will be required to notify each Michigan resident for whom personal information had been maintained in its database. The new law takes effect July 7, 2007.

The new requirement is an amendment to the Identity Theft Protection Act of 2004. The amendment was signed into law by Gov. Granholm at the end of 2006.

Update from Washington
James Goldberg,
MRA Washington Counsel

State backlash to “Real ID” brewing
A backlash is brewing in state legislatures against implementation of the federal Real ID Act, a post-9/11 law which would impose federal standards on the issuance of state driver’s licenses and would require states to link their record-keeping systems to national databases.

Real ID is scheduled to become effective on May 11, 2008. At that time, if a state has not met the federal guidelines, the state driver’s licenses would not be accepted by the federal government for all purposes. In practical terms, for instance, that means a state resident couldn’t board an airplane or enter a federal office building using only a state driver’s license as identification.

There are two major problems with Real ID. First, the Department of Homeland Security has not yet issued rules for the Act’s implementation. Second, Congress has thus far not offered to fund any of the estimated $11 billion in state implementation costs.

Missouri State Rep. James Guest has formed a coalition of lawmakers from 34 states to file bills to oppose or protest Real ID. The coalition includes Michigan State Rep. Paul Opsommer, a Republican whose district includes Clinton and Gratiot counties.

“This is almost a frontal assault on the freedoms of Americans when they require us to carry a national ID to monitor where we are,” said Guest. “That’s going too far.”

However, if the security standards mandated by Real ID were to become law, many retailers of age-restricted products such as alcohol and tobacco believe that their exposure to under-age purchasers—and thus enforcement actions—would be reduced.

Small business targeted as IRS looks to close gap
The leaders of the Senate Finance Committee have asked the Internal Revenue Service to come up with a timetable for closing the estimated $290-million gap between what should be paid in federal taxes every year and what is collected.

“They’re the ones that know how to do it—that’s their job,” said Committee Chairman Max Baucus (D-MT) after meeting with IRS representatives.

If the agency follows through, small businesses could be in the “bullseye” of any plan, because that’s where much of the missing money is. The IRS estimates that understated business income accounts for nearly one-third of the tax gap.

Tax compliance is higher when third parties report payments to individuals and businesses, or withhold taxes from those payments, according to the IRS. Thus, it’s quite possible that the agency’s plan could include a request for new reporting requirements, especially on payments made to independent contractors.

Small business lobbyists in Washington have for years fought efforts to require businesses to withhold taxes to independent contractors, stating that this would pose too much of a paperwork burden and tie up money that independent contractors might not even owe the government.

But Congress took one small step last year toward closing the tax gap, by passing legislation to require local, state and federal governments to withhold three percent of their payments to government contractors beginning in 2011.

H-2B visa exception expires in September
The H-2B visa category allows Michigan employers and others with peak load, seasonal or intermittent needs to add temporary workers to their existing labor force.

Under the MRA-supported Save Our Small and Seasonal Businesses Act of 2005, a special exception has been carved out for the current fiscal year ending September 30. Under the exception, any “returning worker” who counted against the annual limit of 66,000 during any one of the last three fiscal years can be approved for entry in the current year without counting against the annual limit, which generally fills up quickly.

MRA’s Washington Office is working to extend the “returning worker” provision, but in the meantime, employers with seasonal employment needs should begin the paperwork to bring these past workers back.

For more information about the H-2B visa program, including current cap counts on H-2B visas and a “Returning Worker Attestation” form, business owners may visit the U.S. Citizenship and Immigration Services website (www.uscis.gov/portal/site/uscis) and click on “For Employers.”