Omen for Ohio? Michigan’s sales tax on service repealed 17 hours after taking effect.

In his two-year budget, Governor Kasich proposes to expand Ohio’s sales tax to apply to most services to pay for an income tax cut. Expansions of sales taxes to services have been proposed before, but typically fail. We’ve already discussed previous efforts in Florida and Ohio. Today we look at a 2007 effort in Michigan.

On October 1, 2007, the Michigan legislature passed a bill expanding the state’s sales tax to services. Like in Ohio, proponents noted that the service sector was growing as a share of the economy and represented three-fifths of consumer spending. Expanding the sales tax would generate an additional $1 billion in revenue that was needed to fund infrastructure projects, education, police and fire departments, welfare and the prison system. And, also similar to the Kasich effort in Ohio, proponents of the Michigan tax expansion argued that the expansion was actually more progressive than the existing sales tax on tangible goods because wealthier taxpayers use more services — and more expensive services — than the poor.

The bill took effect on December 1, 2007, but was repealed just 17 hours later. Here’s how it played out:

  • Many businesses fought to have the new sales tax repealed. The Michigan Chamber of Commerce, the Michigan Manufacturer’s Association, the Small Business Association of Michigan and an influential group of corporate CEOs quickly voiced their opposition to the sales tax expansion on services.  Businesses claimed that the new sales tax burdened small businesses and that the complexity of the tax’s administrative structure made it difficult to manage. They also argued that the new tax would punish job creation, and, if enacted, that many businesses will simply move jobs to other states (Detroit Free Press 10/31/07). Even if businesses did not move, citizens would end up paying more for the newly taxed services (Detroit Free Press 1/9/07).They also emphasized the arbitrariness of the legislature’s choices about what services to tax—skiing was taxed, but golf wasn’t. (Detroit Free Press 10/2/07).
  • Citizens opposed the tax by a margin of about two to one (Detroit Free Press 2/6/07). Although the sales tax rate actually decreased, some taxpayers saw the extension of the sales tax to previously untaxed services as a tax increase, and for many of them it was. The tax was estimated to cost a family of four making $57,300 a year about $65. Further, many argued that the sales tax extension would hit poor and low-income families the hardest (Livingston County Press 10/7/07). A campaign commenced to recall Gov. Granholm and the legislators who supported the plan.
  • The sales tax expansion was repealed the same day it took effect (Detroit Free Press 12/2/07).

Testimony on the Kasich tax plan continues this week in the House.