Senate Committee on Economic Development, Small Business and Regulatory Reform / House Committee on Tax Policy

The Michigan Economic Development Corporation recommends the Administration support these bills.   The Governor signed legislation into law earlier this year to provide tax incentives for small business start-ups, including House Bills 5331 (SBT credit-PA 126), House Bill 6025 (obsolete property tax exemption-PA 241), and House Bill 6026 (real and personal property tax exemption-PA 252).  Senate Bills 1302-1305 provide additional incentives to small start-up businesses.

According to a report from the U.S. Small Business Administration, Office of Advocacy, the number of employer businesses in 2002 decreased by 0.5 percent and numbered 211,567.   The number of self-employed individuals decreased an estimated 4.2 percent in 2002.  In the state, 98.4 percent of the businesses were small ones with fewer than 500 employees based on 2000 data.

Between 2001 and 2002, new employer firms decreased 1.1 percent to 22,799.  Business bankruptcies increased by 16.6 percent and totaled 802 in 2002.  Business terminations increased by 1.7 percent, and total 26,975 in 2002.

Small businesses play a vital role in Michigan’s economy.   The first five years of operation have traditionally been the toughest years for businesses. Given the decrease in new employer firms and the increase in bankruptcies and business terminations in 2001-2002, it is important to provide incentives to encourage new business start-ups and to help new businesses succeed.

Description of Bills: 

Senate Bills 1302-1305 would exempt qualified start-up businesses from certain taxes, with local approval, during their first five years of operation: Technology park facilities tax, city utility user tax, industrial facility tax, and lessee-user tax.   A qualified start-up business means a business with fewer than 25 employees; sales less than $1 million in a tax year for which the credit is claimed; research and development expensesmake up at least 15% of business’ expenses in the tax year for which the credit is claimed; is not publicly traded; was in or would have been in the first two years of contribution liability under the Michigan Employment Security Act in the immediately preceding seven years. 

Summary of Arguments

Pro: 

These bills focus on the development and growth of small, high-tech firms, which are the key to the state’s economic well-being. 

The definition of a qualified start-up business limits the number of businesses that will qualify for tax exemptions and eligibility to five years, which means the negative impact these exemptions will have on state and local revenues will be minimal and short-lived.

Con:

These tax exemptions could result in future revenue loss for local units of government at a time when most are experiencing budget shortfalls.

It could be argued that the bills, like any other tax exemptions and credits, create some equity problems as they provide exemptions to some businesses and not others.

Fiscal/Economic Impact

(a) Department

Budgetary: None

Revenue:  None

Comments:  

(b) State

Budgetary:  

Revenue:

Comments:(c)

The bills would decrease the State School Aid Fund by a minimal amount, depending upon the number of qualified start-up businesses and the degree to which local units approve the exemptions.

Local Government

Comments:

The fiscal impact would depend upon the number of qualified start-up businesses and the degree to which local units approve the exemptions.

Other State Departments:

The Michigan Department of Treasury would have an interest in the bills.

Any Other Pertinent Information: None

Administrative Rules Impact: None