New service tax worries small businesses
By TIM ALBERTA
Capital News Service
LANSING—A new tax on services will raise about $750 million for the state in 2008-09, but will it help or hurt businesses?
When the Legislature finally came to terms on a new budget during the early hours of Oct. 1, a major item meant to reduce the state’s $1.75 billion deficit was the addition of a 6 percent tax on certain services.
Sen. Gerald Van Woerkom, R-Norton Shores, acknowledged that the levy on services will alleviate the state’s budget problems, but said he personally disagreed with the idea.
“I didn’t vote to support the service tax, but the state does need more revenue to continue operating,” he said. “We simply couldn’t cut $1.7 billion out of the budget—the hole was just too big. We didn’t want an income tax hike, so in some ways, this was a good alternative.
Van Woerkom said start-up companies will take a hard hit. “The service tax impacts so many new businesses—I’m really surprised it even passed, to be honest.”
The tax applies to a wide variety of services ranging from tanning salons to ski resorts to massage parlors.
Tom Lenard, press secretary for Senate Minority Leader Mark Schauer, D-Battle Creek, said something had to be done to prevent massive cuts to health care and education.
“This was a bi-partisan compromise reached,” Lenard said. “The alternative was devastating cuts that nobody—Republicans or Democrats—were willing to consider.”
Because of the evolution of Michigan’s economy from manufacturing to service industries, Van Woerkom said he’s been expecting an eventual tax on some services—but never guessed it would come this soon and include so many different services.
“I thought the first service tax to pass would be on maybe six or eight or 10 services that were widely used,” he said. “This one is like 60 or 70 services, and some are very narrowly used.
“I think the argument is that usually wealthier people use the services on this list, so that’s why those industries were preferred for taxing. We didn’t want to burden the poor.”
Lenard said the services covered were carefully considered. “They didn’t run out a list of services and say ‘lets tax these for the fun of it.’
“The services included were discretionary, high-end services. The people using them won’t be deterred by a small tax,” Lenard said.
Van Woerkom agreed. “Generally, the services on the list are used by wealthier people, so obviously they were the preferred industries for the tax.”
But Bill Jones, owner of Jones Pest Control in Bellaire, said the tax will be a burden to everyone who owns or works for a business—rich and poor.
“I’m very upset about it because it affects everyone,” said Jones. “For businesses, it’s more paperwork to do. Then you have to keep track of that tax money, and if checks are late getting to the state, you get fined on top of that.
“It costs more money all the way around, no matter how you look at it.”
One service included is carpet-cleaning, which Jones knows all about—he owned Jones Carpet Cleaning until he sold the company last year. If he still owned the company, his expenses would be soaring, he said.
“Businesses already have enough to pay for between labor costs and accounting costs,” Jones said. “Now this is just another thing to deal with.
“It’s hard enough to run a business as it is.”
Van Woerkom said the increased expenses won’t be a big deal to many businesses because they will “pass it on to their customers.”
But Jones argued that with operating costs rising in recent years, there’s only so much extra a business can charge its customers to compensate.
“We had to jack our prices up this year anyway,” he said. “Since we’re a service business, we’re getting hit heavy on gas. The products I use are all oil-based, so they went up in price—not to mention gasoline prices for my trucks went up.
“Everything went up and you can’t pass it on to the consumers anymore,” Jones said.
Jim Scatena, president and chief executive officer of FloraCraft, a Ludington-based company that produces plastic foam products, said he’s anxious to see how service companies respond to the tax.
“Were concerned about service organizations that will be faced with the new tax and will pass that on to us, either in basic cost or in add-on taxes,” Scatena said.
Van Woerkom said his biggest worry isn’t customers paying an additional 6 percent for tanning or skiing, but rather the taxes collected from one company by another,
“My greatest concern is business-to-business taxes for consulting services, having windows cleaned or having landscaping done,” Van Woerkom said.
Scatena said he hopes his company won’t bear the burden.
“We hope that those services that face additional taxes will find ways to cut costs and reduce their charges, as opposed to adding the tax on and passing it along to us.
“Because eventually, it passes on to the consumer—which is never a good thing.”
While Van Woerkom admitted that the revenue generated by the tariff “fills quite a hole in the budget,” he said he’s concerned about the future.
“Financially, it’s a significant help,” he said. “But what I’m worried about is now that it’s been introduced, how much will it be expanded?”
Lenard said that question is irrelevant for now, because the immediate goal of protecting education, health care and the economy was achieved.
“The rumors about expansion to the list of services is typical sky-is-falling fear-mongering from the right,” he said.
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© 2007, Capital News Service, Michigan State University School of Journalism