1 MBT Overview Robert J. Kleine State Treasurer Educational Meeting on MBT Grand Valley State University Grand Rapids, Michigan August 1, 2007

2 Michigan Business Tax Replaces SBT New Tax base of income and gross receipts less purchases shifts part of burden to ability to pay while maintaining a stable base Substantial personal property tax relief will attract capital to Michigan Tax credits provide incentives to invest in Michigan, to employ Michigan residents, and to perform research and development in the state Special provisions lower tax burden for small businesses helping them to grow SBT revenues fully replaced

3 New Tax Base Business Income Tax – 4.95% rate – Base includes non-corporate entities – Subject to PL Modified Gross Receipts- 0.8% rate – Base is gross receipts less purchases from other firms – Purchases from other firms includes inventory, depreciable property, materials and supplies, and construction payments to a subcontractor Tax Base is 1/3 business income and 2/3 modified gross receipts

4 New Tax Base Insurance Companies – 1.25% rate – Base is gross direct premiums written – Retaliatory tax is still in place - Financial Institutions Tax – 0.235% – Base is value of net capital averaged over 5 years – A financial institution is a bank, bank holding company, certain thrift institutions and savings and loans, and a business other than an insurance company owned by the bank that is part of the unitary group

5 Personal Property Tax Relief Commercial personal property exempt from 12 of 24 education mills (23 percent) Industrial property exempt from 24 education mills and firms receive 35 percent refundable credit for remaining industrial personal property tax Provides a personal property tax cut of 65 percent on average for industrial property Schools protected by dedicating a portion of the MBT to the School Aid Fund No cuts to city, village, townships, and county property taxes Reduces burden on mobile capital

6 New Credits Designed to Aid Michigan’s Economy Compensation Credit – 0.37% compensation paid in Michigan Investment Credit – 2.9% of cost of net new capital located in Michigan R&D Credit – 1.9% of amount business spends on R&D in Michigan Compensation plus investment credit limited to 65% of liability; Together with R&D credit cannot exceed 75% of liability Entrepreneurial Credit – businesses with less than $25M in gross receipts can claim if they add at least 20 jobs and invest at least $1.25M

7 Key SBT Credits Continued in MBT SBT Credits Continued – MEGA – Brownfield – Historic Preservation – Renaissance Zone SBT Credits Continued and Expanded – Public Contribution and Community Foundation – Alternate Credit – Personal Property Tax Credit

8 Special Provisions for Small Businesses Firms with less than $350,000 in gross receipts exempt Alternate rate phased-in for $350,000 to $700,000 in gross receipts Allow qualifying firms to pay 1.8% on adjusted business income Raise officer compensation disqualifiers to $160,000 to $180,000 Double gross receipts threshold phase-out to $18-20 million Entrepreneurial credit to encourage hiring and investment in Michigan

9 MBT Revenue Trigger MBT has a trigger to ensure that it does not represent a large tax increase If revenues exceed trigger, ½ refunded to taxpayers and ½ deposited into BSF For FY 2008, triggers if tax is 5 percent more than revenue neutral amount For FY 2009 and FY 2010 trigger grows by growth in personal income plus 1 percent

10 Balance Sheet for Michigan Business Tax

11 Who Will Pay Less Manufacturing firms. Small businesses between $10 and $20 million of gross receipts. Small businesses under $10 million with income to owners over $115,000. Michigan multi-state firms.

12 Who Will Pay More FIRE. Profitable firms. Firms without much personal property. Firms that operate in Michigan but have little payroll or property here.

13 Most Manufacturing Firms Pay Less

14 Number of Firms Twice as Many Firms Receive a Tax Reduction

15 Steps to Implement the MBT Treasury Tax Policy analyzes the operational impacts and develops policies and procedures Design of new forms begins Project control office established to create full project plan with IT vendor and DIT Tax calculator placed on web Training seminars developed and other communications are scheduled and launched

16 Steps to Implement the MBT Materials are prepared for U of M and MSU tax schools Materials prepared for MACPA and other preparer group presentations Web based training module available

17 MBT Timeline 1 st estimated payments due – April 08 New automation design complete – May 08 Final build of MBT system – November 08 Final testing and implementation – January 09