Service tax repeal taxing lawmakers

Talks fizzle as Senate rejects House's latest version; deadline looms.

Mark Hornbeck and Gary Heinlein / Detroit News Lansing Bureau

LANSING -- Negotiations broke down between the House and Senate over the widely despised service tax late Wednesday, boosting chances the unpopular levy will go into effect on Saturday.

After leaving a closed-door bargaining session, House Democrats about 9 p.m. pushed through their own service tax repeal and replacement legislation, then quickly adjourned until Tuesday, four days after the 6 percent sales tax on a strange mix of services takes effect.

Senate Republicans rejected the House version less than an hour later, sending it to a joint House-Senate committee to iron out differences. Majority Leader Mike Bishop, R-Rochester, then sent a letter to House Speaker Andy Dillon, D-Redford Township, calling for an emergency session to deal with the issue Friday. The Senate also scheduled a rare Saturday session.

"Have you ever seen anything like this? I know I haven't," Bishop said after the House vote. "For them to just bolt and go home is cowardice, especially after all the time we spent negotiating today."

Dillon said the Senate "kept making proposals that were non-starters with the governor. We moved something we know the governor will sign to replace the service tax."

Gov. Jennifer Granholm said in a statement: "House Democrats have acted responsibly to address the concerns of the business community and protect citizens from massive cuts in public safety, health care and education." She urged the Senate to support the House-passed bill.

It's unclear what happens from here. The House still could return before the Saturday startup of the service tax. But business leaders are worried they're now stuck with a tax they say is unfairly burdensome and will drive some companies out of business or to other states.

"I think we have a services tax right now," said Chuck Hadden, chief lobbyist for the Michigan Manufacturers Association, which represents the Big Three auto companies and other businesses across the state. "I hope the Legislature takes a deep breath because I think this was a rash decision."

Sarah Hubbard, vice president of the Detroit Regional Chamber of Commerce, said she believes "there's still a chance" the service tax will be repealed and replaced before Saturday.

"They need to get back to the table. Anything can happen and there are still a couple days to make it work," Hubbard said.

The House plan passed Wednesday night would levy a 25.7 percent surcharge on business as a replacement for the service tax. The initial House plan contained a 33 percent surcharge, while the Senate version was at 14 percent. Earlier in the day, sources said the House and Senate had tentatively agreed on a rate slightly under 20 percent.

The new House bill would cap at $4.5 million the amount any one taxpayer could be assessed in a year. The earlier House cap was at $2 million while the Senate proposed $7.5 million. The lower the cap, the lesser the amount of tax to be paid by the state's largest businesses.

The Senate had insisted on making the replacement surcharge temporary, first calling for its elimination in 2011 and then 2012. House Democrats, at the insistence of Granholm, called for a permanent replacement tax.

Tapping the state's rainy day fund to keep the surcharge rate low also was a point of dispute. The Senate plan used all $219 million earmarked to go into the fund next year. The fund would be fed by a surplus from the new Michigan Business Tax. The House measure leaves that money in the rainy day pot.

Absent a deal, the state on Saturday begins collecting the 6 percent sales tax on services ranging from landscaping and ski lifts to warehousing and business consulting.

Businesses are spending about $14 million a day to prepare for collection of the new levy, according to a Detroit Regional Chamber study.

The tax would generate more than $700 million a year; about two-thirds of that would be paid by business and one-third by consumers. The levy was passed by lawmakers Oct. 1 as part of the state budget-balancing solution. But business groups, who weren't consulted in drawing up the tax, cried foul.

Tricia Kinley, tax policy expert at the Michigan Chamber of Commerce, called Wednesday night's developments "pretty shocking." "This sends a horrible message to the business community about the way the Legislature is operating." Kinley noted that other states have implemented service taxes and then quickly repealed them, so she didn't rule out action next week after the service levy goes on the books.

You can reach Mark Hornbeck at (313) 222-2470 or mhornbeck@detnews.com.