Lawmakers set to repeal service tax

Legislature will vote today to roll back unpopular sales levy, replace it with 21.9% business surcharge.

Mark Hornbeck and Gary Heinlein / Detroit News Lansing Bureau

LANSING -- Legislators and Gov. Jennifer Granholm struck a deal late Friday to repeal and replace the universally slammed service tax.

The Senate was expected to approve the agreement early today and the House at 3:30 p.m. today.

The accord includes legal protections for firms that don't collect that tax during the few hours that it is in place. It took effect at midnight.

"This agreement protects health care, public safety and education while replacing revenue from the service tax," said Granholm. "I applaud the members of the business community and the legislators who worked with us to craft this fair and responsible compromise."

The deal was announced about 11 p.m. Friday and the Senate was waiting for copies of the bill to be printed before it could vote this morning.

"I appreciate the spirit of compromise to repeal a tax that would have devastated Michigan business," said Senate Majority Leader Mike Bishop, R-Rochester.

Sources familiar with negotiations said the last obstacle to an accord was at least temporarily dissolved when Republicans and Democrats agreed that the new surcharge will be phased out by 2017, pegged to increase in personal income.

Legislative leaders and officials of Granholm's administration met behind closed doors late into the evening, in an effort to repeal the 6 percent sales tax on a mixed bag of services ranging from astrology to wedding planning, and replace it with a 21.9 percent surcharge on a business tax that is slated to go on the books on New Year's Day.

"I am confident that this agreement is a fair compromise that will allow the state to provide the services necessary to support our businesses and attract new businesses to a state that has a tremendous quality of life," said House Speaker Andy Dillon, D-Redford Township, said in a written statement distributed Friday.

The Senate convened Friday morning and was in recess all day, waiting for the accord. The House was not in session Friday.

According to sources, negotiators agreed:

• The surcharge rate would be 21.9 percent. During the past several weeks, proposals have put the rate at a low of 14 percent and a high of 33 percent.

• The surcharge would cost no taxpayer more than $6 million. In earlier negotiations, the cap wavered between $2 million and $7.5 million. The cap is imposed to lessen the burden on Detroit's Big Three automakers and other large business taxpayers.

• A portion of the state's so-called rainy day fund -- $100 million -- would be tapped to moderate the surcharge rate. Democrats had opposed using any of the fund and Republicans argued for using all $219 million, because it is fueled by excess collections expected under the new Michigan Business Tax.

• Businesses would be able to mitigate the surcharge by using a percentage of their business tax credits.

The service tax -- which would be levied on an array of services including manicures, fortune-telling, landscaping and business consulting -- was approved Oct. 1 as part of a budget-balancing deal.

It was cobbled together in the 11th hour of budget negotiations, without public scrutiny or input from business interests.

But it was immediately attacked by the business community, which said it placed an unfair burden on certain businesses and would drive some to bankruptcy, mass layoffs or to other states.

About two-thirds of the tax would be paid by businesses and one third by consumers.

The domestic automakers and other influential members of the business community put constant pressure on the Legislature and Granholm to eliminate the tax before its Dec. 1 implementation.

Lawmakers and the governor had nearly two months to come up with a plan to repeal the service tax and fashion a replacement levy, but as has been standard operating procedure in recent months, they were moving right up to the deadline before reaching a deal.

Everyone agreed early on that the service tax had to go and the surcharge plan has been around for more than a month, but Senate Republicans, Granholm and House Democrats couldn't agree on the details.

"This week I witnessed political maneuvering at its absolute worst," said Rep. Rick Jones, R-Grand Ledge.

"Michigan's job providers are screaming for relief, but partisan lawmakers are too busy screaming at each other. The Legislature is dysfunctional."

This crisis approach to governing has earned the Legislature and the governor dismally low approval numbers.

An EPIC/MRA poll taken earlier this month showed 83 percent of Michigan residents give legislators a negative job rating and 64 percent give similarly low marks to Granholm.

Businesses are not enthralled with the surcharge, either, but a majority that testified before legislative committees said it was preferable to the service tax.

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