News and analysis from The Center for Michigan •
©2015 Bridge Michigan. All Rights Reserved. • Join us online at

Original article URL:

Guest commentary

Guest column: NY Times flubs Mich. tax breaks

By Tim Bartik/ W.E. Upjohn Institute for Employment Research 

Louise Story, an investigative reporter for The New York Times, recently wrote a three-part series on state business incentives. The series was accompanied by a new database, which reports annual dollar figures for business incentives for each state. This database reports that Michigan’s business incentives total $6.65 billion annually.

This figure immediately seemed large to me. I have calculated in previous work that Michigan’s business incentives total about $1 billion per year, which is certainly large, but nowhere near $6.65 billion. Why are the New York Times figures so large?

It turns out that $4.83 billion of Michigan’s business incentives in the NYT database are sales tax relief. In turn, $4.8 billion comes from just two aspects of Michigan’s tax law.

First, the database reports that Michigan businesses save $3.88 billion annually because they do not pay sales tax on business services that they purchase. This is because Michigan’s sales tax does not require anyone, business or consumers, to pay sales tax on most purchases of services.

Timothy J. Bartik is a senior economist for the W.E. Upjohn Institute for Employment Research, an independent, nonpartisan research organization in Kalamazoo. Some further comments on the New York Times series can be found at his blog,

Second, the database reports that Michigan manufacturers save $920 million annually because they do not pay sales tax on goods used or consumed in industrial processing.

Should this $4.8 billion in reduced sales tax because of these two provisions be regarded as a business incentive? This depends on how we want to define an incentive.

Bridge: Is Michigan too light on tax lures?

However, regardless of whether sales tax relief for business inputs is an incentive or not, most public finance economists would argue that the sales tax should not be applied to business purchases of business inputs, regardless of whether those business inputs are goods or services. If business inputs are subject to the sales tax, then the sales tax pyramids as businesses buy inputs from suppliers, who in turn buy inputs from other suppliers.

This pyramiding has several adverse consequences, the most serious of which is that businesses can avoid this pyramiding by “vertically integrating” — that is by bringing their supply activities in-house or buying their suppliers. This vertical integration is easier for large businesses to do, and it also encourages businesses to get larger by buying their suppliers, and reduces the number of small supplier businesses. It is unclear why government would have any reasonable public policy reason for encouraging vertical integration.

For example, if the sales tax was applied to business purchase of accounting services, this encourages businesses to bring their accounting services in-house. Furthermore, such a sales tax would advantage businesses that are large enough that bringing accounting services in-house is feasible. Both these effects would in turn decrease market demand for the services of small, independent accounting businesses. But there is no good reason for policy-makers to want to bias how accounting services are delivered to businesses in our economy.

Therefore, more than two-thirds, in dollar volume, of the business incentives identified by the New York Times for Michigan are incentives that a sensible state and local public finance system would want to continue.

Regardless of what one thinks of property tax abatements, or customized job training, to mention just two other business incentives, state laws that provide sales tax relief for business purchases of inputs can be reasonably justified.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

No comment yet.Add mine!

Leave your comment...

Your email address will not be published.

Currently on Bridge

An Earth Day pitch: When you hang up the phone for good, toss it the right way

Michigan’s roads affect everyone, so a 'yes' vote on Proposal 1 makes sense

‘Diplomacy Begins Here’ conference aims to illuminate international relations

What NOT to post on Facebook: Jokes about prison rape, when you’re in charge of preventing prison rape

A program to give young offenders a second chance is sending many to prison

Similar accounts in teen prison rape suit pose challenge to state's defense

‘New fish’ ‒ One teen inmate’s account of sexual assault

Early learning summit in June could impact Michigan’s children

Money Smart Week: Be penny wise, and pound savvier

Plan B or no Plan B, here’s what happens if road proposal fails

The political tale behind the selling of Proposal 1

A Bridge primer: Untangling the pothole promise of Proposal 1

Who supports, and opposes, Proposal 1

Let's rebuild Michigan through its greatest asset: its water

Could a public boarding school model work in Detroit?

Coalition supporting Detroit schools a step in the city’s road back

Chasing fads? Today’s schools are struggling too much for that

For one Michigan legislative staffer, an hour or two in the spotlight

A cull is a kill, and it’s an overreaction to deer ‘problem’

Lack of college guidance keeps poor and rural students from applying

Those who can, do – and get their hands ‘dirty’ in the process

For one Detroit mom, a complicated path to employment

Detroit by the numbers – the truth about poverty

Michigan should require dental screening for all children entering kindergarten

Where in the world is the Center for Michigan?

After two years, hard to call ACA anything but a success

Bridge’s Academic State Champs emphasizes all the wrong measurements

A graying population poses challenges for Up North counties

Up North, isolation impedes health care for seniors

Enbridge oil pipes and the Straits of Mackinac: Too risky to ignore

Not bigger government, but better services when Community Health and Human Services merge

Two Michigans gaze across a widening gap

In northern counties, workers and business find each other lacking

Hidden poverty stalks a Pure Michigan setting

Postcard: How a git-’er-done spirit helps one rural school district

Postcard: When elk is for dinner

Postcard: Luxe life at Bay Harbor reflects changing economy

Postcard: A roof and a bed

Invest in non-partisan journalism.

Donate to The Center for Michigan. Find out why.