GRAND RAPIDS, Mich. (GRBJ) - When Gov. Gretchen Whitmer presented her 2020 fiscal year state budget proposal on March 5, small business groups immediately objected to her plan to offset a pension tax repeal by increasing taxes on small businesses, or “pass-through” entities.
Whitmer campaigned on a platform to fix Michigan’s infrastructure, as well as to increase education funding, make health care more affordable and repeal the retirement tax, which was passed under former Gov. Rick Snyder’s administration in 2011 and subjects pension income for those born after 1952 to a tax that those who hold 401(k) or 403(b) retirement accounts do not have to pay.
The plan to repeal the pension tax enjoyed bipartisan support during the 2018 governor’s race, with Republican candidate Bill Schuette also advocating for it.
Neither Whitmer nor Schuette fully explained at the time how they would offset the loss of approximately $300 million in annual income generated by the pension tax.
Whitmer’s budget plan accounts for most of the gap — about $280 million — by broadening the 6 percent corporate income tax (CIT) to include sole proprietorships, partnerships, S corporations and limited liability companies (LLCs).
These types of businesses are known as pass-through entities, or flow-through entities, because they are not currently subject to corporate income tax. Instead, the owners are charged a 4.25 percent individual income tax by the state that adjusts for profit and losses in a given year.
Whitmer’s plan is to transition small entities from the 4.25 percent individual income tax to the 6 percent corporate income tax rate.
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