2. ReducingTaxes,PromotingMichiganGrowth
At the stroke of a pen and on May 25th, 2011, Governor Rick Snyder gave his approval to
the Tax Reform Plan that ended the Michigan Business Tax that had widespread disapproval
from business leaders and associations. This plan was expected to reduce taxes on business by
$2.7 billion in the first two years from passage, allowing companies to reinvest this money into
their companies and encourage new companies to relocate to Michigan (CBIZ, 2011). This was
an incredible step in the right direction. So while positive changes have been made in the past
few years, there are still changes that can be made to making Michigan more competitive.
Specifically, we will answer the question begged by the 2014-2015 Bauervic essay which
prompts: “Using Michigan as an example, describe three areas in the economy in which lowered
taxes could generate greater job availability and a healthier economy, and importantly, how the
tax rate changes would accomplish that.” There are three areas where Michigan could benefit
from lower taxes. Those areas are as follows: 1) Reduce the Foreign Insurance Company
Retaliatory Tax. 2) Reduce Oil and Gas Severance Taxes. 3) Eliminate the Captive Insurance
Company Tax. In combination, by reducing these three areas, it will make Michigan a more
business-friendly environment, expand consumer welfare and simplify the tax code.
To begin, we will analyze the Foreign Insurance Company Retaliatory Tax. Adopted in
1869, the tax is levied only on out-of-state companies for the right of doing business in
Michigan. Between 2011 and 2012, this tax generated $293,555,000 in revenue. Currently the
tax rate is 2%, plus .5% of regulatory fees (Citizens Research Council of Michigan, 2014). If a
higher tax was to be imposed onto a company that sold physical products to Michigan, it would
be illegal as it would violate the Commerce Clause. But insurance companies are exempt from
this, and are victims to special taxes placed onto them when attempting to compete in foreign
3. ReducingTaxes,PromotingMichiganGrowth
states. This tax gives an unfair advantage to domestic companies, allowing them to pay lower
taxes, while foreign competition will be able to spend less in operations to compete, and more
into paying taxes. Fortunately this has begun changing. In 1981, 34 states had versions of these
laws. But 25 states have eliminated these in-state-only favorable tax laws (Paul Galindo, 2008).
The Foreign Insurance Company Retaliatory Tax promotes tax warfare between states, much like
how the Smoot–Hawley Tariff Act promoted other countries to wage a tariff war on the United
States in response to the United States raising taxes on imported goods (Economist, 2008).
Ultimately, the real victims are the consumers who will see fewer options as would-be
companies from other states, being perhaps able to offer incredible services, are outright scared
out of the market from the tax code.
The next is the Oil and Gas Severance Tax. Adopted in 1929, this is a tax that is used for
the privilege of producing oil and gas in the state of Michigan. Oil taxes are 6.6%, and gas is 5%.
Between 2011 and 2012 this tax collected $53,785,000 (Citizens Research Council of Michigan,
2014). While this is an impressive source of income, it could become an oil spring of even more
revenue if these rates were reduced, allowing companies to expand, exploit reserves and generate
more revenue, allowing more taxes to be developed, while at the same time, bringing new capital
to Michigan and reducing unemployment. Let us take for example Alaska. In the late 1980’s, the
state generated a quarter of the United States’ crude oil, clocking in at 2 million barrels a day.
But oil production has fallen to some 500,000 a day. Easy-to-reach oil reserves have been
exhausted, leaving Alaska’s budget – to which 90% depends on oil profits for, vulnerable
(Philips, 2014). Alaska has moved in the right direction by providing a better tax environment
for oil producers, right in time for new technology to develop. North Dakota has exploded to the
4. ReducingTaxes,PromotingMichiganGrowth
second largest domestic soul of oil in the United States, given its development of horizontal
drilling techniques that have opened the Bakken and Three Fork fields. Williston, North Dakota
with a population of 14,716 has had its population double, with an unemployment rate of one
percent, and average income going up from $32,000 to $80,000 (Hinkle, 2012). While the
technology called fracking has drawn stiff opposition from environmentalists, this technology
has the potential to revive Alaska. If Alaska had ignored reducing taxes, this technology would
have been slow to reach their state. Michigan can jump on this bandwagon as well. By reducing
taxes on its state-domestic production of oil and gasoline, it will allow new technology to be
developed, make Michigan a promising sight to showcase this technology, allow more of this
resource to be tapped and ultimately harnessed by man.
The last is the Captive Insurance Company Tax, adopted in 2008 that is a tax on the
privilege of transacting business in Michigan for captive insurance companies. Between 2011
and 2012, it generated $39,402 in tax revenue (Citizens Research Council of Michigan, 2014).
Defined, a “captive is an insurance company created and wholly owned by one or more non-
insurance companies to insure the risks of its owner” (Commissioners, 2014). In other words, it
is where an insurance company creates an insurance company to assure its own risks. So instead
of paying money to another company, it pays its own company and retains this profit. The main
purpose of these companies is to reduce cost on insurance. Michigan should encourage the
growth of these captive insurance companies. It allows company to draft their own specific
policies that make sense to their company model, find ways to reduce risk proactively and fosters
a company that can offers its services to the market, and has the potential of developing away
from the parent company into its own independent company, creating greater market value
5. ReducingTaxes,PromotingMichiganGrowth
(Adkisson, 2013). Another point of argumentation is the minute income created by this tax.
$39,402 is a drop in the barrel for a state that reaps $50.9 billion in revenue (Nixon, 2014). This
is an infant industry that has not developed well enough to garner tax attention. So by this tax
being outright eliminated, it will help foster the creation of these powerful entities.
Dismantling poor taxes is just the course of human history. In 1698 of the Russian
Empire, Tsar Peter the Great imposed taxes on nobles and peasants who wore beards; trying to
encourage them to be clean-shaven like the Westerners he visited (Euronews, 2011). In 2011, the
Michigan Congress and Synder successfully destroyed the Michigan Business Tax. There are
now three taxes we can examine, to which were: 1) Reduce the Foreign Insurance Company
Retaliatory Tax. 2) Reduce Oil and Gas Severance Taxes. 3) Eliminate the Captive Insurance
Company Tax. Currently Michigan ranks 39th for business costs which include all taxes and fees
placed onto business (Forbes, 2014). But making these changes can begin to overturn this, and
allow Michigan to climb its way back to the top.
6. ReducingTaxes,PromotingMichiganGrowth
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crcmich: http://www.crcmich.org/TaxOutline/TaxOutline.pdf
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Economist.(2008, December18). The battleof Smoot-Hawley.RetrievedfromEconomist:
http://www.economist.com/node/12798595
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7. ReducingTaxes,PromotingMichiganGrowth
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