CHICAGO -- Gov. John Engler of Michigan and legislative leaders announced an agreement yesterday on a solution to an adverse court decision on the capital acquisition deduction portion of the state's single business tax that would have cost the state $300 million this year.
In a joint statement, the governor, House Speaker Lewis Dodak, D-Montrose, and Senate Majority Leader dick Posthumus, R-Alto, said the agreement "resolves the one outstanding issue from the 1991 budget."
But rating agency officials said they would have to examine the solution to see what implications it may have on state finances in future years.
Over the last two months, state leaders have agreed on plans to reduce a $1 billion budget deficit -- not including the $300 million business tax shortfall -- to $15 million through the use of one-time revenue measures and executive order cuts.
The single business tax agreement, which followed months of polarization on the issue between the Democrat-controlled House and the Republican administration and Senate, will take effect immediately after it is passed by the state Legislature and signed into law by the governor, according to Nick Khouri, the state's deputy treasurer.
Mr. Khouri said the solution would make up for the shortfall in single business tax revenues the state experienced this fiscal year due to the court ruling, as well as provide another $29 million in revenues to cover the remaining $15 million deficit in the $7.6 billion general fund budget. In April, the state reported a $100 million loss in the $1.9 billion of single business tax revenues it expected to collect in fiscal 1991, which ends Sept. 30.
The Michigan Appeals Court in February upheld a lower court ruling that found the deduction unconstitutional. However, unlike the lower court, which eliminated the deduction, giving the state a $500 million a year windfall, the appeals court extended the deduction to all businesses no matter where they are located and where their capital investments were made.
The case, brought by Caterpillar Inc. of Peoria, Ill., had charged that businesses headquartered outside the state were not treated the same as in-state business in terms of the kinds of deductions they could take for capital investments.
State finance officials had estimated the full-year impact of the court decision at $400 million to $450 million.
The agreement forged by the state leaders would apportion the deduction based on a formula involving a company's in-state payroll, property, and sales taxes. Mr. Khouri said the new formula, which would be retroactive to 1990, would net the state an extra $29 million this year. However, beginning in fiscal 1993, exclusions from the tax based on the gross receipts of firms along with a change in the formula will cost the state $44 million a year.
Mr. Khouri said the agreement on how the deduction will be applied was supported by the business community in the state and was not expected to be challenged in court.
He added that the state was also trying to see if it could make the August revenue sharing payments to local governments and schools on time. In May, the state announced it would delay payments throughout the summer due to the revenue shortfall from the single business tax.
Officials at Standard & Poor's Corp. -- which placed $3.14 billion of the state's debt on CreditWatch with negative implications earlier this year -- and Moody's Investors Service said they would be meeting with state officials in the next few weeks to discuss the budget settlement.
Said Steve Hochman, assistant director of state ratings at Moody's, the state "has been spending the last few months putting out a lot of fires, but it really needs fireproofing.
"By that I mean there is still a need to provide a more permanent solution to the state's budgetary problems," he explained.
The state's general obligation debt is rated AA by Standard & Poor's and Fitch and A1 by Moody's.
