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Mich. gov wants sales tax on services

LANSING, Mich. --Michigan residents would pay a 2 percent sales tax starting June 1 on everything from haircuts to movie tickets and legal fees under a proposal by Gov. Jennifer Granholm.

The proposal for a new sales tax on services announced Wednesday would cost a family of four with the median income of $57,300 about $65 more a year, according to administration officials who briefed reporters but would not allow their names to be used because the official announcement was to come Thursday.

The new tax would not be charged on health care services and educational services. No sales tax would be charged on child care, and government and school purchases would be exempt from the tax on services. Tickets to college sporting events would be exempt from the tax, but not those for professional sporting events.

The tax also would be tacked onto business-to-business services, which some had said should be exempt from such a tax.

Residents now pay a 6 percent sales tax on goods, except for some items such as groceries, prescription drugs, medical devices, newspapers and magazines. The tax was raised from 4 cents on the dollar to 6 cents as part of the trade-off for lower property and income taxes included in Proposal A in 1994.

Under Granholm's proposal, consumers who buy new vehicles would get a sales tax break. Instead of having to pay sales tax on the entire price of their new car, truck or sport utility vehicle, they would pay tax only on the net price for the new vehicle minus the cost of their trade-in.

The new sales tax on services would be coupled with a slightly altered administration plan to replace the Single Business Tax, which ends later this year. Republican lawmakers have repeatedly said that the state needs to lower the taxes businesses pay to make the state more competitive.

Under the Democratic governor's plan, which would take effect next January, businesses would see a net $450 million drop from the $1.9 billion annually they paid through the SBT. The governor's proposal, which she first submitted last November, substantially drops tax rates and cuts taxes on equipment nearly in half.

Large companies that keep their headquarters in Michigan would get a tax credit. But all businesses also would pay about $1 billion more through the tax on services.

Only Hawaii and New Mexico have broad-based sales taxes that cover many services, according to the Federation of Tax Administrators. According to a survey the federation did in 2004, Delaware, Washington, South Dakota and West Virginia tax at least 100 services, while Michigan at the time taxed 26.

Granholm during her State of the State address Tuesday night criticized those who say the state's financial problems can be fixed solely with tax cuts and vowed to present a mix of spending cuts, structural changes and tax increases to balance the budget when her administration on Thursday presents its proposal for the next budget year.

She plans to propose a combined $400 million in cuts for this budget year and next, partially by keeping fewer inmates incarcerated, an official said.

The administration also wants to raise the tax on cigarettes by a nickel to $2.05 a pack, increase liquor taxes -- but not those on beer -- and allow Michigan to still tax estates of $250 million or more, even though the federal estate tax is being phased out. Some tax exemptions for certain businesses also could be on the chopping block.

Administration officials said the new sales tax on services would raise about $1.5 billion a year and would be split between the general fund and the school aid fund. Coupled with the replacement for the Single Business Tax, the tax changes would raise about $3 billion annually.

The governor wants the sales tax on services to take effect by June 1 so it could raise about $576 million that could be used to shore up the school aid fund and avert deep cuts to universities, local governments and state services that otherwise would be needed to solve an $800 million shortfall looming in this year's budget.

With less money coming into the state school aid fund than expected, school districts face seeing their state aid cut by around $220 per pupil this school year.

Lawmakers would have to pass new tax proposals by March 30 if the new tax was to take effect by June 1, an administration official said.

It was unclear if the Republican-controlled Senate would go along with that timetable, however.

Senate Majority Leader Mike Bishop said in a release that the governor was working in the wrong order.

"Before we consider the governor's proposed new taxes, there must be a serious focus on restructuring government to find revenue savings," the Rochester Republican said. "We must determine what government services are essential for the safety and well-being of Michigan citizens, then we determine the revenue necessary for those services."

But his predecessor, former Senate Majority Leader Ken Sikkema, said the governor is right to call for a mix of spending cuts, government restructuring and tax increases.

"To say that you can just keep cutting taxes and not make investments in education is the wrong path for Michigan," said Sikkema, a Wyoming Republican who now works for Public Sector Consultants, a Lansing think tank.

House Speaker Andy Dillon of Redford said he and other Democrats who control the House will look closely at Granholm's proposal, but they also might have some ideas of their own.

"We will clearly work off the governor's plan from the start," he said.

Local government officials, mental health service providers, advocates for children and workers and officials from K-12 schools and higher education plan to be at the Capitol Thursday morning to say the tax increases are necessary because they can't handle any more cuts like those they've faced in the past four to five years.

But Scott Petersen, a 37-year-old who works for the city of Lansing, didn't like the idea that he'd be paying a tax on services.

"Most people aren't going to be happy with it," he said. "It could be sports, it could be entertainment. Whatever it is, it would cost more."

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Associated Press Writer Tim Martin contributed to this report.

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