Why is there a business license tax?
- Businesses locate in cities because of the concentration of commercial activity centered in a city. This commercial activity is supported by city services including police services, fire services, zoning, street lights, sidewalks and many others that can't be paid for on an individual usage basis.
- Most public services such as police, fire, zoning, permitting, economic development activities, sidewalk upkeep and street lights cannot be billed based on consumption. Through a business license tax, businesses together help pay for the city services that all businesses benefit from receiving. If our cities, towns and state are going to thrive, public services must be delivered, and the public must cover the cost to provide those services.
How important is the business license tax to city services?
- No one likes to pay taxes, but funding is necessary to provide the services that businesses need to be successful. Each city council makes a determination, based on local priorities, regarding how to fund its local services. By eliminating the business license tax, cities will face a 25 to 50 percent reduction in funding that will gut their ability to provide services. There is not a city or private business that can lose that percentage of revenue and not cut services.
- There is no alternative revenue stream for cities to use to replace the gap that would be created if cities were to lose a quarter to a half of their funding. City leaders have little flexibility in raising revenue because of Act 388's millage and reassessment caps and restrictions on the use of other revenue sources such as hospitality and accommodations taxes. This is in addition to the shrinking allocation from the Local Government Fund.
- A city's ability to finance equipment or projects will be devastated since lenders require a city to prove it has reliable, uninterrupted revenues that are sufficient to pay back a loan. Cities with existing debt risk default since they counted on business license revenue to help them pay back their loans.
How is the current municipal business license tax calculated for a specific business?
- Using the Municipal Association's model business license ordinance, every business type as defined by the North American Industrial Classification System is placed in a rate classification system. The rate class that a business is placed in depends on the average profitability of that type of business based on IRS income data. Business types with a high profitability history are placed in the highest rate classes. Business types with a low profitability history are placed in lower rate classes.
- Cities determine their own rates for each class based on the council's budgeting priorities and how they may raise revenue based on the profile of their individual community.
- A business license tax is calculated by multiplying the rate assigned to the class for that business type by the gross receipts of that business within that city. Gross receipts is used as a general predictor of volume of a business and its dependence on city services.
- For example, all fast-food restaurants are placed in the same rate class and charged the same business license rate. The difference in what two fast-food restaurants pay in a business license tax is, therefore, the difference in the volume of business of each as measured by gross receipts.