Michigan signed a pact with other states three years ago to recoup a chunk of the $264 million a year it loses in uncollected tax revenue on Internet and catalog sales to state residents from out-of-state companies.

But so far, this state is losing $7 million to $10 million annually on the deal.

Dale Vettel, director of the Treasury's bureau of tax policy, told lawmakers Thursday that Michigan is gaining $8 million to $11 million from about 1,000 retailers that are voluntarily collecting the sales tax in the 22 states that belong to the so-called Streamlined Sales Tax Project.

But, at the same time, Michigan is losing an estimated $18 million in revenue each year because, to make its tax laws uniform with the other states in the project, it had to stop taxing some items. The biggest losses came on formerly taxed prepared foods, such as party deli trays sold at grocery stores and baked goods sold for on-premises consumption at bakeries.

"So at this time, we're not breaking even," Vettel said to the Senate Finance Committee.

So much is said in that clip that it begs some analysis.  First, Vettel's claim "we're not breaking even" contributes to the headline editorialization (the Detroit News missed the bias it relayed) that Michigan is "losing" on the deal.  No, it's gaining every dollar that otherwise it would not have collected because no one was collecting those taxes prior to the voluntary arrangement.  It's not "losing" 18M a year, its simply not gaining as much as the theoretical potential if the entire loophole were closed (and even then, I predict other loopholes would arise or become more used).

But more importantly, catch this point, "to make its tax laws uniform with the other states in the project, it had to stop taxing some items."  Wow.  That suggests that Michigan's sales tax is out-of-line with other states and not already competitive, meaning 1) we should reform the tax so that we're not losing other sales and business to out-of-state flight 2) the Governor's now-hopefully-dead 2% "service tax" is even more out-of-line in the context of the current sales tax not being "uniform" with other states.  Unless you had radically different compositions of overall business and income tax burdens (like none, in the FairTax type of proposals), it makes no sense to have a sales tax that is different from other states.  Any attempt to overtax simply causes you to lose business, kill jobs, and ultimately reduce your revenue in the long-run as the tax causes capital flight.  This quote is proof we need tax reform (even if allegedly "revenue neutral") to bring out taxable terms in line with other states (although to be "in-line" would require reductions according to this point)  That also means spending control and reform.

Unfortunately, Hornbeck identifies the Governor's response and even one of our own Oakland County Republican State Senators.

Skimpy collection of Michigan's 6 percent sales tax on out-of-state purchases has become a sore point in recent years, particularly in a state with declining revenues and a $1.8 billion deficit projected by the state budget office for the coming year. Gov. Jennifer Granholm has proposed various tax hikes to help close the yawning gap.

"Prior to looking at the opportunity to increase taxes, we need to look at legitimate taxes that are not currently collected," said Senate Finance Committee Chair Nancy Cassis, R-Novi.

The Governor's DNA says tax increase.  No surprise.  But what's Cassis talking about.  I sympathize with collecting what is due, but exactly how does Cassis propose to get this trivial amount of uncollected amount?

"If Grandma buys a sweater through a catalog, it's very difficult to balance the tax revenue benefit with the cost of collection," Vettel said.

Finally, and very telling:

Following a U.S. Supreme Court ruling that said the sales and use tax laws were too many and varied to foist upon interstate commerce, some states started banding together in 2000 to make laws uniform and therefore make it easier for businesses across the country to collect sales tax and send the receipts to state treasuries. The Michigan Legislature voted in 2004 to conform its sales and use tax laws to those in other states. Absent a federal law the states must rely on businesses to voluntarily collect the taxes.

"I don't understand voluntary compliance. Why not a federal mandate? All states must be having the same problem," said Sen. Gilda Jacobs, D-Huntington Woods.