On Tuesday Michigan voters went to the polls to vote on whether to approve the Legislature’s 2012 plan to phase out personal property taxes. At 10 p.m., the Associated Press declared the successful passage of Proposal 1.
Proposal 1 seeks to eliminate personal property taxes over a 10-year period, including locally assessed taxes that are dedicated to essential services. The projected cost of the proposal is $600 million, which the state seeks to replace through an Essential Services Assessment paid by manufacturers, and the expiration of a number of business tax credits. Local governments will also receive replacement funds through the state’s 6 percent use tax.
Ford Motor Company and Dow Chemical, which contributed $2 million each, led a group of corporations that raised and spent more than $7 million in support of Proposal 1. Having paid $7 million in personal property taxes every year, Dow’s $2 million contribution was well worth it. After all, they will benefit most from the elimination of personal property taxes, as large corporations typically pay the largest share of personal property taxes, with small businesses paying a nominal percentage of total collections, with the cost of compliance possibly exceeding the amount of revenue generated. For example, according to the Indiana Fiscal Policy Institute , 290,000 businesses paid personal property taxes in 2013, but 100 of these taxpayers, which included some of the largest corporations in the country, such as British Petroleum and Eli Lilly, paid 31 percent of personal property taxes that are not collected from public utilities.
Supporters of Proposal 1 contend that PPTs are detrimental to business growth and investment, job creation and creates significant distortions in the economy. Other supporters, such as Michigan Citizen Action, argue that Proposal 1 will make funding for local services such as public safety, libraries, schools, and roads more reliable. Proposal 1, however, removes the property revenue stream from the hands of local governments and establishes the Local Community Stabilization Fund to distribute use tax revenues to local communities from the state level.
Other supporters include Republican Governor Rick Snyder, Republican and Democratic members of the Legislature, Democratic gubernatorial candidate Mark Shauer, the Michigan Municipal League, and both conservative and liberal outside groups, such as the Michigan Chamber of Commerce and the Michigan League for Public Policy respectively. Many local officials also support the proposal given the promise that lost revenue to local governments would be replaced.
On the other hand, there was very little organized opposition to Proposal 1. Opponents, like Warren City Mayor James Fouts focus their concerns on the uncertainty of a full reimbursement to local governments, especially because the industrial exemption becomes effective in 2016, and the loss of local control over taxing power. The Michigan Community College Association, for example, strongly opposes any personal property tax cut bills that do not promise to replace all foregone revenue.
Over the last several decades personal property taxes have been steadily decreasing in popularity. Personal property historically consisted of intangible property, household goods, motor vehicles, inventory and business equipment. Today most states have exempted intangible personal property from taxation, and according to the Tax Foundation , only Oklahoma maintains a tax on tangible personal property (TPP) that is not used to generate income.
The Tax Foundation also notes that seven states have completely abolished TPP taxes, four states have mostly abolished them, and the rest of the states mostly rely on business equipment taxes. In 2009, property tax on TPP only accounted for 2.25 percent of state and local tax revenue. With the exception of Indiana, Michigan was the only state in the Great Lakes region to maintain its personal property taxes.
Research is mixed on the impact that tax rates have on businesses’ decisions regarding where to locate, but an Indiana Fiscal Policy Institute study suggests that while taxes have little impact on multi-regional firms, they have a far greater impact on decisions made by regional firms in competition with neighboring jurisdictions. Thus, Michigan’s phase out of personal property taxes may attract businesses that would otherwise locate in nearby Indiana.
But just as taxes affect business decisions, so do available public services. Personal property taxes assessed by local governments presently pay for police and fire departments, which provide the public safety that protects businesses from property losses, and also education, which provides businesses with skilled workers.
There is little doubt however, that the personal property tax is one of the most onerous taxes with which taxpayers must comply. Personal property taxes present taxpayers with a variety of assessment ratios, tax rates, and depreciation schedules, and taxpayers are often required to provide assessors with a litany of information on each piece of property. Apart from the largest corporations and manufacturers, there is serious doubt as to whether the revenue collected is worth the compliance costs.
It is certainly true, as the Indiana Fiscal Policy Institute study says, that personal property tax cuts are most effective where they do not cause tax revenue losses that diminish public services on which citizens and businesses rely. In fact, the promise that Proposal 1 will not shrink local budgets is largely the reason it received such wide support. It is up to Michigan’s Legislature to keep that promise in the years to come.
By: George Lynch
Continue the conversation on Bloomberg BNA’s State Tax Group’sLinkedIn page: Do you think local governments will be adequately reimbursed with other sources of revenue to replace the $600 million in tax revenue they will be losing?
By: George Lynch
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