Property Tax Post: The Business Personal Property Tax 'Apocalypse' is Here Again

On August 5, Michigan primary voters will see Proposal 1 on the ballot, which would reallocate other tax revenues to help jurisdictions that will lose revenue from the state’s phase-out of its tax on business personal property. Assessed on the value of commercial and industrial personal property, such as machinery and equipment, businesses don’t like the personal property tax because in addition to paying sales tax when they initially purchase their property, they then have to pay tax on the property’s value each year thereafter. There’s also a lot of value involved—total value of commercial and industrial personal property in Michigan for tax year 2013 exceeded $22 billion.

Joseph Henchman of the Tax Foundation called Michigan’s repeal of business taxes a “sign of the Apocalypse” back in 2012, when Michigan Governor Rick Snyder signed a package of bills to gradually phase out the state’s personal property tax, by first exempting new property valued at less than $40,000 in 2014, then exempting all new business personal property, and personal property at least 10 years old, in 2016. The current proposal builds upon that phase-out by reallocating use tax revenues to ensure that jurisdictions that relied on the personal property tax don’t see huge drops in revenue.

Michigan is one of only two states in the Great Lakes area that levies a tax on business personal property, and the only other, Indiana, has a lower tax rate, notes the Holland Sentinel. Proponents of the personal property tax phase-out cite this as a disincentive for businesses to relocate to, or remain in, Michigan. Prior attempts to repeal the tax were unsuccessful, largely because in heavily industrial areas, local revenue is largely generated from the business personal property tax. Commercial and industrial personal property makes up 70 percent of all taxable value in Carson City, Michigan, and in several other municipalities, such property accounts for more than 50 percent of all taxable value, according to data from the Michigan Department of Treasury.

But on the other end, in approximately one-third of Michigan counties, business personal property makes up less than 1 percent of all taxable value. Thus, it is not surprising that these counties would not share the same concerns about lost revenue as those with heavy industrial bases. Consequently, the phase-out is a result of compromise between those areas with very different reliance on the tax, so that those that rely heavily on the tax will be reimbursed for the lost revenue by an expansion of the state’s use tax.

The use tax will essentially be split into two separate taxes—a local community stabilization share tax levied by a newly created “local” body (that ironically has statewide authority), and a state share tax that will continue to be levied by the state. Because the proposal creates a new tax, voter approval is required. The changes will mostly be “invisible” to taxpayers, because use tax rates will stay the same, so revenue will just shift from the state to localities, according to an analysis by the Citizens Research Council of Michigan.

Some are skeptical that the compromise will work as intended for reimbursing local governments for lost personal property tax revenue. James Fouts, the mayor of Warren, the state’s third-largest city, said that because the local reimbursement will depend largely on internet sales, many companies who don’t report the use tax when they complete transactions could limit that source of revenue intended to replace the lost property tax revenue. Fouts called the phase-out a “’sweetheart deal’ for large manufacturers,” and urged voters to vote against it.

The Holland Sentinel called the proposal “a good deal for everyone in Michigan,” and said it is supported by “virtually every business group and local government association in the state.” We’ll find out who gets their way in a few weeks.

Continue the conversation on Bloomberg BNA’s State Tax Group’sLinkedIn page: If you were/are a Michigan voter, would you vote yes or no on Proposal 1? More generally, are businesses right in objecting to being taxed on property they already own and paid sales tax on at the time of purchase?

Sign up for a free trial of the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state property taxes.

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