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Original article URL: http://bridgemi.com/2012/04/snyder-pushes-end-to-personal-tax-on-business/

Public sector

Snyder pushes end to personal tax on business

Steve Carlson considered buying a couple of new machines for his plastic molding business near Lansing, but he and the company’s other owners decided to hold off for now.

One reason, he said, is Michigan’s personal property tax on the new equipment would drive up the cost of doing business, adding another 30 percent to the $11,000 the firm already pays each year.

“We spend $200,000 on new equipment, and all of a sudden our taxes go up thousands of dollars a year,” said Carlson, treasurer and part owner of Molded Plastic Industries, a small shop with 50 employees in Delhi Township, south of Lansing. “I’d say it’s highly likely we’ll purchase the equipment if the personal property tax is removed.”

Delhi Charter Township Treasurer Roy Sweet said he wouldn’t mind if state lawmakers went along with Gov. Rick Snyder’s plan to repeal the personal property tax — as long as they come up with a guaranteed replacement for the money. If they don’t, the township might have to ask local residents to pay higher property taxes, or it might have to “cut services to the bone and beyond.”

Therein lies the dilemma. Business groups, including the Michigan Manufacturers Association and the Michigan Chamber of Commerce, say the personal property tax is a huge barrier to attracting and retaining businesses in Michigan.

For most local governments, loss of the personal property tax would make at least a dent in their tax collections. For some, it would be devastating. Delhi Township would lose $200,000 a year, about 3 percent of its $7 million general fund budget. But several other cities, townships, counties and school districts already teetering on the brink of financial disaster could be forced into insolvency if they lose the personal property tax and don’t receive replacement funds.

Businesses across Michigan — and homeowners — already have seen their property taxes drop significantly in recent years. This “Shadow Tax Cut”, reported on by Bridge Magazine last year, shaved $1.6 billion in property taxes (adjusted for inflation) between 2007 and 2010.

Personal property taxes represent 10 percent of the entire property tax collection around Michigan.

Steve Carlson, part owner of a business in the Lansing area, says he has delayed the purchase of equipment for his firm because of the burden created by the personal property tax. Gov. Rick Snyder wants to eliminate the tax for Carlson and other business owners. (Bridge photo/Robert Killlips)

Repeal of the personal property tax is high on the agenda this year for Snyder and Republicans in the Legislature. Bills repealing the tax were introduced Tuesday. Lt. Gov. Brian Calley outlined the plan to a less-than-enthusiastic meeting of the Michigan Municipal League last month, saying it would save industrial businesses $425 million a year. Local units of government, he said, would be reimbursed with money from expiring business tax credits.

“Our purpose needs to be to implement policies … to grow the economy,” Calley testified Wednesday to a Senate panel reviewing the repeal measures. He added that the administration was confident that sufficient money was available to compensate local governments and schools that have received PPT funds, though he did not go into any details.

Local leaders, however, are dubious they’ll see all that money. “We have a 100 percent track record that tells us ‘no,’” said Summer Minnick, director of state affairs for the Michigan Municipal League. Over the past decade, local governments have lost about $4.5 billion as the state cut revenue sharing to balance its budget, she added. (During the same period, however, statewide property tax collections rose 12 percent, when adjusted for inflation.)

“Hitting (local governments) again on top of all that would be devastating,” she said. “If you think about it, you’re targeting cities that have industrial bases. Those are cities that are older, have heavier legacy costs and urban cores.”

That includes some heavily industrialized suburbs downriver from Detroit, and smaller cities and townships that rely on a large factory or a mine for much of their tax revenue.

Government groups seek guarantee

Several organizations — including the Michigan Municipal League, Michigan Association of School Boards and Michigan Library Association, as well as police and fire groups – formed the Replace, Don’t Erase coalition, urging lawmakers to enshrine that promise in a state constitutional amendment, binding future governors and legislatures.

Under current law, the state has no control over money from the personal property tax, since it is collected by local units of government. If it is repealed, those local units would be dependent on the Legislature and governor, relying on them to replace that money each year.

In a poll commissioned by the Replace, Don’t Erase coalition, 70 percent of voters said they oppose repealing the personal property tax. When told the repeal could lead to cuts in local services and higher property taxes to pay off school bonds, opposition climbed to 78 percent, according to the survey conducted by EPIC-MRA.

Most Michigan residents likely don’t give much thought, if any, to the personal property tax, since they don’t pay it, although it’s been a source of income for local governments and public schools since 1893. Unlike real estate taxes, the personal property tax is assessed only on business equipment, such as computers, office furnishings and industrial machines.

“If you picked up a building and shook it, the personal property tax is on everything that falls out,” Minnick explained.

Michigan’s local governments collect the personal property tax from three classes of businesses, each paying about one-third of the $1.2 billion collected each year:

* Commercial, such as retail stores and professional offices.

* Utility, including telephone and electrical companies.

* And industrial, ranging from small shops to auto assembly plants.

The Snyder administration is proposing a phase-out of the personal property tax for large industrial taxpayers over a seven-year period beginning in 2016. Starting that same year, any new equipment purchased by a manufacturer in 2012 or later would be exempt from the tax.

Smaller industrial and commercial businesses — those that have less than $40,000 in personal property — would be exempt from the tax starting at the end of this year. That latter change alone would excuse most commercial and industrial businesses from paying any personal property tax, according to a document prepared by the Snyder administration.

Initially, the focus is on giving the break to industrial companies, since they tend to be more mobile and can move their machines and jobs to other states and overseas. Utilities have to stay put, and most commercial businesses need to remain close to their customers.

The personal property tax on industries is “a $400-million-a-year disincentive for doing business in Michigan,” said Mike Johnston, the Michigan Manufacturers Association’s vice president for government affairs. “Manufacturing is the kind of jobs that drives the economy. Those are the kinds of jobs that build families. Those are the kinds of jobs we ought to attract.”

The Manufacturers Association and the Michigan Chamber favor Snyder’s plan to replace the tax revenue with money from the expiring tax breaks, such as for battery manufacturers, but they oppose guaranteeing it in a constitutional amendment. It’s unclear how much money those expiring incentives will generate.

“We don’t want to pick a fight over funding of local units,” Johnston said. “We’re consumers of their services, and we need those services. The first thing I’d say is the governor has a plan to support those local services.”

Most Great Lakes states, including Illinois, Wisconsin and Minnesota, do not collect personal property taxes. Ohio finished a multi-year phase-out of its personal property tax in 2009. Of all the Great Lakes states, only Michigan and Indiana still tax personal property.

“We’re at a competitive disadvantage,” said Tricia Kinley, senior director of tax and regulatory reform for the Michigan Chamber. “We have got to get the ball rolling on this.”

Repealing the personal property tax would improve Michigan’s competitive position with other states, an independent study released in November by East Lansing-based Anderson Economic Group found. The Anderson study cautioned that some local governments and school districts would be adversely affected if the lost revenue isn’t replaced. While the personal property tax made up less than 6 percent of the property tax base for most cities and townships, 31 communities counted on it for 30 percent or more of their property tax base.

For some communities, tax is crucial

In River Rouge, personal property accounts for 56.8 percent of its property tax base, according to the Anderson study. In Ecorse, already under the control of a state-appointed emergency manager, it’s 45.8 percent. For Detroit, facing the threat of an emergency manager, 16.6 percent of its property tax base is in personal property.

The city of Dearborn draws $12 million to $17 million a year, about 20 percent of its revenue, from the personal property tax, Mary Laundroche, the city’s director of public information said.

Most Michigan municipalities have cut their services and laid off employees the last few years as their property tax collections declined, reflecting a drop in real estate values during the recession. The city of Allegan is among them.

The industrial portion of the personal property tax pays that city $600,000 a year, about 15 percent of Allegan’s $4 million operating budget, City Manager Robert Hillard said. Most of that tax is paid by the city’s largest employer, the Perrigo Co., maker of generic over-the-counter and prescription drugs.

If Allegan lost that tax revenue, “obviously, personnel would have to be reduced significantly, and services would have to be cut,” Hillard said, making the city a less attractive place to live and do business. “Roads continue to need reconstruction; buildings continue to need to be maintained. With those cuts, that’s difficult to do.”

Perrigo, based in Allegan 125 years, has stayed out of the debate over the personal property tax, said Art Shannon, the company’s vice president of investor relations and corporate communications.

“We’re a proud member of the community,” he said, adding that Perrigo, which already employs some 3,500 in Allegan, is putting up a new office building and plans to add workers. “We pay our taxes and will do whatever the government tells us to do.”

Pat Shellenbarger is a freelance writer based in West Michigan. He previously was a reporter and editor at the Detroit News, the St. Petersburg Times and the Grand Rapids Press.

11 comments from Bridge readers.Add mine!

  1. colleen verge

    It is the death knell for public libraries…

  2. William C. Plumpe

    The easiest and fairest solution to the personal property issue is to allow a dollar to dollar credit for personal property taxes paid against the new Michigan corporate tax and the Michigan individual income tax for partnerships and sole owners with a carry forward for any unused credit. But that is unlikely to happen because the Republicans in the legislature want to have their cake and eat it too—they want to look good by cutting taxes (always a way to get voter attention) but apparently are not willing to guarantee replacement revenue because that would mean State government would somehow lose funding and that simply can’t happen. But of course cities and counties can lose millions of dollars in revenue—that’s OK. And based upon experience with the lottery money I don’t trust the State to “guarantee” anything. Gee and I thought Republicans were all for “local control” and “less government interference” and “increased transparency”—I guess that’s OK if their ox isn’t being gored and they keep all their own funding intact.. And it is a fallacy that reducing or ending the personal property tax will create NEW jobs. Reducing or ending the personal property tax could create jobs in the private sector but that will very likely cost jobs in the public sector—and a job’s a job in the private sector or the public sector. Reducing or ending the personal property tax will only transfer jobs from the public sector to the private sector—it will not create new jobs without taking jobs from somewhere else. Further, losing jobs in the public sector will mean less police officers, public health workers, teachers and accountants (to keep track of everything). Reducing or eliminating the personal property tax is clearly a “good” political idea but not a good idea on a practical level since it will no doubt mean lost jobs in the public sector and reduced services. Enough said.

  3. John B. Czarnecki

    We need to be a little cautious here. I am not a big fame of replacing the lost revenue with state tax dollars. If that occurs then I will be having my state tax dollars go to supporting other communities. Not all that excited about that. Communities must learn to live within their own revenue capabilities.

  4. Chuck Fellows

    Interesting that business consulting organizations and tax repeal advocates fail to reference the impact removal of this tax would have on local libraries but that omission is pretty typical of businesses perfuming the pig in order to achieve some pretty myopic short term goals at the expense of the public which already mightily subsidizes their operations. (Like having roads, sewers, water and public safety? How about a customer base with income to spend or a labor force that wants to live in Michigan?)

    Businesses have two primary complaints about this tax, it makes them non competitive and costs too much to comply with. Kinda universal complaints about any business cost. One question to my friends in the business community, “Compared to what?”.

    Cost of compliance can be reduced through a cooperative effort between business and government to improve the compliance process by dumping the unique state method for assessing valuation and going with IRS requirements. (Ask who created this unique state process in the first place and why they did it). What? Cooperate? Work together toward a common goal?

    Businesses will be non competitive since for capital intensive activities the ROI will be reduced for any new investment decisions, or so advocates for the removal of the tax tell us. If you look at the overall tax burden on businesses in Michigan versus all other states you will discover that Michigan is middle of the road. (Overall tax expenditures to do business in Michigan, not an attack on one slice of the pie that repeal of the PPT is) The non competitive argument loses much if not all of its weight when a proper analysis of business taxation is made.

    And by the way taxes as a business local decision making criteria are pretty low on the decision hierarchy too.

    The real issue here? When are politicians going to cease and desist trolling for campaign contributions at the expense of the public? That is what is going on here and it has nothing to do with creating jobs or improving the economic climate in Michigan.

    No matter how much perfume you use, pigs still like to play in the mud.

  5. Pat LePage

    I would all of the above comments make sense. I believe the bottom line is how will these $ be made up. The Republicans don’t seem to want to go into any detail on this. I wonder why – because they have no clue. It’s just makes sense to do as they say. It’s a ploy to reduce public workers, reduce services and reduce costs. What they haven’t yet figured out is by the time they are done stripping this state of services, quality educational opportunities and jobs is that many will question who wants to stay here. I for one am looking at that very option. Every time I read about a new bill introduced in Lansing it’s about taking back something a middle class michigan resident has worked towards for years. Let’s face it the State Legislature is Pro-Business and focused on on improving their lot in life. Profit’s are their first priority and reducing anything as far as legacy costs are concerned

  6. Gene Markel

    No taxes No government. The citizens of the state realize, I hope, that taxes pay for the goods and services that make it possible for our society to live safely and securely. Without everyone contributing their fair share the result is we become like a third world country where the rich and powerful have no concern for anyone but themselves.

    1. Eunice Burns

      It MAY be a good move to get rid of the personal property taxes; however, there HAS to be thought given to the intended and unintended consequences of such a move. And,before any move is taken, any removal of the personal property taxes MUST be accompanied by a move to replace that revenue!

  7. Matt

    Why is it always more fun to vote for politicians who want to tax some one else? Since businesses don’t vote they’re a perfect target. The Personal? Property? tax ???? … If it was really a tax hitting us PERSONALLY as it is applied to businesses, it wouldn’t last 10 seconds. It’s high time the citizens of Michigan pay for the government they want and elect rather than trying to stick the cost on someone else.

  8. Neil

    Illinois eliminated the business personal property taxes in 1970 with a 5.5 % profits Replacement Tax. This tax is collected by the state treasurer and paid back to the city or township jurisdictions. Why isn’t the state of Michigan considering a replacement tax like this?

  9. Robert

    Why is this an issue? Because the legislature broke the promise of Proposal A, which traded a property tax cut for an increased sales tax. That cut local government revenue, which was to be made up with revenue sharing from the state. That got slashed even before the recession. So what is a local government to do, faced with ever dwindling revenue? Slash services and hear residents complain, and ask voters to approve milage increases. And that is exactly what hypocritical Republicans want. They make YOU vote for your tax increases so they can still claim they did not raise your taxes! I am all for making Michigan a good place to do business. But that includes more than just low taxes. It means competitive utility costs, a supply of quality employees, good schools,, strong communities, and good roads. Businesses need to pay their share to make these things happen.

  10. ... ... ...

    I have no doubts Steve Carlson is telling it like he sees it. But why do news agencies present it as part of a “balanced” story. I really don’t care how the PPT effects one businessman, Snyder is not proposing to cut just his taxes. Has anyone studied the potential impact of this proposal, on the macro level?

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