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Economy & competitive position/Public sector

Snyder tries again on cut for business equipment tax

In the final weeks of the legislative year, the Snyder administration is pressing ahead with a plan to cut a tax on business equipment by attempting to appease two groups: local governments that count on that money to pay for services, and business groups that claim the levy is a job killer.

With a set of Senate-passed bills languishing in a House committee, Lt. Gov. Brian Calley, House Speaker Jase Bolger, R-Marshall, and Senate Majority Leader Randy Richardville, R-Monroe, on Tuesday released details of a modified plan they hope will satisfy both sides. The new plan would phase out the personal property tax for manufacturers over 10 years while reimbursing school districts, cities, townships and counties with a portion of the state’s use tax, which is similar to the sales tax, but is assessed only on out-of-state purchases. Changing the operation of the use tax would require a statewide vote.

“This is a fiscally responsible strategy that helps to lay the groundwork for a more prosperous future,” Calley said in a press release. “It’s an excellent compromise that balances the tax-relief needs of job providers with the revenue needs of our communities and schools.”

Local government officials, however, were not yet embracing the revised plan. The Michigan Municipal League, which represents local governments, has not taken a stand on the proposed changes, said Samantha Harkins, the League’s director of state affairs.

“I would say the lieutenant governor has listened to our concerns and has made changes addressing those concerns,” she said, but she added that the administration has not yet provided a formula showing how much money local governments will be reimbursed. “Our position all along has been that we need guaranteed replacement,” she said.

The personal property tax is assessed on business equipment, such as computers, office furnishings and industrial machines, with all revenue going to local schools and governments. For some units, that tax produces only a small percentage of their total revenue. For others, particularly in heavily industrialized areas, it is a significant source of money.

Neither business owners nor local government leaders are especially fond of the personal property tax. Business groups claim it discourages job growth; local government leaders say it is difficult to collect.

Money from the personal property tax goes to both local governments and the state.

A recent survey by the Gerald R. Ford School of Public Policy at the University of Michigan found that 74 percent of local leaders favor repealing the personal property tax use tax — if they can be guaranteed the state will replace the money. The survey also found that 67 percent of local government officials don’t trust the state to keep its promise to fully replace the lost revenue.

The Republican-controlled Senate last May passed a package of bills (Senate Bills 1065-1072) to repeal the personal property tax for most businesses. Backers of those bills said the state would reimburse the schools and local governments with money from expiring business tax credits. Opponents, noting a history of broken promises, do not trust future Legislatures to appropriate the money each year.

An analysis of the Senate bills by the Senate Fiscal Agency gave credence to the skeptics. The agency, the Senate’s nonpartisan research arm, questioned whether the money from expiring tax credits “would be sufficient to fund reimbursements at the level suggested by the bill.” Most local units would not receive any reimbursement under the Senate bills, according to the analysis, and even those that qualified for payments “could experience substantial revenue losses.”

And some business leaders were concerned about a “poison pill” provision inserted in the Senate bills at the last minute that would re-impose the personal property tax if the state failed to keep its promise to reimburse the local units.

Such opposition sent the Snyder administration back to the drawing board. The revised plan would designate about 1 cent to 1.5 cents of the state’s 6 cent use tax to replace revenue from the personal property tax. The new plan would create a “metropolitan authority” appointed by the governor to distribute the money, thus avoiding an annual appropriation from the Legislature.

According to the House Fiscal Agency, the state should raise about $1.25 billion with the use tax this year, with $415 million going to the School Aid Fund and the rest into the state’s general fund.

A 1.5 cent diversion of the use tax would equal about $300 million. State accounts also would have to absorb the loss of its share of the PPT funds. The SFA analysis of the original bills pegged the full annual loss at $120 million.

A Snyder spokesman said the state’s loss would be made up from revenue from expiring state business tax credits such as those granted to boost the electric auto battery industry, though there’s some question about how much the state will get from the end of those credits. Asked what would happen if voters failed to approve the diversion of the use tax to cover the local governments, the spokesman noted, “Then you lose the guaranteed funding.”

New plan creates reimbursement hierarchy

Under Calley’s new approach, local governments that get less than 2.5 percent of their total property tax collections from the personal property tax would receive no reimbursement. Those that get 2.5 percent or more of their property tax collections from the personal property tax would be reimbursed for at least 80 percent of the lost revenue. Those local units would be allowed to impose an “essential services assessment” on businesses to make up for the money that would have gone for police, fire and ambulance services.

The state School Aid Fund would be fully reimbursed, the administration said, and school debts would be covered 100 percent.

Beginning in 2014, industrial and commercial businesses with personal property valued at less than $40,000 would be exempt from paying any personal property tax. The tax on industrial personal property would continue to be phased out over the next eight years. Utilities, however, would still pay the levy.

Mike Johnston, the Michigan Manufacturers Association’s vice president for government affairs, expressed support for the “direction” of the proposed changes.

“Our goal is to eliminate the personal property tax and make us competitive,” he said. “Having said that, we are happy to see the local governments’ concerns addressed. We are consumers of local services.”

Harkin, of the Michigan Municipal League, was concerned that designating a portion of the use tax for local governments and schools will require a statewide vote, which could be defeated. “That’s a question we have,” she said. “If there is a statewide vote, what happens if the vote fails? That makes us very nervous.”

She also questioned the urgency of rushing the bills through the lame duck session without giving enough thought to the possible impact on local governments.

“Doing something in the ‘lame-duck’ Legislature makes me think we might be facing our own fiscal cliff in Michigan,” she said.

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.

Senior Editor Derek Melot contributed to this report.

6 comments from Bridge readers.Add mine!

  1. Tom Ivacko

    Great summary of the key issues, Pat. Based on our Ford School Michigan Public Policy Survey of the state’s local government leaders, I would expect there to be significant concern among local officials, given the less than full replacement of lost PPT revenues that is presented in this new plan (although it’s not quite clear how much of the lost funds might be recouped through the essential services assessment). Our MPPS survey found that, among jurisdictions that said the PPT revenues are an important source of funding for their budgets, only 23% of local leaders would support a plan that replaces most, but not all, of the PPT revenues that would be lost.

  2. Charles Richards

    This article is pretty much obsolete. The Detroit News of Wednesday, November 28, 2012 outlines a whole new approach. It seems to me that the Snyder administration, for all their avowed competence, is not handling this issue very well.

  3. Neil

    There are some 15 states that have eliminated the business personal property tax (BPPT) including Illinois, Ohio, and Wisconsin. I am not sure about Indiana. Illinois replaced the BPPT with a 6 % profits tax in 1970 and called it the Replacement Tax. Ohio eliminated its BPPT in 2010.

    The BPPT is a tax on business capital equipment, not on finances. The BPPT is a tax on automation. The BPPT discourages business to take the risk on expansion of automation. Business plays games not to pay the BPPT by leasing equipment rather than purchasing it or rotating equipment out of state before tax time. The BPPT discourages business to store equipment not in use. The BPPT discourages business such as business equipment sales or resale. To avoid the BPPT, equipment for sale is stored in non BPPT states like Ohio.

    Now these states also eliminated the sales and use tax on business purchases. Michigan has to do this too. Now what is this replacing the BPPT with the use tax? I would assume that business pays most of the use tax talked about here. If that is true, the business use taxes should not be used for BPPT replacement.

  4. Chuck Fellows

    There is no business justification for elimination of the personal property tax. At best the analysis provided to support the repeal is mythology mixed with wishful thinking and ideology.

    That’s the conclusion that should be drawn since there is no way to verify the evidence provided to support this action. (Thousands of jobs created and increases in local revenues due to increased business activity which according to the AAG data supporting these claims is “proprietary).

    Improve the process, don’t eliminate it.

  5. colleen verge

    The repeal of PPT will also have a crippling impact on our local public libraries.

  6. David Waymire

    “According to the House Fiscal Agency, the state should raise about $1.25 billion with the use tax this year, with $415 million going to the School Aid Fund and the rest into the state’s general fund.

    A 1.5 cent diversion of the use tax would equal about $300 million. State accounts also would have to absorb the loss of its share of the PPT funds.”

    In other words, higher education, environmental programs, state police…everything other than corrections, which is immune from cuts under this governor and legislature…would be cut by another $300 million. Can somebody say “Michississppi?”

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