On Aug. 5 Michigan voters will be asked to approve or reject Proposal 1, which would modify the state’s personal property tax. Personal property taxes are levied on business equipment and machinery, and raise about $1.286 billion, most of which funds local government units such as counties, cities, schools and community colleges. Personal property taxes are widely considered to have a disproportionately negative impact on economic growth. By taxing business equipment and machinery, they discourage businesses from investing in expansion and growth.

The legislation that would go into effect if Proposal 1 were approved by voters creates three new exemptions for certain businesses that are currently subject to the personal property tax; it does not eliminate the personal property tax. One exemption is a de minimis, or “small parcel exemption,” that frees businesses with less than $80,000 worth of personal property from this tax liability. Another exemption phases in relief for manufacturing personal property that has been subject to the tax for at least 10 years, and a third exempts all new manufacturing personal property. These exemptions amount to an estimated $600 million tax cut when fully implemented.

The package of bills that would become state law if Proposal 1 is approved includes a mechanism for reimbursing local government units for the revenue lost from these new exemptions. The state would set aside a portion of the statewide Use tax revenue, and use this revenue to reimburse local governments. It is estimated that local governments will be reimbursed for the entirety of the revenue lost due to the personal property tax cuts.

The state would also levy a new, but relatively small, tax on manufacturing personal property that qualifies for one of the exemptions described above, except the small parcel exemption. The state estimates this to raise $117.5 million, making the overall net tax cut of the legislation package worth about $500 million.

Proposal 1 asks voters to approve or reject a package of bills already approved by the Michigan Legislature. These reforms would provide a net tax cut to businesses with manufacturing personal property, and provide a different source of funding for local governments.