If approved, this reform package will result in an estimated $500 million cut in the personal property tax for manufacturing firms and other companies that own relatively small amounts of personal property. The state replaced the revenue that local government units will lose from these tax cuts, but the replacement will not dip further into taxpayer pockets. The state budget will largely be responsible for sparing local units of government from significant revenue losses, but even this effect will be mild. Still, there are some important considerations about the end result of this package of tax reforms.
The cuts are structured to improve growth prospects. The key economic growth considerations are those influencing a business’s investment opportunities. When a business runs financial projections for an expansion, it will consider the new costs of capital. Personal property taxes increase those costs. Eliminating this tax on new personal property reduces the cost of expanding for Michigan businesses. This reform influences those investment decisions.
Some tax relief will be phased in for owners of existing personal property. The manufacturing businesses that already made the decision to expand under the older personal property tax rules will see their personal property taxes reduced over the 10-year phase-out period. This tax relief may also provide economic benefits of a different kind than those that influence the decision on whether or not to invest in new equipment.
This benefits only manufacturing firms, however. Non-manufacturing firms will continue to pay taxes on both new and existing personal property. Arguably, excluding these businesses from tax relief was a trade-off intended to maximize the economic benefits of personal property tax cuts while minimizing their impact on government revenue. Proponents of the reform may point out that replacing the Michigan Business Tax with the Corporate Income Tax in 2011 already provided substantial tax relief to many non-manufacturing enterprises, while large manufacturing businesses may not have experienced as much benefit because of substantial credits towards their MBT liability based on what they paid in personal property taxes.
New industrial investment decisions may be more footloose — that is, industrial companies may be more able than commercial or utility businesses to move their taxable personal property to low tax jurisdictions. In other words, industrial firms may be able to take advantage of differing taxation rates across the country compared to commercial enterprises that often service a particular market or customer base.
Tax reductions for utility personal property would also likely have a smaller economic impact than they would have for industrial property. As David Zin of the Michigan Senate Fiscal Agency observed, utilities in Michigan are highly regulated enterprises that can pass increased capital costs onto their customers. Lowering a utility’s costs of capital may decrease the rates they charge customers, but it is not likely to have much impact on utilities’ investment decisions.
One of the complaints about personal property taxes are their costs of compliance. Businesses need to estimate the value of all their equipment and this can be onerous. Business equipment can range from paper clips to industrial molding machines to junkyard dogs (as Patrick Anderson has observed).
The legislation put before voters provides some relief from this compliance burden. Businesses under the small parcel exemption will only need to judge whether they own less than $80,000 in personal property and file an annual affidavit with their local assessor. New manufacturing personal property will no longer have to calculate the depreciated value of their equipment, just the acquisition costs (which they currently do). Assessors will still have the obligation to ensure that companies are complying with the law and may still conduct audits.
By tying local government and school district revenues to the Use taxes, there may be greater demand to increase Use tax collections in the future. For example, the state is currently under discussions to expand its taxing authority to items purchased over the Internet from out-of-state sellers. In fact, there was an amendment that was introduced but rejected that would have tied the personal property tax reform to this Use tax expansion, meaning that neither would become law unless the other was also passed.
While these goods are currently subject to the state Use tax, and taxpayers should remit those taxes to the state treasury, widespread noncompliance is suspected. Bills have been introduced that would push retailers that sell to Michigan residents to collect Use taxes, and all the new beneficiaries of Use taxes — local government units — might find it in their interest to support such bills.
The personal property tax reforms going before voters mitigates this factor, because local governments are set to receive a pre-defined, fixed dollar amount out of Use tax revenues. After phasing in the full amounts, the 1 percent annual increase in the “local” Use tax revenue is expected to be a decreasing proportion of total state and local Use tax revenue. These government units, however, might still find that their Use-tax-based payments are more secure with a larger revenue base.
Whether these ongoing payments will continue is a difficult question. A statute cannot bind the Legislature to appropriate money. Local governments already know this, based on their experience with the state’s revenue sharing policies. The Glenn Steil State Revenue Sharing Act requires the state to contribute 14.2 percent of its sales tax collections to local governments, but these amounts are not approved in annual state budget bills.
One of the ways that this legislation attempts to secure future payments is to keep the replacement revenue out of the appropriations process. Although the overall rate will remain the same, the Use tax will be split into two portions — a local Use tax and a state Use tax. The local portion is paid directly to the newly created authority, whose sole intent is to reimburse local government units. This local portion of the Use tax will not require annual legislative approval. Further, this funding mechanism also reduces revenue volatility for local government units that are being reimbursed, since their revenue will be based on fixed amounts set by statute rather than the value of the personal property residing in their jurisdiction on Dec. 31.
However, this separation of the Use tax between state and local entities is far from being iron-clad. Future legislators could possibly amend that statute or eliminate it altogether through the normal legislative process.
The package is subject to a public vote in August because of the requirements under the Headlee Amendment in Michigan’s constitution.[*] This vote can offer ancillary protection from changes to the local government replacement revenue mechanism. Elected representatives may be hesitant to change a policy that has won a popular vote, but it is difficult to speculate on this issue.
Technically, the local Use tax replacement mechanism is the only portion of the reform package that voters are being asked to approve on the August ballot. However, the legislation contains sections specifying that the package will not take effect if voters reject the Use tax replacement. This package provides some tax relief to a group of taxpayers that have what is believed to be a concentrated impact on the economy. This tax relief has budgetary impact on the state and alters local government revenue sources. Voters will be asked to certify a replacement revenue mechanism that lowers state government revenue to replace local government revenue. The estimated $500 million tax cut was also designed to have a larger dollar-for-dollar impact on the state economy.
[*] There is some question about whether or not the new authority is “local,” considering it has statewide jurisdiction and levies a statewide tax. If it were a state entity, it would be subject to different constitutional limits.