A late addition to the 2004 Department of Treasury budget bill (see MichiganVotes.org) will give new muscle to local governments seeking to collect more "personal property tax" from businesses. The result is likely to be a "stealth" increase in the regulatory and tax burdens on business.

The measure was slipped into the budget by a House-Senate conference committee, and will give local governments $7 million in grants to divvy up if they make "contracts with third-party vendors who will audit large personal property returns." Translation: Local governments are going to be rewarded with your tax dollars for hiring new auditors to poke around in the records of large Michigan job providers, looking for unreported tools and equipment to tax.

Assessed and levied in the same manner as regular property taxes on real estate, the personal property tax is a tax on the tools and equipment that businesses use to provide goods and services, everything from cash registers to billion-dollar assembly lines. The House Fiscal Agency estimates that without the beefed up audits, in fiscal year 2004 personal property and related capital equipment taxes will collect some $2.2 billion from large and small businesses. With them, this amount could substantially increase, putting far greater pressure on businesses that the current tax already imposes.

You might ask what’s wrong with making sure that everything that comes under already existing tax laws are, in fact, taxed? Unfortunately, determining that "fair share" is not clear cut. The personal property tax is based on the value of a firm’s equipment, but this is not easily quantified. Capital equipment depreciates in value, may be purchased or leased, is often modified or damaged after installation, may be exchanged, etc. Figuring out the value of new types of assets like computers and software is particularly difficult.

Reasonable people can disagree about these valuations. Homeowners vexed by the judgments of assessors regarding how much their house is worth can imagine how much worse it would be if the assessor also started estimating the value of appliances and furniture! That is essentially the position businesses find themselves in with regard to the personal property tax. The increasing number of audits that will result from the new stealth "tool tax" will make their enterprises more difficult and less predictable.

It is hard to imagine a tax more destructive to the creation of jobs and wealth. Yet, legislative efforts to limit or eliminate the personal property tax regularly crash and burn on the testimony of local officials who flock to hearings with dire warnings of closed parks and laid-off police.

The "stealth" nature of this new tool tax lies in the fact that most legislators probably do not even know it was inserted in the final compromise version of the Treasury budget, which was presented for an up-or-down vote to the House and Senate on the last day before the Legislature’s summer recess. The actual budget line item read, "Grants to local government for activity under MCL 211.22a – $7,000,000." The statute authorizes personal property examiners to investigate "the property or cost records . . . of any corporation, firm, or individual." Only when letters went out to local governments alerting them to the grants for "third-party" auditors did the public receive notice of what was really afoot.

The new tax, because it is a disincentive to job providers, is part of a mixed message Gov. Jennifer Granholm and the Legislature are sending to Michigan firms, or those considering new plants here. By her own account, during the past three years Michigan has lost more than 170,000 manufacturing jobs, or nearly 20 percent of our total manufacturing employment. In response, Gov. Granholm has announced that reducing regulatory impediments to manufacturing will be a high priority for her administration, and has launched a high-profile "manufacturing matters" initiative to expand this sector.

This is a great idea. As part of the effort, the Democratic governor has even dared to challenge a key constituency of her party, environmental activists. Granholm directed her cabinet, including the head of the state’s Department of Environmental Quality, to figure out how to speed up the process of granting air quality emissions permits to new industrial plants. Reportedly, the state of Oklahoma can grant a permit in half the time as Michigan. Gov. Granholm points to the 18-months it took for GM to acquire a permit for a state-of-the-art paint facility in Lansing, as an example of what needs to be changed.

Economists increasingly recognize that predictability under the rule of law is what accounts for much of what separates the vibrant economies of the developed world from basket-case "peoples republics" or kleptocracies elsewhere in the world. When the tax system creates uncertainty about what is liable to be taxed or about how long it will take to launch an enterprise, entrepreneurs are less certain that the risks they take will bear fruit. The new stealth tool tax creates such uncertainty for Michigan.

With the economy sending its own mixed messages, this is no time for a stealth tax hike. Michigan’s per-worker tax burden is already 15th highest among the states, as shown by a 2002 Michigan Chamber Foundation study. In fact, the good Gov. Granholm did for Michigan businesses by avoiding increases in economically destructive taxes like the income tax or Single Business Tax may be cancelled out by increasing uncertainty regarding job providers’ liability under the personal property tax.

Sending mixed messages to job providers is no way to improve the lot of taxpayers or workers.

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Jack McHugh is legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland. He is also the manager for MichiganVotes.org, the Center’s free on-line legislative information web site.