Table Four summarizes the revenue analysis of Cut and Cap, based on a tax model developed by the author for the Mackinac Center. The model uses base data on SEV, millage rates, inflation, new construction, and other factors from the Senate Fiscal Agency. The model's innovations are the explicit recognition of both tax capitalization and the other tax revenues gained from increasing disposable income and wealth. The model is described in Appendix IV.
Using the same methndology adapted to local and specific examples, the succeeding sections analyze the effect of Cut and Cap on individual properties and major Michigan Cities and Counties.
Cut and Cap Statewide Projections
The following are the key statewide revenue projections for Cut and Cap:
Current-law baseline property tax revenue grows from $9.0 billion in 1992 to $13.0 billion in 1997. Under Cut and Cap, property tax revenue grows more slowly, to $10.4 billion in 1997. The difference is a gross tax cut starting at $748 million in 1993 and growing to $2.7 billion in 1997.
Increases in other taxes – sales, income, and SBT – and reductions in income tax credits make the net tax cut start at $562 million in 1993 and grow to $2.0 billion in 1997.
School districts receive reimbursement for the exemption starting at $571 million in 1993 and growing to $2.2 billion in 1997. However, given reductions in outlays and increases in tax revenues, the net effect on the state's general fund is a smaller amount, ($402 million) in 1993 growing to ($1.6 billion) in 1997.
Property tax revenue to local governments, as augmented by reimbursement to local schools, grows from $9.0 billion in 1992 to $9.6 billion in 1993, a 6.6% increase. Local Government revenue reaches $12.6 billion in 1997, with annual growth rates increasing to almost 7%. This represents continuous real increases in revenue for local units of government, assuming that inflation remains around 4% per year.
SEV, as limited by the assessment growth cap on unsold properties, grows from $171 billion in 1993 to $207 billion in 1997. This is a 34% increase in five years over the 1992 SEV of $154 billion. SEV unlimited by the assessment cap would reach $229.7 billion in 1997. Such increases occur even with the 3% annual assessment cap on unsold property, because newly sold property adds to SEV substantially, and because new construction is immediately added to SEV according to its market value.
The true value of property increases by $19.4 billion in 1997 due to tax capitalization, with a steadily growing portion incorporated into SEV.
The effective tax rate on Michigan property declines from 2.94% in 1992 to 2.26% in 1997, compared with a baseline effective tax rate that increases slightly to 2.95% by 1997.
Comparison With Other Revenue Analyses
Table Five compares this revenue analysis with two others, done by Gary Wolfram for the Department of Treasury, and Jay Wortley and George Towne for the Senate Fiscal Agency. The estimates for gross tax cut, local school reimbursement, and net impact to the general fund are very similar among the three studies. Appendix IV discusses the methodological differences among the three studies.