The Michigan Legislature has adopted a fiscal 2005 state budget that closes an approximately $1 billion gap between expected revenues and projected spending. Around one-third of the gap is filled by a hike in the state taxes on tobacco and Detroit casinos. Another one-third comes from actual reductions in spending and smaller-than-expected spending increases. The final one-third comes from fund shifts and accounting changes.
Possibly the most controversial element of the budget is advancing the county property tax billing date from December to July, phased in over three years. In 2005, one-third of county property taxes would be billed in July, and two-thirds in December. In 2006, two-thirds would be billed in July, and one-third in December. In 2007, the entire amount would be billed in July. (July billings are due Sept. 15, and December billings are due Feb. 15.) This move allows the state to gain $183 million, which would be used to make future state revenue-sharing payments to counties.
There is some controversy over whether this is a tax increase. Oakland County Executive L. Brooks Patterson has no doubt, telling the Oakland Press, "Every year, we're going to pay not 12 months, but 16 — and at the end of the third year, we will have paid a full year of extra property taxes." The Press also quotes Greg Bird, spokesman for the Office of the State Budget, disagreeing: "You’re not paying an extra year. You’re simply paying at an earlier date."
The legal details of the new tax shift are awesomely complicated, and they are giving county officials and the real estate industry huge headaches. Still, figuring out whether this is a tax hike is not so difficult if examined solely from the point of view of how the proposal affects the net worth of an average taxpayer, who only cares about two things: How much do I owe, and when do I have to pay it?
Imagine you pay $100 a year in county property taxes. Under current law, between July 2005 and July 2007, you will have paid $200 in property tax — $100 in December 2005, and $100 in December 2006. You will also have accrued another seven-month’s county tax liability of $58, which will have accumulated from December 2006 through June 2007, but is not payable until December. Thus, an informal "personal balance sheet" at that moment would show your wealth down by $258: $200 in cash already paid out, plus a $58 accrued liability.
Under the new law, in contrast, you will have paid out $300 between July 2005 and July 2007 — $33 in July 2005, and $67 in December 2005; $67 in July 2006, and $33 in December 2006; and $100 in July 2007. Although you wouldn’t have accrued the $58 "accounts payable" liability that you would under current law, your personal balance sheet would still show your wealth down by $300: $300 in cash already paid, and $0 in accrued liability.
Therefore, you would be $42 poorer under the new system — the difference between the $300 decrease in your wealth under the proposed system and the $258 decrease under the current system. In contrast, the government would be $42 richer, having added $300 of your money to its accounts, compared to having $200 of your money in hand with an additional $58 in "accounts receivable." This increase in your payments is equivalent to a one-time 42 percent tax hike over the entire phase-in period.
Moving forward from July 2007, you would be back to paying the old rate of $100 per year. When December of 2007 rolls around, you won’t get a new tax bill, but will have accrued another five months of "accounts payable" liability, or $42. At that point you are still out the $300 in cash payments and have added a new liability. And so it goes, rolling on into the future. You never do recoup that $42.
But that is not the only damage done by this proposal. For many taxpayers, there is also the opportunity cost of handing over their cash five months earlier. This kind of cost was calculated in a memo by a state House Fiscal Agency economist in 2001, when Gov. John Engler persuaded the Legislature to adopt a similar tax collection date shift for the six-mill state school property tax.
The fiscal agency explained that assuming the loss of an opportunity to collect a five percent interest rate between July and December on the money used to pay the tax sooner, and assuming a three percent annual inflation rate, the owner of a home with a $150,000 market value would be out $18.33 in "present value" for each mill paid in property tax over a ten-year period.
A similar calculation can be applied to the current proposal, adding to the loss in net worth described earlier. Therefore, the proposal is at minimum the equivalent of a one-time 42 percent increase in the county property taxes billed during the proposal's phase-in period.
So is this a tax increase? Taxpayers will have involuntarily lost wealth, and the government will have gained it. That is called a tax increase.
Instead of stealth tax hikes and semantic debates, the Legislature should instead consider balancing its budget through pro-growth policies that lower taxes and cut spending. The math will be easier, and it will be a real chance for leadership, rather than a nightmare exercise in accounting.
Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.