Executive Summary

"A"Would Cut Total Taxes Sharply in 1993, By Smaller Amounts in the Future

An economic model developed by the author for the Mackinac Center indicates that Proposal "A" would save Michigan taxpayers approximately $1.1 billion in net state and local taxes in the current year, and between $230 and $320 million in each of the next four years. This model relies on assumptions independent from those used by government agencies, incorporates dynamic behavior on the part of both the private and public sectors, and does not include tax savings measures proposed alongside "A" but not included in it. See page 21 and Appendix III on page 37.

"A" Would Increase Homeowners' Equity by $16 Billion

The permanent reduction in property taxes would significantly increase the value of property since the lower cost of holding the asset would increase its market value. This increase in homeowner's equity would add approximately $16 billion to the wealth of Michigan citizens in the current year, the equivalent of $1775 for even man, woman, and child. This real spendable wealth would be convertible to cash through mortgage refinancing, home equity loans, or sales of property. See page 13, and Appendix II on page 34.

Tax Cuts and Wealth Increases Would Add Jobs Economic Growth

The substantial net tax reduction in the current year, the smaller tax reduction in future years and the increase in wealth of Michigan residents would stimulate Michigan's economy. The additional disposable income would generate increased private sector jobs in the state and the reduction in property taxes would encourage investment in plant and equipment among Michigan industries. While estimates of "new jobs" from government programs are notoriously exaggerated, the benefits from a reduction in state and local tax burdens – allowing the private sector to create the jobs where most needed – are proven. See page 30.

"Cap" on Assessments Introduces Nonuniformity, But Avoids Assessment Shock

The cap on annual assessment changes would make property tax burdens much more predictable, but at the cost of introducing nonuniformity, since owners of similar parcels would often face different tax burdens. The current assessment system fails at providing due process, and "A" would substitute deliberate, but predictable and tax-limiting, nonuniformity. See page 8.

State Would "Lose" Over $130 Million a Year to Sales Tax Avoidance

The economic model developed for this study recognizes that taxpayers avoid paying taxes when possible. Using conservative estimates of tax avoidance behavior, the model predicts that a 50% increase in the sales and use tax rates would result in a 5% drop in taxed transactions. Tax avoidance results in about $135 million less sales and use tax revenue in 1994, growing to $154 million by 1997, than the consensus state government estimate. The sharply increased sales and use tax rates would result in more catalog sales from out-of-state vendors, purchases of big-ticket items in advance of the effective date, and reduced incentives to travel and purchase goods in Michigan. See page 21 and Appendix III on page 37.

Watch for Legislative Weakening of Millage Limits

The constitutional amendment is clearly intended to permanently limit property taxes by limiting school operating millage rates. "Operating" has a long history of meaning all purposes other than millage to repay voter-approved debt. However, the amendment allows the legislature to define "operating," and a draft bill excluded "operating deficit" millage. Such an exclusion, if it survived court challenge, would open the door to school property tax increases beyond the 27-mill limit clearly stated in the amendment.

Since future judicial interpretation of this amendment willhinge on for what the "common man" thought he was voting, voters must pay close attention to any statutes enacted prior to the election date that define its tax limitations. See page 6.

"Double Rollback" on Millage Rates and Assessments Required in 1993

Under the current Constitution and law, the assessment increases mailed to taxpayers in the spring must cause "Headlee " rollbacks in millage rates immediately after the fourth Monday in May – before the election date for Proposal "A." If "A" is adopted. then the new constitution would require further rollbacks in assessment increases that exceeded 3%, resulting in a "double rollback" for 1993. The "Headlee" millage rollback in 1993 accounts for approximately $110 million of the gross property tax savings under "A." Should immediate-effect legislation eliminate the millage rollback in 1993 under "A," it would add this amount to the property tax for future years as well. See page 11.

Taxpayers Would Gain Greater Control Over Local School Expenditures

Taxpayers in most school districts would gain more control over their local school finances under "A" because of its little-noticed provision restricting millage elections to no more than two per year, and its allowance of only 9 voted mills for operating purposes. Rather than facing multiple elections each year and "all or nothing" ballot questions, taxpayers under "A" would have two or less elections per year, and each ballot question would ask for marginal increases in tax revenue. See page 18.

"A" Would Strengthen "Headlee" State Tax Limit; Weaken Local Share Requirement

The new sales and use tax revenue would be applied against the existing Article IX section 26 ("Headlee") state tax limit. Although the state government currently has substantial cushion above the limit, the additional state tax revenue under "A" would reduce tile opportunity for a future legislature to raise taxes. However, the additional state spending to local schools would also weaken the Article IX section 30 ("Headlee") requirement that the statesend 41.6% of their spending to local units of government. See page 25.

Many Implementation Questions Unresolved

The constitutional amendment leaves many definitions, implementing procedures, and interpretation question to the legislature. Probably the most important are the property tax limitation issues. Besides the definition of "operating" purposes millage. cited above, important unresolved questions include

How school districts can levy "extra-voted" millage in 1993 and thereafter; see page 8; and

What expenditures are included in the per-pupil guarantee, and whether such funding counts for categorical programs protected by the "Headlee" amendment: see page 20.

"A" Not School Quality Reform, Except by Encouraging Some Competition

"A" would substantially reduce the current disparity in school district expenditures, primarily by allowing lower-than-average spending school districts to spend more. The historical record indicates strongly that student performance has little or no relationship to expenditures, so increased public school expenditures under "A" would likely have little long-term benefit in terms of student performance. However, "A" would encourage some competition among public school districts by making it easier to adopt a limited "schools of choice" system. See page 20.