Analysis: The "Cut" in Property Tax Rates

The Exemption as a Property Tax Cut

The exemption for school operating property taxes would act as a simple reduction in the overall property tax rate. As. detailed below in the revenue analysis, at would result in a gross reduction in property taxes beginning at three-quarters of a billion dollars in 1993, and ultimately reaching over 2 1/2 billion dollars in 1997.

Such an increase in disposable income would also directly result in higher revenues from existing income, sales, SBT, and other taxes, and lower tax credits, which are also incorporated in the revenue analysis. However, the magnitude of the property tax reduction far outweighs that of the higher revenue and reduction in outlays. For example, adjusting the gross tax cut of three-quarters of a billion dollars in 1993 for increases in sales, income, and SBT taxes, and reductions in tax credits, leaves a net tax cut of over a half-billion dollars.

Reduction in Property Tag Rates and the Michigan Economy

By reducing property tax burdens significantly, Cut and Cap would give a powerful boost to the state's economy. The permanent reductions in tax burden would result in greater disposable income available to Michigan consumers, increases in wealth due to tax capitalization, and better incentives to entrepreneurs to locate in Michigan. As detailed in the introduction to this study, page 2, such a reduction in tax burden would increase employment and improve per-capita income. This would provide additional revenue to state and local governments as well as reductions in outlays which are not incorporated into the revenue analysis.

Tax Capitalization

A lower tax rate directly increases the value of an economic asset, through the phenomenon known as "tax capitalization." Whenever the cost of holding an asset declines, its value increases, since the owner now will be required to pay less each year. This improvement of the owner's cash flow is capitalized into the price of the asset. Tax capitalization in property values is well established in commercial practice, the law of taxation and assessment, and the financing of homes.

The permanent reduction in property taxes would result in a large increase in the wealth of Michigan property owners, on the order of $19 billion when fully implemented. This would be over $2000 for every Michigan resident in real, spendable wealth – a further stimulus to the Michigan economy. Examples are provided below for both typical households and selected Michigan cities and counties.

The revenue analysis in this study explicitly includes estimates of tax capitalization To not include tax capitalization would be to ignore fiscal reality, as well as Michigan law. Further explanation of the commercial, legal, and financial aspects of tax capitalization is in Appendix II.