For Immediate Release:
July 1, 2014
Contact: Bob Schneider
CRC Releases an Analysis of Proposal 2014-1: Personal Property Tax Reform
Proposal 1, the only statewide measure on the August 5 ballot, asks Michigan voters to approve the conversion of a portion of the state’s current use tax to a new local tax as part of a plan to reimburse local governments for the cost of recently enacted exemptions of business property from the personal property tax. The Citizens Research Council of Michigan (CRC) has released its analysis of the ballot proposal to explain the ballot measure for voters.
The state Legislature and Governor enacted legislation in 2012 and 2014 that bring significant personal property tax (PPT) relief to Michigan businesses. Because the PPT is levied locally on the taxable value of business property, which includes everything from business equipment and machinery to chairs and computers, local governments stand to be most directly affected by these changes.
“Past efforts to exempt business personal property from the local property tax base eventually failed because the state was never able create a reimbursement method to keep local governments whole,” said Bob Schneider, CRC’s Director of State Affairs. “For some local units with a strong manufacturing base, the tax on personal property brings in a lot of local revenue.”
To address this local impact, the legislation creates a mechanism to reimburse local governments for any lost PPT revenues. A key element of the plan is the conversion of a portion of the state’s current use tax into a new local community stabilization share tax. The revenues of this new tax would be distributed to local governments to offset lost PPT revenues through a new special authority — the Local Community Stabilization Authority (LCSA). The LCSA is considered a local unit of government in the legislation, but would look rather different than other local governments.
“The new authority is defined as a local government, but has statewide boundaries, so we essentially have a very unique statewide local unit of government set up to administer the reimbursement of other local units of government,” said Schneider. “This peculiar arrangement really revolves around assuring local governments that they’ll get their money. They don’t want to see this money pass through the state government’s appropriations process.”
The conversion of a portion of the state’s use tax to a new local tax, however, creates other constitutional issues. In 1978, voters added several sections to the Michigan Constitution (commonly referred to as the “Headlee Amendment”) that limit the taxing authority of both the state and local governments. Calling the new tax a local tax means it has to be approved by voters, which explains the need for the ballot measure.
“Because the law creates a new local tax, that local tax needs to be approved by local voters,” said Schneider. “And, in this case, because the ‘local’ tax is administered by a local authority that happens to have statewide boundaries, the usual local vote now becomes a statewide vote.”
The tax shift will have significant fiscal implications for the state’s General Fund. The state will lose a portion of its current use tax revenues under the proposal. The analysis suggests state general fund/general purpose (GF/GP) revenues will be $107 million lower in FY2016 and $349 million lower in FY2017 as more and more state revenue is shifted to the new local tax. By FY2025, the GF/GP revenue loss is expected to reach $500 million.
Because all of the enacted PPT legislation was “tie-barred” by the legislature, the August vote effectively becomes a referendum on the entire package of reforms. If the ballot question is approved by voters, the personal property tax reforms will go forward, with local revenue reimbursement from the new tax. If the measure fails, all provisions of the personal property tax reforms will be repealed effective for tax year 2015, meaning that all businesses would once again be subject to any relevant tax levies on personal property.
The full report is available at no cost on the Citizens Research Council’s website, www.crcmich.org.
Founded in 1916, CRC works to improve government in Michigan. The organization provides factual, unbiased, independent information concerning significant issues of state and local government organization, policy, and finance. By delivery of this information to policymakers and citizens, CRC aims to ensure sound and rational public policy formation in Michigan. For more information, visit www.crcmich.org.