Lansing —Gov. Rick Snyder’s administration is lobbying communities to back a statewide ballot issue that would phase out a billion-dollar tax burden on businesses and change how municipalities fund services.
Michigan voters will decide in August 2014 whether to shift part of the revenue from the state’s use tax to communities to make up for the gradual end of the personal property tax, a key source of municipal funding. The use tax, a companion to the sales tax, is paid by businesses and individuals on out-of-state purchases and some other transactions.
Snyder signed legislation last December that phases out the personal property tax. It’s a levy on items such as equipment, furniture, tools and computers that business advocates have long complained discourages investment.
Lt. Gov. Brian Calley, Snyder’s point man on the issue, has appeared around the state to drum up support for the vote. Calley argues the shift will give communities a more reliable source of money, but he and municipal officials agree it will be a challenge to get voters to go along.
“We are the last Midwestern state — the manufacturing base for the country — that has a personal property tax on industrial equipment,” Calley said, adding its elimination will help local communities.
“The payoff is in jobs,” Calley said.
But the tax helps fund police, fire protection and other services in many municipalities, which have already suffered state cuts in revenue sharing and drops in property tax revenues.
If voters agree, communities would depend instead on an earmarked portion of the annual revenue from the state’s 6-cent use tax. The amount transferred to a special fund for local governments would start at $41.4 million in the 2015-16 fiscal year and grow to $362.4 million in fiscal 2022-23.
The use tax applies to the total price of purchases by mail or Internet from out-of-state retailers and also to such other transactions as vehicles, airplanes or watercraft bought from individuals.
The loss of the personal property tax “is going to hit a lot of our locals where it hurts,” said Oakland County Treasurer Andy Meisner. “(And) locals have become skeptical of these Lansing deals.”
Personal property tax revenue accounted for 5-20 percent of the operating budgets in most Michigan cities in 2010, according to a 2011 report by the Senate Fiscal Agency.
The personal property tax, which dates to 1893, has been criticized as burdensome and unfair because every business has to fill out a form itemizing each piece of equipment and its age, after which an assessor assigns a value according to depreciation tables, the Citizens Research Council says. It raises $800 million to $1.2 billion annually.
Corporate leaders point to this tax as a greater obstacle than the now-defunct Michigan Business Tax ever was, Calley said. As long as it is in effect, he added, Michigan is missing opportunities to capture its full share of the nation’s economic recovery.
Onetime foes, including the Michigan Municipal League, have dropped their opposition in favor of a wait-and-see approach on the vote. Its county and township counterparts also are neutral. But opposition remains.
“The personal property tax is seen as pretty onerous and possibly out of step with the tax environment in other states,” Meisner said, but lost revenue that forces local communities to cut services also makes them less competitive by harming the quality of life.
Countless hours invested
If Michiganians reject a state use tax shift, countless hours of debate and negotiation to end the tax will go for naught.
Rejection of the change “takes us back to square one,” Calley said.
Michael Johnston, legislative affairs vice president for the Michigan Manufacturers Association, expects businesses to step up with financing for an educational campaign.
“I think there’ll be support from the small-business community to get this thing done,” Johnston said. “This is a good thing for the business community, a good thing for jobs.”
The personal property tax phase-out law — also known as the “Calley Plan” — phases out the industrial portion of the tax from 2016 through 2022. Local governments receive replacement revenue equal to 80 percent of what they lose — if the lost revenue comprises at least 2.3 percent of their total property tax revenue.
Local governments also can levy a special assessment on industrial plants to recover all of the remaining lost revenue for essential services: police, fire, ambulance and jail operations. School funding lost by the personal property tax repeal is fully replaced.
But all of the replacement money hinges on voter approval of the redistribution of state funds.
Selling change a challenge
Commercial and utility personal property taxes are mostly unaffected by the changes. But businesses with equipment worth less than $40,000 in taxable value — to be redefined as $80,000 in true cash value under pending legislation — also would be exempt from the personal property tax.
Samantha Harkins, the Municipal League’s state affairs director, said the organization still is asking for a few changes and lawmakers seem responsive.
“If those issues are worked out the way we think they can be, then it’s fairly innocuous,” Harkins said. “(But) educating the public on an issue like this is going to be a challenge.”
Calley said it’s also a challenge to ensure local officials understand how they can benefit.
His selling point: The use tax fund will provide a guaranteed revenue stream that’s even more reliable than the personal property tax. If a business or plant closes, for example, the local government loses all of its personal property tax revenue.
Calley is not sure local governments are giving up so much. It is rare to get substantial investment — in a new business or an expansion — without an abatement of the personal property tax, he said. Instead municipalities would get a new source of revenue along with new revenue generated by the demise of the old tax.
“When people have jobs, they’re buying homes,” Calley said. “And when commercial enterprise is growing, then you’re going to see the main part of the tax and revenue system growing.”