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The state Senate recently passed bills that deal with exempting data centers from the sales and use taxes as well as the personal property tax. While most of the discussion has been about the effect on economic activity, in particular whether the tax reductions will advance economic activity in Michigan, it is useful to examine the fundamental theory of the sales taxes and whether the property tax exemption is consistent with current policy.

The General Sales Tax Act was passed in 1933 and the Use Tax Act in 1937. The Sales Tax Act states that it is a tax on the right to make retail sales in Michigan. As such the tax should not generally tax goods that are used to produce other goods. The act has several exemptions from the tax, one of which is goods used in industrial processing. The idea is that the tax is on consumption, not production, so one would not tax the sale of a drill press, for example, since the drill press is used to produce goods that are sold at retail.

The use tax is connected to the sales tax in that it was passed once the Legislature began to figure out that if a good were purchased in another state and brought into Michigan the purchaser could successfully avoid the Michigan sales tax and this would put Michigan retailers at a disadvantage. Thus the use tax should tax goods that were sold at retail in another state and then brought into Michigan in order to be consumed here.

Property purchased by a data center is not used for consumption. The data centers do not consume the goods for enjoyment. They purchase property in order to produce a good or service that is consumed by someone else. Thus, it is not inconsistent with the theory of a sales and use tax to exempt property purchased by data centers.

Similarly, Michigan already exempts personal property of industrial manufacturers. There were probably a number of reasons for this exemption to be passed. It would not be inconsistent with current tax policy to exempt personal property of data centers from the personal property tax since it is used for the production of services in much the same way that property used in industry is used to produce other goods.

While one may speculate on the degree of economic effects of the legislation, by reducing what economists call the marginal cost of production there will be additional economic output in Michigan due to the exemptions. There can certainly be disagreements about the degree of the effect. But the bills should not be read as a special exemption, but rather as something consistent with current tax policy.

Gary Wolfram is a professor of economics and public policy at Hillsdale College.

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