Cutting business equipment tax will mean cuts to local governments and higher real estate taxes

May 7, 2012

The Michigan legislature will soon vote on whether to shift more of the state’s tax burden from business to households.  Last year the legislature and the governor shifted about one-and-a-half billion dollars in tax payments from small and medium sized businesses to retirees and the working poor. This year there’s a proposal to cut another business tax. That proposed tax cut could mean higher real estate taxes for homeowners and revenue cuts to local governments.

The Michigan Senate is considering a package of bills that would cut the Personal Property Tax. The term, 'Personal Property Tax,' gives the wrong impression to most people. It’s a tax on much of the equipment manufacturers, commercial companies and other businesses need to operate.

Mike Johnston is the Vice President of Government Affairs for the Michigan Manufacturers Association. He says most Great Lakes states don’t have a personal property tax, so it puts Michigan companies at a competitive disadvantage.

“Michigan has a very high rate and remains on the books. So, equipment we’ve had, some company may have had since the 1940s has been paying annually on that equipment even though the value of it’s been depreciated decades ago.”

Most of the people familiar with the tax say it’s a disincentive to expand business in Michigan. They say eliminating much of this business tax will help the Michigan economy.

The problem is this: local governments rely on the tax, some more than others. If there’s a big factory in your town, a good deal of the city’s revenue might come from the personal property tax. If it’s eliminated, it could hurt city services, schools, libraries and so on.

Summer Minnick is the Director of State Affairs with the Michigan Municipal League.

“There are really only two choices. We can either go the voters and try to raise taxes or they’re going to eliminate services because we have a lot of cities in this state who are at their millage cap. They can’t, even if they wanted to or if the voters were willing, they can’t even ask for more revenue.”

And some of these local governments borrowed money from Wall Street bankers. They took at loans through bonded indebtedness to build new schools or fire stations or other big projects. Those bonds are backed by tax revenue. If the Personal Property Tax is part of that revenue and it disappears, the millage rate will go up automatically.

“So, many homeowners around the state, starting next year, will see tax increases because of school bonds, library bonds and other debt.”

The lawmakers who support eliminating the Personal Property Tax say the local governments can absorb the cuts if they operate more efficiently.

Senate Majority Leader Randy Richardville, a Republican from Monroe, told Michigan Public Radio Network it’s all about better management at the local level.

“The reason that some of the municipalities and some of the school boards and school districts are in the kind of financial situation they’re in and need emergency financial managers and have unfunded liabilities, etcetera, etcetera is because of poor management decisions for the past couple of decades,” said Senator Richardville.

Summer Minnick with the Michigan Municipal League sees it differently.

“That’s an absolute fallacy.”

She says local governments are in trouble because real estate tax revenue is down and because the state has cut back the amount of money it shares with municipalities.

"For ten years the state has helped solve its own problems and balance its own budget to the tune of over $5 billion that was short-changed to local communities. So, quite frankly, our members, cities, villages in the state have been cutting, consolidating and cooperating to an extent greater than we ever seen because the state has chosen to use that use that money for their own budget rather than send it down to the local communities and their citizens.”

But in an interview with Michigan Watch last fall, Senator Richardville said a lot more can be done to reduce the cost of local government.

“But, I think we’re going to have to step back and take a look and say maybe we don’t quite as many cities, quite as many villages, quite as many townships, at least not in the same structure there are today.”

So, some cities just disappear, merging with a neighbor; school districts consolidate.  Fewer local governmental entities, using fewer resources.  

And the lawmakers who back this legislation to end these business taxes say they’ve got a plan to replace some of the Personal Property Tax income that local governments will lose. They’ll use increased tax revenue as business tax breaks are phased out in future years.

There’s a problem there too.

“Who knows if a future legislature will ever really replace it down the road?”

That’s Ken Sikkema. He’s a senior policy fellow at Public Sector Consultants and the former Senate Majority leader, and a Republican. He spoke to Michigan Radio’s Jennifer White about the legislation.

He says this package of bills to eliminate the Personal Property Tax for businesses in Michigan is really complicated.

“Very cumbersome at best. They phase it out over time; they try to create a replacement fund that may or may not be there years down the road; it puts a tremendous administrative headache on the Department of Treasury to calculate every year how much each of these municipalities has actually lost. Treasury then has to then supposedly reimburse them. As this has been a hard tax to collect and audit with high compliance costs, it’s also going to be administratively hard to phase it out and try to partially replace it the way they envision it."

If local governments do get partial replacement of the lost revenue in the future, it will still mean further cuts in city services. Police and fire protection, schools, and libraries could all be targets. It will also mean higher real estate taxes for some homeowners.

Mike Johnston with the Michigan Manufacturers Association says you have to look at the big picture. Eliminating this tax on businesses will be good for the overall economy of the state.

“What we’re trying to do is eliminate the barrier to investment. And we believe that locals will be reimbursed and will benefit from having removed this barrier because Michigan will attract more investment. And, by the way, those investments come to local communities.”

Observers in Lansing believe the Senate will pass the legislation soon. The House might put off a vote. With elections this fall, House members might not want to risk the perception that the tax burden is being shifted from big business to homeowners. But, after the elections, during the lame duck session, there’s a fair chance the House then will go ahead and pass the bills that will eliminate the Personal Property Tax.