Proposal 1 asks Michigan voters to weigh in on a complex tax issue
First, let's get a little griping out of the way.
Just look what your Michigan Legislature is asking you to decipher when you step into the voting booth on August 5:
There are many problems with this language.
- It doesn't mention the central issue the Legislature is trying to address: the phase out of the "personal property tax" on businesses.
- The language appears to show bias toward a "yes" vote - "modernize the tax system to help small businesses grow and create jobs in Michigan."
- It contains an inaccuracy - the state's use tax isn't capped at 6% by the constitution. The state sales tax is.
Craig Thiehl of the Citizens Research Council lays out how this confusing and inaccurate language made its way to the ballot in his post, "Huh? Why am I Voting to Modernize the Tax System?"
Thiehl points out that the Legislature bypassed the Secretary of State's office when drafting the ballot proposal. They wrote the ballot language into their legislation. The Secretary of State's office typically drafts ballot language that follows Michigan election law which states:
“The question shall be clearly written using words that have a common everyday meaning to the general public. The language used shall not create prejudice for or against the issue or proposal.”
The legislators used their words, just not words you or I understand.
Now that we got the griping out of the way, what is this proposal all about?
You're being asked to vote on a measure that represents a big change in how local governments collect revenue across the state, and in how the state shares revenue with local governments.
A "yes" vote would endorse the Legislature's plan to phase out the personal property tax in Michigan.
A "no" vote would essentially nullify the Legislature's plans, and keep the personal property tax in place.
What is "personal property tax"?
Local governments in Michigan rely on the taxes they collect to run their cities and communities. Property taxes pay for roads, police and fire, support schools, etc.
In Michigan, local governments not only collect those typical property taxes – the taxes you might pay on a house, for example – they also collect something called a "personal property tax."
That's a tax businesses pay on all kinds of equipment they might own. It could be heavy machinery for a carmaker, or a dishwasher in a restaurant.
Businesses hate it
They say it's a burdensome, confusing tax and it kills investment. They're trying to get the tax repealed.
Here's how supporters of the personal property tax phase-out put it in a TV ad:
But when lawmakers first tried to pass the phase-out, they received all kinds of opposition from local governments. Municipal leaders said taking this tax away from them would hurt the health and well-being of their communities.
And for some of communities, in areas with a lot of manufacturing, personal property taxes make up a great deal of their revenue.
In its analysis of Proposal 1, the Citizens Research Council shows which communities in Michigan rely heavily on the tax.
Addressing the concerns
To alleviate this burden that would be placed on local governments, the Legislature agreed to offset the costs by diverting some of the state's use tax back to local communities.
The state's "use tax" is not the same as the sales tax. A use tax is taxes paid on all taxable items brought into the state, and on certain services like telecommunications and hotels.
The process for shifting use tax money to local governments is complex.
For starters, it establishes a "local" (yet statewide) board that would be responsible for doling out portions of the state's use tax to local governments.
The "Local Community Stabilization Authority" would direct the use tax money back to the local governments based on a formula.
This assurance that local governments wouldn't lose massive amounts of revenue brought a lot of bi-partisan support to the issue. Rebekkah Warren, D-Ann Arbor, writes the following to her constituents:
"I am confident that this change will both update our tax structure and ensure that our communities have a stable stream of revenue into the future, all without raising taxes on our working families."
There are a lot of supporters of this ballot proposal. You can see a list of them here.
But Warren Mayor James Fouts says he's not one of them. His city, home to large GM facilities, relies heavily on the personal property tax.
From his Detroit Free Press opinion piece:
It has been our experience that businesses choose to locate and invest in communities for a variety of reasons, only one of which is low taxes. Qualified workers, excellent transportation, reliable infrastructure, dependable public services, quality schools and desirable neighborhoods are all important ingredients.
I view Proposal 1 on the August ballot as another large corporate giveaway that will result in service cutbacks and employee lay-offs by cities like Warren.
Because a chunk of the state's use tax revenue will be diverted to local communities to offset their losses, it will mean that there will less money available for other things the use tax currently pays for.
From the House Fiscal Agency's analysis:
… the legislation would represent a major shift of current revenue from state budgets to local units of government in order to provide the reduction in personal property taxes for manufacturers, small businesses, and other commercial enterprises. In other words, the use of this money for local unit reimbursement means it is not available for other purposes. Other major uses of General Fund revenue currently include the state’s Medicaid and other health care programs, Corrections spending, operational support for public universities and community colleges, human service programs, the Michigan State Police, and transportation spending.
With new taxes and expiring credits on businesses, the agency estimates the losses at $75 million to $125 million a year through fiscal year 2024/25.
So, as the House Fiscal Agency's analysis notes, the question before voters is whether this is a worthwhile way to spend the state's revenue.
If voters reject the proposal, the CRC notes that it essentially cancels the whole set of reforms and re-establishes the personal property tax.