What does Michigan’s Proposal 1 mean for businesses and communities?
In the August primary, Michigan voters will be asked to decide on Proposal 1 of 2014 that repeals the business personal property tax and directs part of the current state use tax monies to reimburse communities.
In an effort to make Michigan a more business-friendly state, different options have been considered to reduce the taxes paid by businesses. Currently, businesses pay an annual personal property tax (PPT) on the value of their commercial and industrial personal property such as furniture, computers and equipment to the local unit of government where the business is located. Advocates of PPT reform believe that the current business tax structure discourages business investment, expansion and job creation because business is being taxed twice – through the state sales tax and PPT. However, many local communities rely on the business PPT as a significant source of revenue to support services in their community. If these taxes are repealed or changed, how would these local revenues be replaced? (For background on the PPT, see this 2011 memo from David Zin of the Senate Fiscal Agency).
Proposal 1 of 2014 (also known as PA 80) is the resulting compromise between state policymakers, local governments and business to reduce business taxes on businesses while protecting local government revenue sources.
This act would take the existing state use tax and redirect a portion of it to create a new local tax. Currently, the six percent state use tax is divided into four percent going into the state’s general fund and two percent earmarked for schools as part of the 1994 Proposal A school finance reform. The two percent for schools does NOT change. Proposal 1 only impacts the four percent state general fund portion, PA 80 calls for the current four percent of the state use tax to be divided into two new separate taxes:
- A local community stabilization tax that will be distributed back to local governments in the amount lost from the repeal of the PPT.
- A state share tax that would continue to go into the state’s general fund
This act also adopts the Local Community Stabilization Authority (LCSA), which was created under PA 86 of 2014. The LCSA would consist of five-member council appointed by the Governor with two specific purposes:
- To administer and distribute the local community stabilization tax portion revenues back to the local governments, and
- To exercise the duties of the former Metropolitan Extension Telecommunications Right-of-Way Oversight Authority that was transferred to the LCSA as part of the PPT legislation.
The LCSA is defined as a local unit of government; however, its boundaries encompass the entire state instead of a specific geographic area within the state. The Authority would be prohibited from raising taxes.
Because Proposal 1 is converting a portion of the state use tax and creating a new local tax, certain constitutional requirements (known as the “Headlee Amendments”) must be met. “Headlee” was enacted to limit additional local taxes by government without a vote of the people. Because this LCS share tax is considered a new local tax, it must be voted on by the people. And since the Authority is bound by the entire state, the entire state must approve or reject PA 80.
Not all local governments may come out ahead under this new formula, but Economic analysis from the Senate Fiscal Agency of Public Act 80 (Senate Bills 821-830) estimates that, on the whole, local units of government would be expected to increase their revenue by $45.1 million in 2015, increasing to an estimated $111 million by 2027-28. School districts, both local and intermediate, are not likely to be affected by the change. However, some townships and villages will likely lose overall revenue in 2014 and 2015, as the Act does not provide reimbursement for losses under a small taxpayer exemption.
The largest loser is likely to be the State’s General Fund. Reducing the revenue going into the Fund would mean less money for other state agencies and services in the future. To address this, legislative intent language in Public Act 80 states that the legislature is committed to making up for future General Fund losses through appropriating revenue from expiring business tax credits.
If approved, the PPT changes will occur on January 1, 2015 and local revenue replacement will be implemented as outlined in the legislation. If Proposal 1 fails in August, all of the PPT reforms will be repealed (some were previously passed by the legislature contingent on Proposal 1 passage) and business taxes would remain the same as they have been.
For information on Proposal 1 of 2014, visit the Citizens Research Council