Columns

Tricia Kinley

Reducing the Personal Property Tax Burden

January 16, 2012

Governor Rick Snyder and Republicans in the House and Senate should be applauded for the steps they’ve taken to reinvent Michigan. Their work to reform Michigan’s complex business and income taxes sends a clear message to job providers that Michigan is a great place to do business.

Yet Michigan’s personal property tax — a tax on business equipment, machinery and utility property — remains a significant barrier to moving Michigan forward. Reforming this antiquated tax is a top priority of the Michigan Chamber of Commerce.

Personal property tax is levied generally on machinery and equipment, which is not considered real property (land and buildings), and it is primarily administered by individual local units of government. The tax in Michigan costs job providers approximately $1.2 billion per year in direct tax collections; approximately $400 million from industrial equipment, $400 million from commercial property and $400 million from utility property.

However, the indirect costs — those associated with the cost of compliance — also represent money forgone that could otherwise go to truly productive investments like increased wages, new hires and capital improvements. An Anderson Economic Group report pegged the increased costs to the private sector associated with compliance at over 35 percent of the actual tax revenue collected. And it is no surprise; the complicated nature of assessing a tax on multi-use, depreciable property, which is often inconsistently administered, does not lend itself to uniform taxation across jurisdictions, but rather numerous and costly appeals.

The State Tax Commission and Tax Tribunal are currently experiencing significant backlogs due to appeals regarding classification of property. The costs associated with compliance are not exclusive to taxpayers; local governments often report that it costs more to administer the tax than the tax generates in revenue.

Many other states, including Ohio, have eliminated this outdated tax. Their elected officials realized the burden this tax put on their largest job providers — namely manufacturers, retailers and utility providers.

Michigan legislators have debated this issue for decades without a solution. The major stumbling block has been how to make up for the revenue generated by the personal property tax. These dollars are distributed mostly to local governments (approximately $800 million) and, to a lesser extent, public schools ($400 million.) Further complicating the debate is the fact that different local governments depend on personal property tax revenue to widely varying degrees.

The Michigan Chamber recognizes this dilemma. With the tax, Michigan can’t compete for the best jobs. Without the tax, some communities may struggle to provide essential services such as trash removal, public safety and roads.

Michigan Chamber members expect and rely on essential local government services. That’s why we are carefully reviewing a number of proposals to find the best solution for Michigan. Among the possible options:

• Phase out the tax over time for all taxpayers. Providing a planned phase-out of the tax would allow local governments to adjust resources, seek efficiencies and consolidation.
• Immediately implement a reasonable threshold exemption. Approximately 80 percent of taxpayers have property valued at less than $50,000 in taxable value. For relatively little cost (estimated $70 million) most taxpayers would be alleviated from the tax. In addition, local governments would be immediately relieved from administration of the tax.
• Improve administration of the tax statewide. Providing clarity and consistency in assessing the tax would help reduce costly and time-consuming disputes and appeals.
• Allocate expiring tax credits as a source of revenue replacement. Efforts to rely less on targeted industry and company-specific tax credits potentially affords an opportunity to redirect those “unused” dollars towards general business tax relief to benefit a wide range of job providers.

All of these ideas take a responsible, measured approach to ease the burden of the personal property tax over time. Any serious proposal will identify adequate replacement revenue. The Snyder administration and House and Senate Republicans have established an excellent track record on tax reform already by putting forward well developed ideas that take into account both the need to make the state more competitive with the need to provide services.

Unfortunately, some groups are pushing policies that set us up for gridlock by demanding constitutionally guaranteed, full-funding replacement of personal property tax revenue.

Such a guarantee is bad public policy. A constitutional guarantee of appropriations would take away our legislators’ ability to make reasonable spending decisions based on economic realities. In fact, many local governments opposed a 2006 ballot proposal that would have guaranteed spending on “K-16” education. Some of their reasons then: a guarantee eliminates any accountability of spending decisions and could fund schools at the expense of local services. Yet, now local governments apparently want their services funded at the expense of education and other state priorities.

Michigan policy is finally headed in the right direction. We’ve successfully eliminated the jobs-killing Michigan Business Tax and created a simple and fair business and income tax system. The governor and legislature are moving swiftly to cut unnecessary spending at all levels of government.

Eliminating the personal property tax is a great opportunity to make Michigan a better place to create jobs. Forward-looking local governments should view this as a chance to improve their own operations and make their community ripe for job growth.


Tricia Kinley is senior director of tax and regulatory reform for the Michigan Chamber of Commerce.