For at least the third time in the last year, Michigan Senate Republicans have introduced legislation that would phase out, if not eliminate altogether, the state’s personal property tax (PPT) — a tax paid by businesses on their various equipment, including everything from furniture and computers to factory machines and research lab equipment. In early February after the introduction of different PPT reform legislation, we acknowledged the need to nix the tax that many claim is a business expansion and retooling killer, but asked that local governments be reimbursed in some way for the loss of PPT revenue. Therefore, we’re relieved to see the latest PPT reform proposal — a beefy package of eight separate bills — includes a local government reimbursement component, albeit partial reimbursement. This new legislation represents a better starting point for a comprehensive dialogue on getting rid of the PPT.
In a legislative package unveiled last week, the upper chamber’s GOP Caucus is proposing to eliminate on Dec. 31 the PPT for commercial or industrial businesses that have personal property valued at less than $40,000, thereby eliminating between 75 and 80 percent of the PPT filings, according to Republicans.
Under the package, eligible manufacturing personal property bought after Dec. 31 would not be taxable beginning Dec. 31, 2015. Also on that date, any personal property 10-years-old or older would no longer be taxed, an exemption that will continue until all personal property is exempt.
Legislative analysts say the proposal, consisting of Senate Bills (SBs) 1065 through 1072, would set back state and local property tax revenues significantly: Roughly an $840 million loss 10 years from now. But the GOP plan has a mechanism in place to shore up those losses for local units of government — a reimbursement fund administered by the state Department of Treasury that would begin receiving annual appropriations from the state Legislature based on estimated revenue losses. The department would estimate PPT revenue losses in excess of 2 percent of total local unit revenue, legislative analysts say, meaning that local units of government that receive less than 2 percent of their revenue from the PPT would receive no reimbursement. That figure for distressed local governments is 1 percent.
According to state Sen. Jack Brandenburg (R-Harrison Township), a sponsor of two bills in the new PPT package, the legislation won’t cut businesses taxes at the expense of individual taxpayers, since some of the tax reform provisions are timed to coincide with the expiration of exiting Michigan Economic Growth Authority battery industry tax credits. That means firms with those tax credits will begin paying more in taxes to the state at the same time PPT exemptions begin to kick in.
Many argue that axing the PPT will remove an onerous financial liability for companies looking to expand or invest in new equipment. They note that business sometimes hold off on buying new equipment since they would pay more PPT each year on upgraded equipment. That can stymie business upgrades and even ventures into new industries.
Yet, local governments and schools have been concerned about another loss of revenue, given years of declining revenues from taxes on real property (actual land and any structures or fixtures permanently affixed to land).
According to state Sen. David Robertson (R-Waterford), 89 percent of the revenue lost by local units of government through the new Senate legislation would be reimbursed, although a distribution formula for reimbursements has yet to be developed.
Not surprising, Senate Democrats have railed against the GOP package as one that would whack nearly $1 billion from local governments, including schools and police departments.
The new legislation is being deliberated in the state Senate Finance Committee, which Brandenburg chairs.
Overall, Senate Republicans’ latest PPT package sounds much more promising and reasonable than previous proposals, specifically because of the reimbursement provisions. However, we remain leery of the negative impact the legislation could have on local governments, including public schools, which rely on PPT collections.
If Robertson’s citation of reimbursing most local units for 89 percent of their lost revenue holds true, that’s far better than flat out eliminating the tax and providing no level of reimbursement. If that’s not going to be the case, then lawmakers should get back to work to find a way to replace most, if not all the PPT revenue that local governments and schools desperately need.
While we know it may be a longshot in an election year, lawmakers from both sides of the political aisle and representatives of municipal governments and schools should immediately engage in a thorough discussion on the latest PPT package. A change this fundamental should be the focus of exhaustive debate and analysis, including an eye toward ensuring local governments and schools aren’t devastated by any enacted change.