Proposal 1 aims to replace potential loss of revenue for municipalities
Published July 24, 2014
METRO DETROIT — Alongside Democratic and Republican challengers for the November election, voters will decide the fate of a statewide proposal Aug. 5 to compensate local governments for the potential loss of personal property tax revenue.
If approved, Proposal 1 would take a portion of revenue from the use tax — a 6 percent tax that the state already collects and that is similar to the sales tax — and divert a portion of it back to local governments. The proposal would simultaneously phase out the personal property tax, which provides an essential revenue stream for some municipalities across Michigan.
Local governments collect personal property tax on a depreciating scale on businesses’ industrial and commercial equipment.
Eric Lupher, research director for the Citizens Research Council of Michigan, said that Proposal 1 intends to ensure that municipalities would be compensated for the loss of personal property tax collections.
“The intent is to fully reimburse local governments,” Lupher said.
For some cities in Michigan, the collection of the personal property tax accounts for more than half of their property tax revenue.
For example, 70 percent of property taxes in 2013 brought in by Carson City, located in the central part of the Lower Peninsula, came from personal property, according to CRCM.
In 2012, a new law set into motion the eventual phasing out of the personal property tax throughout the next 10 years. Businesses with less than $40,000 in taxable value assets became exempt Jan. 1, 2014.
Organizations representing local governments in Lansing pushed the Legislature to come up with a replacement revenue stream for municipalities.
“We’ve been saying all along if you phase out the personal property tax, you have to give a full replacement for it,” said Matt Bach, the director of media relations for the Michigan Municipal League.
At the beginning of this year, the Legislature amended the 2012 law with a series of bills that would divert a portion of the use tax back to local governments. Because it represents a significant change to tax law, the Michigan Constitution requires that voters approve the change. Thus, if the proposal fails to pass, the property tax phaseout will be repealed — including the exemptions that were scheduled to begin this year.
The concern of the Michigan Municipal League is that if the proposal fails, the Michigan Legislature will simply approve another bill getting rid of the personal property tax.
“We fear that if it goes down, this lame-duck session, they could do it again,” Bach said.
The proposal has its skeptics. Royal Oak City Manager Don Johnson is one of them.
“The problem from my perspective is we’ve seen this kind of promise before, and the state has never kept it,” Johnson said.
As one example, Johnson pointed to revenue sharing from the state to municipalities, which has been on the decline. He doubts the state will uphold its end of the deal if Proposal 1 were to pass.
Bach argues that the proposal would establish a Local Community Stabilization Authority that would not be part of the Legislature’s annual budget process. Revenue sharing is part of the annual budget process.
“It’s a step removed from that,” Bach said. “It’s better (than revenue sharing) in that it does not involve appropriations by the Legislature.”
But as a Citizens Research Council report on Proposal 1 highlights, it does nothing to prevent future lawmakers from changing that aspect of it.
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