Several Republican Senators introduced in February two bills that would eliminate the tax. The debate then picked up steam in recent months, sending many local and school administrators into a panic.
Despite its name, the tax applies only to businesses and property owned by householders, schools, charities and scientific institutions is exempt, according to a report by the Senate Fiscal Agency. It is levied on items like machinery, equipment and even office furniture, but excludes buildings and land. The tax applies to both old and new equipment, but the rate is calculated based on acquisition cost minus depreciation.
Michigan is not alone in taxing personal property, since only 10 states exempt it entirely from property taxes. Many of these 10, however, are in the Great Lakes area, including Ohio, Illinois and New York. Illinois ended the tax out in 1979 and replaced the lost revenue with an income tax on businesses. Ohio phased out the tax two years ago, but without any guaranteed revenue replacement source.
As a whole, Michigan's personal property tax brought in about $1.2 billion in 2010. The money is mostly distributed to local units of government near the business where the money originated. Therefore, urban units generally depend much more heavily on the tax, since a plethora of taxed businesses exist nearby, while rural districts are somewhat less reliant. Overall, cities, townships and counties gained about $456.9 million in 2010, which is about 35.5 percent of all personal property taxes brought in across the state.
In addition, K-12 schools received nearly $225.7 million in 2010, according to the Senate Fiscal Agency. Cutting the personal property tax would not necessarily mean schools would suffer a $225.7 million hit, however. Since the state maintains per-pupil funding guarantees, the $225.7 million contributes to the state's obligation, lessening the amount of money it has to remove from the School Aid Fund to pay for education. The eventual fall out effect on schools still is indeterminate.
As a general rule, many lawmakers and business owners view the personal property tax unfavorably. It is akin to private citizens being taxed on their couch, bed and dining room table, which is a strange concept. However, since the tax provided about $1.2 billion to local units, it is here that the debate enters.
Local governments already faced numerous cuts in revenue sharing in recent years, and many administrators say their municipalities could not survive a hit that totals upward of 50 percent of the budget. Police and fire departments, libraries, schools, future investment and debt repayment all would face the ax, they warn. Although some, of course, believe the personal property tax should not be removed at all, many others advocate for the funds to be replaced in the event of its revocation.
However, no one seems to have much of an idea of how to replace such a significant chunk of change in a teetering state economy. Gov. Rick Snyder, who has crusaded the state effort to create a tax structure advantageous to businesses, has made it clear personal property tax reform is on his agenda. He told the AnnArbor.com editorial board in September that he believes the tax to be generally unpopular.
"It causes a lot of capital misallocations and is not something that's conducive to job growth," he said.
Snyder also acknowledges the problem presented by such drastic cuts to local units of government. He repeatedly has said the reform could take upward of a decade to accomplish satisfactorily, and it will require a constant dialogue between all players to find the best solution.
The governor has not, however, said he only will cut the tax if he can find the funds to replace it, a commitment for which opponents have pushed.
Finding a way to replace the funds would be the best solution, but it might be a luxury, Sen. Mike Green, R-Mayville told the Port Huron Times Herald. Green co-sponsored two Senate bills to eliminate or reduce the tax.
"I'd like to see it replaced 100 percent, and I'd like to see it done without affecting any of our budget," Green said. "But I can't guarantee that that's the direction that we're going to go."
So far, neither side has floated a concrete plan for how to replace the lost revenue. The issue seems to have stalled for both sides until a mutually agreeable solution can be found.
The Bay City Times Editorial Board. "Our View: Sure, get rid of despised personal property taxes, but only if their money is replaced." 25 Sept. 2011.
Lane, Amy. "Forces muster to protect revenue in personal property tax debate." Crain's Detroit Business. 8 September 2011.
Mattera, Julianne. "Tax changes blow ill wind." Port Huron Times Herald. 20 Nov. 2011
Stanton, Ryan J. "Gov. Rick Snyder: Personal property tax reform in Michigan could take 5 to 10 years." AnnArbor.com. 19 September 2011.
Zin, David. "The State and Local Impact of Property Taxes Levied On Michigan Personal Property." Senate Fiscal Agency. Sept. 2011.
Continuing in their quest to reform Michigan's tax code, many Republican lawmakers recently have been debating the elimination of the state's personal property tax.