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    A bill currently making its way through the Michigan Senate would accelerate the implementation of the sales tax on the difference for new vehicles and watercraft. SB 754 [1] would modify existing legislation by increasing the maximum possible exemption for trade-in vehicles, as well as increase the growth rate of that exemption. 

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    The current law, PA 234 of 2013, was enacted just this last December. The law established a sales tax on the difference between the trade-in value and purchase price for new motor vehicles and watercraft. This delivered long-sought reform, as Michigan was one of only 6 states still levying a sales tax on the entire purchase price of new vehicles regardless of the value of a trade-in. The exemption – the trade-in value deducted from the purchase price - was initially limited to $2,000. This maximum was scheduled to increase by $500 each year beginning in 2015 and become unlimited after the maximum reached $14,000. [2]

    For the consumer, this meant not having to pay Michigan’s 6 percent sales tax on up to $2,000 of the purchase price, saving them a maximum of $120 the first year and $30 each year the maximum increased. [3] 

    The newly proposed legislation, SB 754, accelerates the implementation and growth of the maximum exemption. The maximum would remain at $2,000 through 2014, but jump to $5,000 in 2015 and subsequently increases by $1,000 annually. [2]

    The bill was reported favorably without amendment by the Finance Committee in late February and now awaits a full vote by the Senate. Given that the bill’s predecessor, PA 234, passed unanimously in the Senate and with near unanimous support in the House last year [4], SB 754 seems likely to pass. 

    The main appeal of the proposed legislation is that it greatly increases consumer incentives. The existing law provides possible tax savings for individuals as well as businesses, but these savings are seemingly small and grow relatively slowly. Currently, the maximum exemption will not become unrestricted until 2039. Conversely, exemptions would be unrestricted by 2025 in the new legislation. By doubling the growth rate of the maximum exemption, SB 754 would increase the incentive’s effectiveness and perhaps create a growth in consumer and business spending. [5] 

    While the proposed legislation increases consumer incentives toward buying new vehicles, it also reduces the sales tax revenue the treasury can expect to collect. According to the Senate Fiscal Agency report [5], the expected strain on state revenue was a main reason for building the gradual increases into the original law. By doing away with the slow, steady exemption hikes, the new bill would increase volatility to state revenues. The Senate Fiscal Agency [6] estimates that revenue losses will be nearly $24 million in the first year alone, and could increase to above $38 million by 2017. 

    Considering the advantages and disadvantages of this bill, I believe the bill in current form might be too much of an adjustment. There might instead be an ideal middle ground. Increasing the maximum trade-in credit, but by less than what is currently called for, increases consumer incentives but does not create as big a potential for lost revenue. 

    Looking at the incentives, the current law will increase the potential tax break by $30 per year. This seems insignificant next to the total price of a new vehicle. Any increase in this rate should spark more purchases. 

    Having said that, too big an increase potentially causes large declines in sales tax revenue. Theses losses would hurt primarily the School Aid Fund and the Comprehensive Transportation Fund [6]. Currently, the budget allocated $20 million to absorb this cost. However, the costs in lost revenue are projected to eventually reach more than $200 million. [3]

    Weighing the benefits against the costs, and also considering that the actual effects of these new tax credits are yet to be fully understood, it could be rash to immediately double the maximum exemption.  A reasonable, more responsible policy is to increase growth of the exemption rate by a half or less. An increase of this magnitude still enhances incentives driving new vehicle sales, but also takes the state’s fiscal future into account.

    It appears unlikely the Senate will amend SB 754. However, there is ample opportunity to amend the bill when, or if, the legislation reaches the House. Should the House pass a version of the bill with less extreme increases of maximum exemption, the Senate might be forced to compromise.

    References:

    [1] Senate Bill No. 754. Michigan Legislature. 2014. http://www.legislature.mi.gov/documents/2013-2014/billintroduced/Senate/htm/2014-SIB-0754.htm

    [2] Senate Finance Oks Expanded Sales Tax On Difference, Tax Compromise. Gongwer News Service, 53 (29) 8. http://www.gongwer.com/programming/news.cfm?article_ID=530290108#sthash.1jZPR9y1.dpbs

    [3] Michigan Gov. Rick Snyder signs tax break for car, boat buyers with trade-in: ‘They deserve it’. Jonathoan Oosting. MLive, 11-6-13. http://www.mlive.com/politics/index.ssf/2013/11/michigan_gov_rick_snyder_signs_9.html

    [4] Use Tax Difference. Gongwer News Service. 2013. http://www.gongwer.com/programming/legislation_billdetail.cfm?billid=2013SB9001

     [5] Arguments. Suzanne Lowe. Michigan Legislature. 2014. http://www.legislature.mi.gov/documents/2013-2014/billanalysis/Senate/htm/2013-SFA-0754-A.htm

    [6] Fiscal Impact. David Zin. Michigan Legislature. 2014. http://www.legislature.mi.gov/documents/2013-2014/billanalysis/Senate/htm/2013-SFA-0754-A.htm

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    The Michigan Policy Network is a student-led public education and research program to report and organize news and information about the political process surrounding Michigan state policy issues. It is run out of the Department of Political Science at Michigan State University, with participation by students from the College of Social Science, the College of Communication, and James Madison College. 

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