The poison-pill politics of the personal property tax

Michigan residents trust local government far more than they do state government, according to the latest survey released Wednesday by Michigan State University’s Institute for Public Policy and Social Research. Nearly twice as many say they seldom or never trust state government than those who say they seldom or never trust local government.

Municipal employees pick up your trash, sweep your neighborhood street, collect your ballot on Election Day, assess your house, inspect that the new water heater was installed correctly and park a patrol car in your kid's school zone to keep traffic speeds in check.

If you renew your vehicle registration by mail, keep under 80 mph on the interstate and don’t visit a Michigan state park, you are unlikely to encounter a state employee. State government is an abstraction to some; a waste or a critical safety net provider to others.

What it has proven not to be is a reliable partner. Be it revenue sharing, road funding, even fire protection for major state-owned facilities, the state government, during a decade of plummeting local property values, has reneged.

Gov. Rick Snyder’s 2013 budget departs little from past practice in recommending that cities, villages and townships receive $361 million in statutory revenue sharing, instead of the $1 billion the law calls for. Municipalities received $3 million less in PA 51 street funding -- $326 million -- in FY 2011 than they did in 2001 because lawmakers have refused to consider raising gas taxes and registration fees.

Though there is widespread agreement that the personal property tax is difficult to administer and that its application on industrial equipment makes the state less competitive with its neighbors, the question always has been how seriously lawmakers would handle the revenue loss side of the equation.

Cutting taxes is easy; paying for them is hard. Two decades ago, eliminating the property tax as a primary revenue source for K-12 schools required a year of negotiation and two statewide elections to secure legislative and voter approval for the replacement revenue.

The PPT reduction package wipes out the tax on commercial and industrial equipment with a taxable value of less than $40,000. It creates a new category of manufacturing equipment that will be exempt from all PPT effective in 2016. But, as it cleared Senate Finance Committee on May 2, it contained few assurances that local governments would be reimbursed for the revenue loss.

Faced with complaints from angry mayors across the state, Senate Republicans short of votes for passage were forced to tighten it up.

Lost personal property tax revenue that exceeds 2 percent of a local unit’s total “general fund” would be eligible for reimbursement by the state. PPT revenue loss that's less than 2 percent of a local's general fund revenue would not be replaced by the state. That's better than the introduced version and it means that more local units would qualify for cash back. How much back remains unclear. Before lawmakers take another vote, it only makes sense that the specific impact of the plan on each community be available. That wasn't the case during Senate deliberations.

Whatever the reimbursement, municipal budgets would take an overall operating revenue haircut of as much as 2 percent. Now a growing economy would ordinarily help offset local revenue loss from the business tax cut, but Proposal A's constitutional cap will restrain real property tax collection growth for years to come.

As amended on the Senate floor, reimbursement would begin in 2013, instead of 2016. Mindful of last year’s big shift in tax burden from Michigan business taxpayers to individual personal income tax filers, stronger guarantees are in place to prevent automatic increases in local debt millages on homeowners to compensate for reduced PPT collections.

That’s if the package delivers on its assumption the state will annually reimburse local units. The overhaul still neither earmarks where the money to fill that fund would come from and, like any law, lacks the authority to dictate to a future Legislature that money be appropriated towards it.

Legislative intent language identifies expiring alternative energy and other business tax credits as a revenue source for the Department of Treasury's new PPT reimbursement fund. Treasury calculates the value of those expiring credits to be $137 million in FY 2016, of which $57 million would be needed to pay the locals. But that $137 million, which is estimated to balloon to more than $300 million by FY 2020, represents additional revenue to state coffers, not the expiration of an existing appropriation. An economic downturn that depresses overall business tax collection means the additional money wouldn't necessarily exist at all.

The so-called “poison pill” amendment added on the Senate floor does present future lawmakers a painful choice. They can fulfill the obligations made by the 96th Legislature to local governments. Or they can anger every small business in the state with a reinstatement of the personal property tax and the administrative headache that would entail. Once you pull a tax out by the roots as the Legislature did with the MBT, and would be the case with the PPT for most firms, it's pretty tough to replant it.

So a third alternative for, say, the 99th Legislature, would be to simply excise that poison pill, 31 words, out of the law. Problem solved. Excuse municipal officials when they say they've seen that movie before.

Peter Luke was a Lansing correspondent for Booth Newspapers for nearly 25 years, writing a weekly column for most of that time with a concentration on budget, tax and economic development policy issues. He is a graduate of Central Michigan University.