The arguments for and against Michigan’s Proposal 1

Those of you voting in Michigan today will be confronted by a terribly confusing ballot item called Proposal 1, or the Michigan Use Tax and Community Stabilization Share. Boiled down to its essentials, the legislation, if passed, would phase out the Personal Property Tax (PPT) currently paid on industrial and commercial personal property, and shuffle around other tax revenues in order to fill the gap for Michigan’s struggling cities, who presently depend on the PPT for a significant part of their operating budgets. (Michigan’s business community has been trying to kill the PPT for years.)

The PPT, as it’s currently structured, is essentially a tax on business equipment. Generally speaking, businesses in Michigan pay taxes when they buy equipment, and then continue to pay an annual tax (the PPT) on said equipment for as long as it has value. The result, we’re told, is that businesses are, in many cases, dissuaded from making significant capital investments in the state, making us less competitive. Furthermore, as I understand it, it is an expensive tax to account for and collect. At the same time, though, the PPT, as noted earlier, is a primary source of income for Michigan’s chronically underfunded, and increasingly failing cities. (All of the revenue from the tax, as I understand it, presently goes to local governments.)

If we collectively decide to eliminate the PPT today and pass Proposal 1, we’re told that Michigan’s cities won’t take a financial hit. Instead of collecting PPT from businesses within their borders, our cities, they say, will be given a share of what the state collects in what is called Use Tax. Here with more is a clip from the website Democracy Tree:

…Lawmakers want to repeal the PPT and replace it with a more reliable revenue stream for local governments from the 6 percent State Use Tax — not to be confused with Michigan’s sales tax. The state describes the use tax this way:

“The use tax is a companion tax to the sales tax. Use tax of 6% must be paid on the total price (including shipping and handling charges) of all taxable items brought into Michigan or purchases by mail from out-of-state retailers. Credit is given for tax paid to another state. Use tax is also applied to certain services such as telecommunications and hotel/motel accommodations.”

Use tax revenues are more than double those collected from the PPT. One-third of the use tax goes directly to the School Aid Fund, with the remainder sent to the state’s general fund. The plan is to re-allocate a portion of those general fund revenues back to local units of government, and possibly short-change other state budget priorities, say roads, as an example…

It’s a confusing issue to be sure. On one hand I do feel as though we need to reform tax policy in such a way that we’re incentivizing business owners to invest in Michigan, and build thriving, competitive, sate-of-the-art companies here. On the other, though, I don’t trust folks in Lansing to stay true to their word that, once the PPT is gone, new sources of revenue will flow into cities to compensate, not just now, but in the future. As you’ll recall, they said the same thing decades ago about state revenue sharing, and we saw how that worked out.

So, I think it’s safe to say that I’m conflicted. I want to vote yes, as I don’t like the PPT as it currently stands, but I just don’t believe, when push comes to shove, that folks in Lansing will make good on their promise to reallocate money brought in via the Use Tax. And I think, based on what I’m reading from others, that I’m not alone. With that said, there’s a very real chance that, if Proposal 1 doesn’t pass today, that Republicans in Lansing will kill the PPT anyway, and leave us in an even worse position than in Proposal 1 had passed. Either way we vote, it’s a gamble.

Proposal-1-Press-Conference-Oakland-County-June-2014-Brooks-Patterson-Barry-Brickner-16-edited-smallTo be honest, I was on the fence about the legislation until I saw the ad campaign in support of it. Looking at the materials I’ve received in the mail, and the ads I’ve seen in support of it, I can’t help but think that we’re being hustled. It’s not being presented as yet another tax break for businesses, which is what it is, but as a way to ensure “strong and safe” communities. And, guess what? According to the campaign, we can do it for free! That’s right, it’s a “win, win.” We can have stronger, safer communities, and it won’t cost us a dime. All we have to do is let businesses off the hook… As the commercial says, by voting yes, we can “help small businesses and create 15,000 new jobs… without raising taxes!” It reads like something straight out of the ALEC playbook.

And if you believe, in a state where we already don’t have enough money to fix the roads, that we’ve got the wherewithal to keep our crumbling cities afloat after eliminating one of their biggest sources of revenue, without raising money elsewhere, I think you’re more optimistic than I am.

But, admittedly, I’m not well versed on tax policy. And, for that reason, I’d like to pass along the following statements made by several people in our community over the past few weeks concerning Proposal 1. I tried, as best as possible, to find people on both side of the issue, and I feel as though I’ve done a pretty good job of it… Let me know what you think… Hopefully you have a better sense of the proposal once you finish this.

STATE REPRESENTATIVE JEFF IRWIN: NO

…My opinion is that the tax ought to be reformed (although we could do better than Prop 1). The business community has been clamoring for this tax to be reformed or repealed for years.

So, the legislature passed a bunch of bills designed to repeal the PPT and replace that revenue with two sources: a new, simpler tax on businesses, and a reassignment of general fund revenues to fill the balance of the hole created by PPT repeal. Proposal 1 is the linchpin of that bill package. If Proposal 1 goes down, Michigan’s tax policy is unchanged and the PPT lives on in its current form.

The net effect of these changes – If Prop 1 passes – is that the business community will pay less tax, the state general fund will pick up the difference and local governments receive good assurances that their revenue will be protected for the near future. The estimated impact of the losses to the general fund are $100M in the first year and $500M/year in ten years. That means less money to pay for schools, roads, health care, environmental protection, assisting the poor or tax relief for one of more sectors of the economy. Whatever the legislature would have spent those dollars on will be lost to pay for the tax cut embedded in Proposal 1.

There are reasons to vote yes for Prop 1 and many Democratic elected officials are supporting this measure because they believe it is the least bad option. There are credible concerns that legislative Republicans will jam through a worse PPT repeal if this one fails. In fact, the original PPT proposal was worse, a key component of their strategy to offer death and then encourage the victims to settle for dismemberment. Also, the arguments to redesign this tax are genuinely strong. Nobody would design the tax in this way if we were starting from scratch.

Personally, I’m voting no. I’ve had enough of the trickle down economics of this administration. It’s bad for our future prosperity and leads to greater economic inequality. Tax policy that benefits the wealthy and sends the bill to the working class has been a consistent failure in Michigan and the United States and I know that PPT can be reformed without doubling down on regressive tax strategies.

MICHIGAN RADIO’S JACK LESENBERRY: YES

…There is a very important proposal on the ballot – Proposal 1 — that everybody agrees voters need to pass. It has the strong support of everyone from solidly Republican Chambers of Commerce to liberals like State Senate Minority Leader Gretchen Whitmer…

What Proposal 1 would do is abolish this, and instead compensate communities by giving them a stable share of the state use tax, which is levied on things like hotel rooms and rented cars.

Two years from now, large manufacturers would begin paying an assessment to replace some of the lost revenue to the state. Small businesses, however, wouldn’t pay it, meaning Proposal 1 amounts to about a half a billion dollar tax cut for them.

The state would recover the rest of the lost revenue by allowing some business tax credits to expire. Basically, everyone wins.

The state doesn’t lose money; community revenue would be more secure, and small business has more reason to expand.

That is, if voters say yes. When people don’t understand ballot proposals, they tend to vote ‘no,’ which is normally a sensible reaction.

However, in this case, it would be an economic setback. We need to hope that Proposal 1 passes

ECLECTABLOG’S CHRIS SAVAGE: NO

I will be voting NO on Proposal 1. While it may be our best chance to eliminate the PPT without causing undo harm to local municipalities and schools given our current legislature, I am a hopeless optimist and believe that the complexion of our state legislature will become bluer in time as Republicans are replaced by voters who are unhappy with how they are running our state into the ground.

If we want real tax reform in this state, it must be done in a more holistic and comprehensive way. This proposal seems haphazard and piecemeal and I trust Democrats far more than our current cohort of lawmakers to do the right thing in the future. I am also distrustful of the way that the Proposal ensures local governments will be held harmless. There is a real possibility that, over time, they will be hit much harder than proponents promise. Even Democrats might find themselves in a position, as they have in the past, of having to balance the state budget on the backs of local municipalities if the economy takes another nose dive like the one we saw in 2006-2008.

That said, I admit that it’s risky. If Proposal 1 is voted down and the GOP remains in control of our state government, there is a good chance that they will simply eliminate the PPT without protecting local governments and that would be much worse.

I’m counting on our voters to restore our state government to the control of people who don’t see continuous lowering of taxes on businesses as the cure-all for all of our problems.

FORMER YPSI CITY PLANNER RICHARD MURPHY: YES

Proposal 1, on tomorrow’s ballot, is one of the most confusingly-written things I’ve seen in a long time, and is in no way perfect. But, to paraphrase a friend, “I once wrote a perfect piece of legislation. Then I put it in a drawer, and wrote the version that could get passed.” Prop 1 is one of those things that counts as a best case scenario in context.

This piece from Samantha (whom I am lucky enough to work with) lays out a lot of that context: eliminating PPT is one of the big things that Lansing has been working on for almost 4 years, and Prop 1 is the best option on the table for it–much better than the fallback options of eliminating PPT with zero replacement revenue to local cities and school districts. The Prop 1 solution does implement a new business tax that covers some, but not all, of the replacement revenue, and, while the replacement revenue piggy bank is not 100% immune from legislative raids, the new “Authority” created by Prop 1 would make it a couple steps safer and more predictable than the revenue sharing piggy bank.

So, while it’s definitely not the version of PPT elimination that I’d write if I had totally free rein, I’ll be voting “YES” on Prop 1.

FORMER YPSI MAYOR CHERYL FARMER: NO

This proposal asks us to repeal an existing industry tax on which communities rely – PROMISING that the money lost will be replaced by the state. HELLO! Revenue sharing, where the state promised it would share sales tax with cities fairly, is a promise that has been broken every year for 20 years. Why should this promise be any different? If our state legislature has shown itself unable to raise revenues to repair roads at a time when the public is screaming for road repair, why should we think it will be able to find new sources of revenue for cities to replace money lost by repealing this state use tax on industry?

And, if you still haven’t made up your mind, I’d encourage you to visit the site of the Citizens Research Council of Michigan and read their detailed, non-partisan analysis.

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18 Comments

  1. Glen S.
    Posted August 5, 2014 at 5:54 am | Permalink

    No. No. No.

    * This legislation is poorly-written and overly complicated.

    * It was put on the (historically low turnout) primary ballot at (what seems like) the last minute.

    * It was launched complete with its own pre-fab “Vote Yes” campaign that includes $Millions in TV advertising (chief sponsors, Ford and Dow Chemical) — yet with virtually no time for any substantial “No” campaign to be developed.

    * The entire concept rests on the “promise” that an unelected board — appointed by, and accountable only to the governor — will fully and fairly compensate local communities like Ypsilanti for revenue they will lose due to the phase-out of the personal property tax. (Given ongoing budget challenges, I can’t see how the power to dole out these funds *won’t* end up being used to political advantage — for instance, to “punish” and “reward” certain constituencies, and communities.)

    * The idea that we can eliminate the personal property tax without harming local communities seems like just another in a long history of “too-good-to-be-true” Michigan ballot proposals. (Remember how the Michigan Lottery was going to finally solve the school funding crisis? Or how the cuts that resulted from Proposal A were going to be reimbursed through “revenue sharing …?”

  2. John Galt
    Posted August 5, 2014 at 6:44 am | Permalink

    How can you be against “strong and safe” communities?

  3. Jcp2
    Posted August 5, 2014 at 7:22 am | Permalink

    Veronique, Tracy. Remember those names for local judge races.

  4. Jean Henry
    Posted August 5, 2014 at 7:32 am | Permalink

    Good summary. I’m voting yes for the sake of a best bet outcome for small biz development and local government/schools funding. I get the impression many people are voting no as I kind of protest against Lansing. (and maybe hoping they don’t have to find out the consequences of it failing). We are both voting the way we do out of some essential distrust of Lansing. Kind of depressing if you think about it. I chose the vote I could live with if the rest of the voters go my way. Either way the vote goes, my guess is that the PPT is doomed, based on past legislative end runs to popular vote in Lansing.

  5. anonymous
    Posted August 5, 2014 at 8:03 am | Permalink

    “help small businesses and create 15,000 new jobs… without raising taxes!”

    If it sounds too good to be true, it probably is.

  6. josh
    Posted August 5, 2014 at 8:03 am | Permalink

    The proponents keep saying it will partially be funded by expiring business tax cuts. Bullshit. Those tax cuts are expiring with or without Prop 1. Just because they “promise” to reimburse local governments doesn’t mean they aren’t opening yet another gaping wound in the state budget. Whose money do you think is going to fill that hole?

    The PPT is stupid, but I have zero interest in subsidizing yet another corporate tax cut.

  7. Jeremy Peters
    Posted August 5, 2014 at 8:06 am | Permalink

    You can add me to the Yes list, and also the democratic mayors of a East Lansing and Lansing.

  8. Posted August 5, 2014 at 8:07 am | Permalink

    The Citizens Research Council analysis is also worth reading, for the nuts and bolts breakdown of the ballot proposal and what it would do. I’d recommend anybody read that first, for the more factual analysis, before taking my or any other opinion into account.

    As you note, there’s no “right” answer here, only best guesses. A “No” vote risks the legislature coming back and eliminating PPT with no replacement, which would wipe out, on average, 10% of city and school district budgets. (Only 5% or so in Ypsi city, I think.) A “Yes” vote risks the legislature coming back over time to raid the replacement pot to patch budget holes in Lansing. (Putting the revenue through a new Authority, rather than through the annual legislative appropriations process, at least puts one layer of protection in place against future piggy bank raids — but it makes raids “harder”, not “impossible.”)

  9. Posted August 5, 2014 at 8:07 am | Permalink

    http://www.crcmich.org/PUBLICAT/2010s/2014/memo1128.pdf

    ^^^ it would help if I linked the CRC piece, wouldn’t it?

  10. Jeremy Peters
    Posted August 5, 2014 at 9:35 am | Permalink

    This one is a bit confusing, and while I’m not entirely thrilled with it, it is, in short, the best way possible I see to prevent problems stemming from the legislature from getting rid of the Personal Property Tax (PPT), which is scheduled to expire on December 31st, 2014.

    The conservative legislature in Lansing would definitely not be trusted to replace that revenue — instead they’ll likely choose not to do anything at all to fund fire and other municipal needs in our cities — a very definite possibility.

    I’m pretty darn progressive, and I don’t think this is a corporate tax grab, as some state.

    Yes, I’ll give, it may seem so on the outside.

    Is it perfect? No.

    Is it the best option we have a on the table right now to prevent the Legislature from further decimating revenue sharing with cities and towns? Yes.

    That, in short, is why I’m voting Yes on Proposal 1.

  11. Glen S.
    Posted August 5, 2014 at 10:43 am | Permalink

    Call me crazy, but I’m tired of being asked to support/vote for shitty public policy based on threats that, if I don’t, Republicans will push through something even worse …

  12. Jules
    Posted August 5, 2014 at 11:12 am | Permalink

    Well put, Glen S. and it’s one more reason I’m a no vote on Prop 1.

  13. Taco Farts
    Posted August 5, 2014 at 6:59 pm | Permalink

    It will pass, it will turn out awful for everyone but the 1%, and dems will exclaim “this is the last time we go along with…!”

    Then in two or three or six years, someone will say we need to invade Bora Bora and you’re unAmerican if you say otherwise, and everyone will put their flags on and believe that they’re buckling down for the sake of patriotism. Rinse, repeat.

  14. Glen S.
    Posted August 5, 2014 at 9:21 pm | Permalink

    @ Taco Farts

    It appears that you are (were) psychic: As of 10 p.m. tonight, Prop 1 appears to be passing statewide by a more than 2-1 margin.

    Bora Bora, here we come!

  15. Posted August 5, 2014 at 10:01 pm | Permalink

    I came here to say the same thing. It looks like it passed with a wide margin. Now I guess we just sit back and wait for things to unfold.

  16. Meta
    Posted August 6, 2014 at 10:23 am | Permalink

    It was money well spent by big business.

    From Crain’s Detroit Business:

    The business community scored a big win Tuesday night, with Michigan voters approving Proposal 1, thus ensuring the elimination of the industrial personal property tax.

    With 98 percent of precincts reporting statewide as of early Wednesday morning, the proposal passed 69-31.

    Proposal 1’s passage also ensures approval of a plan supporters say will allow local communities to continue to receive the revenue the tax generated.

    Tuesday’s win was never a sure thing, despite there being no organized opposition. The group Michigan Citizens for Strong and Safe Communities, primarily backed by big business, shelled out about $7 million to secure the victory.

  17. Posted August 6, 2014 at 12:29 pm | Permalink

    This was interesting, but it was posted far too late.

  18. Dan
    Posted August 7, 2014 at 1:36 pm | Permalink

    Mark, are you going to have a post about the new (well, soon to be) ypsi mayor. Wondering what your thoughts were re: qualifications, new blood, etc, or if it even matters who the mayor is??

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