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.

To 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.