This Tuesday, August 5, 2014 is election day. Here in Ann Arbor, voters will be choosing a candidate for mayor as well as choosing one new councilmember from their ward in the Democratic Primary. (See the following for my reviews of the candidates see the following links: (Mayor, Ward 1, Ward 2, Ward 3)
Statewide, there is also one ballot proposal on the ballot that would essentially eliminate the Personal Property Tax (PPT) on industrial and commercial personal property. Here is a link to the ballot proposal overview that was prepared by the senate. This is worth reading to get the background of the proposal.
I am voting NO on Proposal 1 and here’s why.
There has been all sorts of press on this, mostly from the pro-side. This does not appear to be a partisan issue–there are candidates from the Democratic Party as well as the Republican Party who are for this. There is no strong opposition group against it.
Here is the Mlive produced video explaining Proposal 1:
Here is the proposal 1 quiz you can take that asks you 5 questions you should ask yourself before voting on Proposal 1on August 5. The quiz is embedded in the article you need to scroll down the page to take the quiz. No surprise my result was “You disagree with most of the changes Proposal 1 would implement.”
Top 12 questions and answers the Mlive editorial board used to determine their opinion:
Ballotpedia gives a really nice description of will happen if this ballot proposal passes.
The wording of the proposal
The voters will be asked the following question:
APPROVAL OR DISAPPROVAL OF AMENDATORY ACT TO REDUCE STATE USE TAX AND REPLACE WITH A LOCAL COMMUNITY STABILIZATION SHARE TO MODERNIZE THE TAX SYSTEM TO HELP SMALL BUSINESSES GROW AND CREATE JOBS
The amendatory act adopted by the Legislature would:
1. Reduce the state use tax and replace with a local community stabilization share of the tax for the purpose of modernizing the tax system to help small businesses grow and create jobs in Michigan.
2. Require Local Community Stabilization Authority to provide revenue to local governments dedicated for local purposes, including police safety, fire protection, and ambulance emergency services.
3. Increase portion of state use tax dedicated for aid to local school districts.
4. Prohibit Authority from increasing taxes.
5. Prohibit total use tax rate from exceeding existing constitutional 6% limitation.
Should this law be approved?
Say what? Now I keep up on things politically, but I have to admit when I first read this I had no idea what it was asking? I have never really thought of the PPT as a use tax. It was always the Personal Property Tax (PPT) on businesses to me. The use tax was what individuals were charged when they shopped on the internet and didn’t pay sales tax directly or when they paid that extra fee on their renewal of their vehicle license plates that was based on the value of the vehicle. But it turns out that the Michigan use tax” includes individuals as well as business use taxes (PPT).
Here is the actual language from the Michigan.gov site that refers to the individual and business portion of the use tax:
Individuals and Businesses – Use tax on tangible personal property is similar to sales tax, but applies to purchases when Michigan sales tax is not charged. Use tax of 6 percent 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. It applies to purchases made in foreign countries as well as other states. Businesses registered for sales or withholding tax may remit use tax on their returns. Individuals can pay their use tax liability on their MI-1040 tax return. Additional information and instructions on use tax for “Internet “Mail Order and Out-of-State Purchases” may be found in the Michigan Income Tax Booklet.
Use tax is also due on vehicles, off-road-vehicles, mobile homes, aircraft, snowmobiles, and watercraft purchased or transferred by an individual or business from anyone who is not a licensed dealer or a retailer. Tax on vehicles, ORVs, snowmobiles, and watercraft should be paid to the Secretary of State prior to the transfer of the registration. Tax on mobile homes should be paid to the Secretary of State at the point transfer of ownership takes place. For transactions involving aircraft, tax should be paid to the Department of Treasury. More information may be obtained on this topic in Revenue Administrative Bulletins 1990-4 (Use Tax Base for Vehicles).
There is an exemption allowed for the purchase or transfer of these enumerated items between spouse, mother, father, brother, sister, child, stepparent, stepchild, stepbrother, stepsister, grandparent, grandchild, legal ward or a legally appointed guardian with a certified letter of guardianship. Other specific, less common exemptions are also allowed.
I don’t quite understand how the PPT falls into the ‘use tax” because the language above states that it is a tax on newly purchased items. I’ll just go with the assumption that maybe the language on the website is not complete or I am not fully understanding it. Anyway, the ballot proposal overview put out by the Michigan Senate says this:
In general, personal property includes property that is not part of a structure, such as machinery, equipment, and furniture, but a wide variety of personal property is exempt from taxation.
For example, the tax does not apply to personal property that is owned and used by a householder, such as furniture,clothing, and jewelry, or to property used in agricultural operations.
The personal property tax, therefore, is paid by manufacturers and other businesses.
For purposes of assessment, taxable personal property is classified as industrial, commercial, or utility.
The amount of the tax is based on the taxable value of the property (usually the purchase price less depreciation)
What I want you to notice is that the use tax is not being eliminated, it is just being REDUCED, not eliminated. The business part of the use tax, the PPT, is being eliminated by giving businesses exemptions to the use tax. The individual portion remains the same. We still have to pay our use tax, the businesses do not. Although the individual’s use tax is not on items we own, we do pay it on items we buy from out of state that did not Michigan sales tax charged and on our vehicle license renewals or vehicle transfers.
The legislation also includes a plan to replace the loss of revenue for the local municipalities that have depended on the revenue from the PPT in the past. The state will levy a statewide essential services assessment (ESA) upon those property owners who were paying PPT, but now who are exempt. However, this tax will only be on businesses who used to pay the PPT , it does not include new businesses. The purpose is to reimburse the local municipalities who would lose out on the tax revenue that is lost by the elimination of the PPT.
Problem is that this ESA will not cover the entire loss of revenue from the new exemption of PPT for businesses. There is a gap that the general fund will now have to cover. The proposal is for the use tax along with revenue from expiring business tax credits to cover this PPT gap.
The whole thing is complicated…too complicated….but in my mind it’s gambling. There is no guarantee that the revenue gain from the use tax or expiring tax credits will ever be large enough to cover this gap. How many of you actually claim your use tax on your tax forms every year? I bet not many of you. You should be paying sales tax, paid on your state income tax form, for all those Amazon and other internet purchase that are not currently taxed.
Some of the expiring tax credits that will be used to fund this gap are GOOD in many of our opinions. What happens if we don’t want those to expire and they get renewed? For example, brownfield, battery and the controversial film credits?
The back up for insufficient replacement funds is the general fund. Really? What happens in the next budget crisis when we are short on revenue? Will the use tax be raided? Will taxes be raised on individuals to cover the shortfall?
Even if the use tax comes through and does have enough revenue to make up for the PPT gap, I don’t actually trust the state government to not use the money for something else. The 6% use tax is non-dedicated general fund revenue. At any time it can be spent on anything. It is not earmarked for any specific use (except for the 2% that is supposed to go to the schools for Proposal A).
Mlive did a piece on the Top 12 questions and answers from MLive’s editorial board interview on Proposal 1. Many of the questions were very good..in fact they were actually what I would have asked. I just did not like the answers. I thought they were incomplete. Although they were answers, they did not make me feel any better about the proposal. In fact, they made me feel worse.
In the article there was this Q and A:
Q: If replacement revenue comes from funds tied to the state general fund, how can Michigan protect against future difficult budget cuts in tight times?
Here’s what we tell our members when they ask us similar questions: Unlike statutory revenue sharing these PPT replacement funds are not subject to an annual appropriations by the Legislature, so therefore we believe the Legislature would be very unlikely to steal these replacement funds. Also, the fact that this PPT reform is tied to a statewide vote (on Aug. 5) we believe the Legislature would feel much more obligated to live up to their promise.
— Dan Gilmartin, Michigan Municipal League
‘Very unlikely” and “feel much more obligated to live up to the promise”?
Really? No thanks.
There is nothing in place to prevent future state legislatures from using the identified replacement funds for something else. Yes, the state is agreeing to reimburse local municipalities for their losses, but if the general fund can’t cover the expense either by insufficient funds or by choice of the legislature then what do you think will happen? Taxes will be raised on us the individuals. Read over all the Questions and pay close attention to the answers, which are very telling. Yes, the local municipalities will be made whole with revenue reimbursements, but how that is done is NOT guaranteed to have a neutral effect on us the taxpayer.
This is simply a redistribution of tax from business to the individual in a back door sort of way. Proponents say that this is not an increase in taxes on the individual, but a tax cut for businesses. However, if the plan for the replacement revenue is not sufficient or not abide by then, if not immediately, then in the near future we the individual taxpayer will have to be taxed more to cover this shortsightedness.. The plan to replace the revenue for local municipalities does not seem solid to me and is in fact a gamble. There are no guarantees anywhere that I can find except that the local municipalities will have their revenue share remain whole.
Much of the press, including the video above, appear to concentrate on the fairness issue of the PPT. If this proposal was really fair it would have also included the personal property tax we the individual pays on our vehicle registration /license plate fees. But it does not.
I am not exactly tied to the PPT Whether it exist or not, I don’t really care. I do care that the businesses pay their fair share, whether that is in a direct business/corporate tax or with the PPT. I don’t buy all the claims that thousands of jobs will come to the state if we lower our business taxes. California, New York and many other have much higher taxes and have plenty of businesses wanting to locate there. I do care that this is a form of redistributing the tax burden to the individual.
If the PPT is unfair then raise the business/corporate tax overall so each business pays the same rate and is not punished for investing in modern equipment. Raise the rate enough to cover the loss of revenues that need to be reimbursed to the local municipalities. That would create fairness amongst businesses, but not increase the tax burden on the individual.
Much of the press, including the Mlive editorial in favor of Proposal 1 says that “if the proposal fails, the lame duck Legislature late this year might just repeal the tax without a strategy to replace the essential funding for local police, fire, ambulances and schools. That would be disastrous for communities across Michigan.’
Really? I don’t take kindly to threats.
We the taxpayer are going to end up paying for this anyway, due to lack of a concrete plan for replacement revenue. If the legislature wants to be that unethical and repeal a tax two months after the voters said not to repeal it which then results in a detrimental effect on local municipalities, then so be it. At least the voters will see the true colors of their state representatives.
There are too many non-guaranteed answers for Proposal 1. I’m voting No.
saltus in demonstrando