Personal Property Tax
Replace, Don’t Erase
By the League’s Information & Policy Research Department
Personal property tax is perhaps one of the biggest legislative fights facing Michigan’s municipalities, and this is a hill we all must be willing to charge. Failure to replace revenue lost through changes to personal property tax will be a death blow to communities large and small, urban and rural, all across our state, and that is NOT an over-dramatization!
Think of the small city of Litchfield (population 1,458) which derives 50 percent of its total taxable value from personal property. Litchfield is second only to River Rouge (population 9,917) which attributes 57 percent of its taxable value to personal property. Statewide, revenue generated by personal property tax in 2010 totaled over $1 billion!
Litchfield and River Rouge are “top two” on a list no one wants to be on—places that will be severely crippled by the elimination of personal property tax. These two examples show how this issue touches every type and size of community in Michigan across party lines. Litchfield is represented in the state House and Senate by Republicans, River Rouge by Democrats. Litchfield is in rural Hillsdale County, River Rouge is in Wayne County, the heart of our state’s most populous region and largest urban center.
|Wayne Mayor Abdul Haidous (l) and Sterling Heights Mayor Richard Notte (r) testifying on personal property tax.|
Some Facts (and a Little Fiction!)
Personal property tax in Michigan is paid by businesses on property not permanently affixed to land, such as furniture, equipment, and tools. The tax is based on voter-approved millage rates.
Fiction: Michigan is the only state that levies personal property taxes.
Fact: Michigan is one of forty-three states that levy some form of personal property tax.
Fiction: Personal property tax is a business inhibitor. Evidence of that, one way or the other, is elusive.
Fact: What we do know is that business growth is dependent on many factors and taxation is just one of those. We also know that the revenue generated through personal property tax is absolutely essential to funding core community services.
It is important to note that, like the business community, not many of our members are big fans of personal property tax. They find it cumbersome and costly to administer; however, they cannot survive without the revenue it generates. Everyone agrees there is room to improve this tax, but clear consensus has yet to emerge on how to replace revenue.
Fiction: The Legislature will align along party lines when it comes to personal property tax.
Fact: Personal property tax crosses party lines, and in a major way. The vast majority of communities that will be hardest hit are represented by Republicans. Among the 118 communities with 10 percent or more of their total taxable value comprised of personal property tax, more than 73 percent have Republican legislators. It will be a tough sell to those they represent that they must forego essential services like police and fire protection, safe streets, water and sewerage systems, and adequate parks and recreation, to fund a tax break to business.
Fiction: Personal property tax can easily be replaced at the local level.
Fact: The state severely restricts local revenue options (think Headlee and Bolt!). Even in the few communities with an income tax, the levels are severely limited by the state, as are other local tax options. Some are pointing to Ohio as a model, but the vast majority of Ohio cities levy income tax and, in most of those cities, income tax is the primary revenue source. Income tax accounted for over 70 percent of revenue in some Ohio cities. Further, Ohio municipalities receive the majority of revenue collected by counties through a statewide estate tax. In Michigan, the fact is that local government’s hands are tied when it comes to finding alternative sources of revenue.
What Have Others Done?
Most states have some form of personal property tax, and in the few states where it has been eliminated, revenue was replaced to keep local units whole. Illinois constitutionally guaranteed replacement; others created special funds to reimburse municipalities. Some allow local units to continue to collect the tax, then reimburse businesses through a state tax credit. Pittsburgh adopted an innovative “land value taxation” system. See sidebar for specific case studies.
Replace, Don’t Erase!
Replacement revenue must be predictable and reliable, guaranteed through constitutional protection. Anything less puts essential services at risk in communities across Michigan, and severely limits our ability to fulfill our “better communities, better Michigan” pledge. Please be prepared to stand with us and be heard on this issue.
Be An Activist!
Stay up to speed through the League website, legislative newsletter, listserves, blogs, Twitter and Facebook. Visit replacedonterase.com.
• Communicate with your legislators early and often. Inform them about emerging issues and challenges in your community, and cultivate an ongoing relationship with them through regular calls, email, and letters.
• Respond quickly to League action alerts and listserv communications.
• Call and email the League when issues arise in your community.
• Come to Lansing to meet with legislators in person or to testify before a committee.
• Invite your legislators to your council/commission meeting, give them time on the agenda, and put them on TV.
• Make an effort to develop a good working relationship with staffers.
• Find others with a common interest and build coalitions to strengthen your position.
This issue is so important to Michigan communities that the League started a web page dedicated to it. Please visit replacedonterase.com for the latest information, background, and important facts about this issue.
The information & policy research department provides member officials with research assistance on a vast array of municipal topics. Examples of items in our collection include sample ordinances, policies, programs, articles, referrals, databases, charter provisions and regulations. Send your municipal inquiries to inf[email protected], or call our information department at 1-800-653-2483.
A study by the University of Delaware found that the traditional method of taxing land owners “actually provides incentives not to maintain a piece of property.” An alternative approach, “land value taxation,” shifts the tax burden away from buildings and possessions, and onto the value of the land itself. This reduces the tax “penalty” associated with making property improvements or investing in equipment because property owners pay taxes based on the value of the land, regardless of the condition of the buildings or equipment within them. Therefore, it is also helpful to communities struggling with abandoned or blighted property. In fact, studies found a strong correlation between Pittsburgh’s shift to land value taxation, its downtown revitalization, and the overall regional economic growth in the 1980s and 1990s.
In 1970, an amendment to the Illinois Constitution was adopted that abolished personal property tax. The change in the Constitution replaced and constitutionally protected the revenue lost by local governments. In response, the Legislature created the Personal Property Replacement Tax, which accompanies additional state aid payments to local governments. The replacement tax is levied against utilities and other businesses with funds distributed to local governments based on historic personal property tax collections.
The Ohio Legislature adopted broad tax reform policy in 2005 that initiated a five-year phase-out of personal property tax for most businesses. As in Illinois, local governments’ lost revenue was initially replaced by the creation of a new tax. In Ohio, this was the Commercial Activity Tax, a 0.06 percent levy on all gross receipts over $500,000. Unlike the Illinois example, however, this tax revenue was not constitutionally protected. Therefore, as Ohio faced general fund deficits, the governor and Legislature targeted personal property tax replacement as an option for filling the budget hole. The fiscal year 2012-2013 budgets dramatically reduce the payments from the Replacement Fund and change the phase-out schedule established in 2005.