CHICAGO — The Michigan Senate Wednesday launched the first hearing on Gov. Rick Snyder’s controversial measure to eliminate the state’s personal property tax, a move that would likely bring more pain for already-struggling local governments.
The complex, eight-bill package is likely to be one of the most contested measures in the new legislative session that began Tuesday.
The legislation would mean the loss of around $700 million annually for local governments and school districts by fiscal 2021, according to an analysis by the Senate Fiscal Agency.
The bills would attempt to replace most of the revenue, but critics note that the replacement provision relies on future approval by lawmakers.
It could make borrowing more difficult for local units that face not only a cut of property tax revenue but the lack of a stable revenue stream to bond against, some say.
The personal property tax is applied to equipment and machinery owned by commercial, industrial and utility businesses. Ten states currently exempt personal property from taxes. In Michigan, the tax generated $1.3 billion in fiscal 2010, according to state fiscal analysts.
Critics are asking lawmakers to include language calling for a constitutional amendment that would require the Legislature to replace the revenue dollar for dollar and send the money back to local governments.
“That would solve our problem, which is primarily on the bonding side — we need to have a stable stream of revenue that we know we can count on,” said Summer Hallwood-Minnick, the director of state affairs for the Michigan Municipal League.
Many local governments will not be able to ask voters to raise real property tax rates because they are already at their limit, Hallwood-Minnick said.
“The PPT goes into a community’s general fund, and when we bond, that’s our full faith and credit,” she said. “Obviously bond payments we have to make first, so the impact will be significant service reductions. I suspect it will also cramp our ability to bond for large projects going forward.”
The legislation would immediately eliminate the tax for most businesses and implement a phase-out for most larger businesses over a 10-year period. It would create a fund to replace the revenue lost by a local unit if its losses exceed 2% of its operating budget, or 1% for a fiscally stressed unit. It would also replace revenue that covers debt service payments or tax-increment revenues.
The replacement money is expected to come from revenue generated by the gradual expiration of various business tax credits. “The intent is clearly there, in terms of reimbursement,” said David Zin, chief economist for the Senate Fiscal Agency, who wrote the bill analysis. “But what’s causing most of the local units heartburn is that no Legislature can bind a future Legislature.”
The impact of the tax varies, depending on where a municipality is located — urban cities generally rely on it more than rural ones — and on how much industry a city has. For example, personal property taxes in 2010 accounted for 41% of the property tax revenue that Ecorse, already under state emergency management, uses to pay debt, according to a 2011 Senate Fiscal Agency report on the proposal.
The personal property tax accounts for 13% of the property tax revenue that Detroit uses to pay for its debt.
The proposal is the Republican governor’s latest effort to cut taxes for businesses. Last year, the Legislature followed Snyder’s lead when it eliminated the Michigan Business Tax, replacing the lost revenue in part with a new tax on pensions.