Snyder builds tax plan on complicated tax credit math
The Snyder administration's plan to give tax relief to businesses by reducing the personal property tax rests ... on the end of tax breaks for businesses.
Yes, you read that correctly.
Over the next several years, Michigan will stop sending hundreds of millions of dollars of business-tax credits out the door. The corresponding expected increase in revenue, from tax credits that are expiring, is how the Snyder administration plans to pay for the bulk of its PPT reform plan.
"In a nutshell, it's broad business tax relief at the expense of targeted business tax incentives," said Lt. Governor Brian Calley.
The money saved from ending tax credits like those for battery makers, film companies and investors in so-called brownfield sites would go toward reimbursing local governments for lost PPT revenue. Local governments are dubious, but the administration sees the shift as a solid way to provide PPT relief that it believes improve Michigan’s business climate and economy.
And there are questions even over how much money will be saved by not issuing the tax credits.
Calley explained that the expiring business tax credits are “something we know for sure is going to happen.” He added that the amount needed for PPT replacement revenue “will be a lot less than what’s available” from the certified credits previously awarded to select business sectors.
How much money is out there? The administration projects annual tax credit savings that begin at $11.3 million in the current fiscal year and increase steadily, reaching $538 million by fiscal 2030.
But an analysis by the Senate Fiscal Agency suggests the state may not gain the full amount of all of the expiring tax credits because the tax credits were granted under the former Michigan Business Tax, which businesses no longer will be paying after their credits expire. If they’re a corporation, they’ll instead file under the new Corporate Income Tax. “In some cases, after the credits expire, the subsequent revenue may be substantially less than the value of the credits,” the analysis states.
The SFA projects annual losses for local governments and schools from a PPT phase-out rising from about $64 million in calendar 2013 to about $512 million in calendar 2022 -- the year the Snyder repeal plan would be completed.
Of the local losses, $297.4 million would be impact felt by cities, counties, townships and villages, SFA estimates. The remainder would include community colleges, intermediate school districts, school debt and school operating elements, and revenue collected by taxing authorities such as libraries or transportation authorities.
The administration’s estimates by the Treasury Department project the tax reform plan by calendar year 2022 would reduce personal property tax state and local revenue by $601.5 million, $47.9 million of which would be state impact and $553.6 million would be local impact. Of that $553.6 million, $286.4 million would be the impact felt by cities, counties, villages and townships. The administration sees Senate Fiscal’s numbers as high.
The first element of the Snyder proposal is an immediate tax-cut piece -- a provision to exempt industrial and commercial property with a combined taxable value of less than $40,000, beginning in 2013. By one projection, administrative savings to local governments, primarily cities and townships, and to the state are collectively pegged at more than $12 million a year starting in 2013. The savings are expected to increase to $32 million a year in 2022 and beyond, with all the proposal's exemptions phased in.
The costliest chunk of the tax cuts would start in 2016, which coincides with the last year that the state expects to pay out major tax credits for advanced battery projects.
Beginning in 2016, new manufacturing personal property would be exempt. And existing manufacturing personal property that is at least 10 years old would start to drop off the tax rolls. In 2022, all manufacturing personal property would be exempt.
To compensate local units for the larger amount of tax relief that would begin in 2016, there would be a new PPT reimbursement fund. Senate Bill 1072, part of a bill package for the administration's PPT reform, states the intent is for the Legislature to fill the new fund from an anticipated revenue increase associated with the expiring tax credits.
But that and other aspects of the proposed revenue replacement give no comfort to the Michigan Municipal League, one of a number of opponents who say there’s no guarantee a future Legislature will appropriate any money to reimburse locals, let alone from expiring business tax credits. The MML and others want a constitutional amendment that would guarantee full replacement revenue.
An MML analysis in 2011 argued that in Midwest states that have already phased out their personal property tax, only Illinois came up with full replacement funds -- because of a companion constitutional amendment.
“All of this is going to be dealt with in 2016,” said Summer Minnick, director of state affairs at the league. “They can say whatever they want, but the fact of the matter is that absent further legislative action in 2016, nothing would happen. And they can decide at that point whether to do any of this, or none of it.
“Senate Bill 1072 is effectively meaningless because all it says is what this Legislature would like the Legislature in 2016 and beyond to do.”
But Calley said that local units may want a revenue source that’s guaranteed never to go down, but their revenue streams are tied to economic activity and “every single one of them will be impacted when there’s a bad economy.”
Making the state more competitive and improving Michigan’s business climate and prospects for jobs and investment would further economic improvement and growth in local government revenues, added.
Mike Johnston, vice president of government affairs for the Michigan Manufacturers Association, said communities could lose businesses that provide some of their existing tax base if Michigan remains uncompetitive with other states, such as Ohio, that have eliminated personal property tax.
“What level of confidence, or level of certainty, does any community really have that they will be able to retain the company base they have currently. And, that they won’t lose a company that they have now to a state with a better tax policy,”Johnstonsaid.
He said the Snyder administration is “taking what they think is a sustainable and reasonable approach to fund the program, and we support their proposal.”
But Minnick said the discontinuation of tax credits is not a given in the future.
“Michigan, under Republicans and Democrats, has awarded credits for decades. Most other states award credits. The idea that none of them will come back is a hard sell,” she said.
“The idea that anyone can commit four years ahead, what the plan will be, is something we absolutely don’t buy.”
Amy Lane is a former reporter for Crain's Detroit Business, where she covered utilities, state government and state business for many years.
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