Lt. Governor Brian Calley testified last week on behalf of the Snyder administration's proposal to phase-out the personal property tax (read business equipment tax) by 2022. The proposal is strongly backed by business groups and just as strongly opposed by groups representing local governments and schools, which fear the loss of almost half a billion dollars in revenue, when the repeal reaches full force. In a short interview with Bridge Magazine on Tuesday, Calley argued that the repeal plan is built around the availability of other state funds to protect local coffers and the change will putMichiganon the cutting edge of business recruitment tactics.
Bridge: The personal property tax cut calculates to $470 million (when at full force), or about 3.5 percent of total statewide property tax revenues. Do you think critics of the proposal are overstating the potential impact of the change?
A: "There are varied amounts of reliance that different communities have on the personal property tax. For the vast majority, getting rid of the hassle of handling (the PPT) will be a better benefit than the revenue stream was in first place.
That being said, certain communities have an extraordinary reliance on (the PPT). I don't think that the claims by those communities could possibly be overstated.
It is critically important to places likeMidland, or River Rouge ... the more the industrial concentration in the area, the heavier the reliance (on the PPT). That's why we spent so much time on putting this proposal together. Whereas, ideally, we would have started this legislative process last year. But we really wanted to understand the implications, the flow-through of the resources from where they are collected to where they ultimately end up. We wanted to make sure that our replacement revenue stream could bear the weight of those impacted the most.
Bridge: The Michigan Business Tax conversion comes in at about $1.7 billion. And businesses have seen their property taxes go down in recent years, along with their property values. How much more does business need or deserve? What is business' appropriate share of the tax burden to fund public services?
A: As a practical matter, we need to make sure we, at the very least, get back on the list of states even being considered (for business prospects). We were struck off that list for much of the last decade. I believe we are achieving that more and more every day. Taxation is just one piece of that picture, an important piece, but one piece.
From the standpoint of transformational proposals ... one was the MBT. And we went from 49th to 7th (in business climate ratings), according to the National Tax Foundation.
So, mission accomplished when it comes to the MBT repeal. But that can't be the end of tax reform.
The other major initiative, going back to 2010 campaign, was the transformation of the personal property tax system to remove the investment penalty. Once we are successful in that piece, that really is the last large, transformational taxation proposal that we have. From that point, we want to move toward efficient operations, customer service and consistency of application of taxes. ... The personal property tax is the last big transformational piece.
Bridge: How will PPT repeal generate new jobs and economic activity? How and when would you measure the success of the change?
A: It's a matter of the type of equipment that gets penalized in Michigan for simply being here. That type of equipment is the base economic activity of any economy. ... We make all kinds of things in Michigan: autos, chemicals, furniture, bowling balls, snowplows, slinkys, medicine, appliances -- all these things sold all over the world. This is the base economic activity that everything else lives off of; the service economy lives off of it; government itself lives off of it. That's what we need more of.
We would expect to see same types of results you see in Anderson Economic Group study on tax credit effectiveness -- commissioned by (the Michigan Education Association). It determined that the most successful on job creation was the abatement of the personal property tax. On a company by company basis, it makes that big a difference, so think of how much larger the difference would be if you get rid of the investment penalty in the first place?
Bridge: A new report from BusinessWeek argues that entrepreneurs don't make site decisions based on tax rates. What's the administration's response to the argument that a business tax cut will not move the needle on business growth?
A: I have heard many people say that taxes don't matter -- typically people who have never started a business themselves. All I can go on is feedback we hear from people who do start businesses. They say taxation is a critical component. There are other factors as well ... the regulatory environment is a critical factor. Having a skilled work force to fill the particular needs of a business is a critical factor. Taxation has to be one of many factors. ...
One of the main reasons that manufacturing is still happening here is the concentration of engineers ... the work force is a competitive advantage. Put all those factors together, you make the environment conducive to job growth and just watch what the private sector can do.
Bridge: The Michigan Business Tax conversion is almost four months old officially. What data is the administration using to determine whether the MBT repeal is working as intended, or not?
A: If you look at the Michigan Dashboard numbers, you'll find everything we are tracking. It's all very public; the measurement systems are all public. ... Private sector job creation is a top priority. As we move forward, it's difficult to isolate one piece of the agenda. We know the entire agenda as assembled is having a big impact. We believe the impact of the (MBT) change started immediately upon passage (in 2011). Once you put something in, in law, you can factor into it into future decisions. Countless examples we can provide where people made decisions in 2011, even before the effective date of the tax, because they knewMichigan was going to be a competitive place again.
Bridge: The primary thrust of critics to the PPT repeal is that the administration and Legislature of today cannot bind the lawmakers of tomorrow to commitments to make up lost PPT funds. Why should local governments and schools back a change that removes a sure source of revenue for an uncertain one?
A: First is that we're concerned about future. All of us, schools, local governments, state government, we're all tied to revenue streams that are affected by overall economic activity ... We are trying to create an environment where all the revenue streams are going up. That will reduce the risk for every one of us.
Staunchly defending the status quo will get us the same results as in the past. We know that doing more of the same ... we know how that story ends. It's not pretty for Michiganor for local governments.
The personal property tax is not a constitutionally guaranteed tax. It's a statutory tax that can be changed by any Legislature at any time. The fact that there is a risk that a future Legislature would do something different than what we are doing now is no different than the risk that's borne by the PPT system today.
And the reliance on the personal property tax has declined 39 percent since 1999. That's a huge decline. So those who would hold the PPT as a rock-solid, dependable source of revenue, and say that it is somehow different or better than revenue sharing or state revenue sources, ignore the facts. The facts are that the personal property tax dropped and the reason is manufacturing operations, and jobs that go with them, left Michigan because we have been so uncompetitive. That's what we are trying to change.
If we have a growing economy, nobody's going to be in a position where they are forced to make these difficult decisions to cut support to local government.
Bridge: How does the tax credit conversion work to fund replacement dollars for local governments and schools?
This chart (from the Treasury Department) shows you the total amount of tax credit awards given out by the previous administration ... Each year, you see how much we are going to pay out. The peak on payouts is 2014-15. In 2016 is where you see the first drop, than a substantial drop in 2017. ...
The reason we were not proposing to start PPT relief until 2017 is because that's when tax credit payouts get smaller. We are trying to time up distribution to local governments with the availability of resources that we used to give out to business tax credits and give it to local governments instead ... In a nutshell, it's broad business tax relief at the expense of targeted business tax incentives.
By 2022, we have enough tax credit savings to eliminate the personal property tax and provide the support to local government.
Bridge: Ohio converted from a PPT to a commercial activities tax. What are the advantages, disadvantages?
A: The Ohio CAT is like a gross receipts tax. It's not good tax policy. They traded one bad tax for another bad tax. Michigan is on an awesome track. Our trends are outperforming most other states'. One of the reasons we are outperformingOhiois because they went to a CAT.