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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Thu, 04/26/2012 - 9:15am
Replacing the lost personal property tax revenue with sate general fund dollars is not fair. Individuals living in low personal property tax communities would be subsidizing those that live in communities with lots of personal property taxes and are being reimburses by the state for the lost revenue. While don't you just allow communities to eliminate the personal property tax on their own.
Thu, 04/26/2012 - 11:55am
This latest tax cut for businesses is an insult to every citizen in Michigan. It's message: We lawmakers would rather jeopardize your houses, schools, streets and safety by giving tax cuts to businesses in the vague hope that they might, just might squeeze out a few new jobs. I used to think that the notion of corruption in politics really did not apply to our State of Michigan. I was wrong. Lansing is a sewer of political payoffs in exchange for horrible legislation that benefits few and puts all others at greater risk.
Tue, 05/01/2012 - 9:10am
Since I can't click "Like", I'll just say, "Thank you, T.W.!"
Chuck Fellows
Thu, 04/26/2012 - 12:08pm
Is anyone else getting tired of hearing the lie that taxes are job killers and uncompetitive? It’s time to drive a stake through the heart of the conservative mantra about “job killing taxes” and push back with the real historical record. Stating that we need to eliminate business taxes because they are “job killers’ and uncompetitive is ignorant. Yet this myth permeates the GOP sound bite machine. American economic history shows that that tax cuts and spending without revenues to support it are what “kill jobs!” Despite what Ayn Rand and Ronald Reagan espoused and their GOP knee-jerk, anti-tax, small government ideologues believe, there is no clear relation between lower taxes and creating jobs. A review of the record under both a traditional Republican like Eisenhower and several Democratic Presidents, including Kennedy, Johnson and Clinton, show that higher taxes combined with less borrowing is what creates jobs and contributes to increased economic growth. That’s what an honest look at the data tells us! Constantly labeling taxes as job-killers and uncompetitive is at best an unsupported assertion, and at worst an outright lie.
Sat, 04/28/2012 - 12:46pm
Cchuck, I have to agree with You. If people would take the time to research when Our economy grew the most and what the taxes were at that time you get the rest of the story. What happened in this country from the end of world war two until 1957-1960? What was the reason for this expansion of our economy. If you don't look at the reason something happens. How do you try to get it to happen again? What is the one and only one thing that causes our economy to expand and grow?
Tue, 05/01/2012 - 9:11am
Let me take a guess: War?
Sat, 04/28/2012 - 3:32pm
Thanks Amy for a good article. Hope people will stop and think more about the funds to replace lost revenues. Two industries are mention in losing tax credits. What happens when both of these have closed their doors or moved out. Business today have no allegiance to this country and especially Michigan. How many companies have left Michigan for cheaper labor? Getting tax credits back doesn't give the state money. It's money the state doesn't give to those companies. So what happens to replacement revenues for local government. There is none.
Sat, 04/28/2012 - 3:37pm
Can someone at the Center find out Who is getting the tax credits?
Jon Blakey
Sun, 04/29/2012 - 2:30pm
I want a competitive business environment as much as anyone but I have little faith in business people to look out for anyone but themselves and their companies and/or shareholders (I own stocks and bonds). What incentives are needed to cause businesses to invest in Michigan and stay here, instead of looking for the next "cheaper" place to create their products? Is it even possible to motivate companies to locate and stay in Michigan? Will the continued underfunding of local governments, colleges, and schools leave any desirable places to live in the state? Will these government entities be able to get concessions from their employees to reduce costs to meet the "new normal" of future government revenues? Is that what this is really about; starving the beast of government spending and the resultant reduction of the wages of unionized public employees? Sounds like conspiracy theory stuff, but there is plenty of public hostility from some Michigan politicians to feed the thought. I'd want to see a more clear exchange between these tax cuts for businesses and resulting jobs for Michiganders. I want to see the anti-union rhetoric stop. I want to see the public school attacks and mythical charter school salvation prophecies end. Let's end the circular firing squads where we spend most of our time shooting at each other. I am very tired of it.
Tue, 05/01/2012 - 9:15am
Thank you, Jon! Since the GOP has been failing us through their admitted plan to block any progress by President Obama, regardless of the plight of our country, people have fallen into fighting over the scraps they're leaving us. At the same time, I personally know a whole lot of good people who live in America, who want good things for their neighbors and their children, and who understand that working together for good is what makes America work effectively for the benefit of all.