When it comes to repeal of the personal property tax on business, Kentwood Mayor Richard Root says, “Not so fast.”
Jim Zawacki, on the other hand, probably speaks for most Michigan manufacturers; he says it’s about time.
A couple of bills have been introduced in the Michigan Legislature to amend or eliminate personal property tax, and Gov. Rick Snyder indicated recently he wants to do something about it, too, but not until January at the earliest.
“I think what the governor’s trying to do is attract business to Michigan,” said Zawacki, chairman of Grand Rapids Spring & Stamping Inc. GRS&S pays personal property tax of $150,000 a year on equipment in its plants in Grand Rapids and Comstock Park. That $150,000 “could be better put to use employing people, buying new equipment, better wages …”
Zawacki bought a used press from Steelcase for $1 million, with at least five employees now assigned to it.
“We put another half million into the press, and then I ended up paying $5,000 or $6,000 worth of property tax. I’m being penalized,” said Zawacki.
Would he favor immediate repeal, before there is a replacement for the lost revenue?
“Yes, I would like the personal property tax removed,” he said.
Elimination of the personal property tax without anything to replace it “would represent a substantial whack” to the finances of the city of Kentwood, according to Root. He estimates it generates from 10 to 12 percent of the city’s revenue.
“We’ve worked hard and we have a good solid industrial corridor out here” that pays personal property tax, said Root. To eliminate the tax “without any kind of reasonable replacement, or any kind of reasonable plan … is not a reasonable approach. There needs to be some form of replacement.”
“This is by far the No. 1 issue” facing all county and local taxing authorities in Kent and Ottawa counties going into 2012, from a legislative standpoint, said Don Stypula, executive director of the Grand Valley Metropolitan Council.
For Kent County administration alone, elimination of the personal property tax would be “just under a $10 million loss,” he said. Throughout Kent County, the tax raises $95.9 million; in Ottawa County it is $6.4 million.
The personal property tax is only paid by business, not households or individuals, and makes up more than 50 percent of the taxable value in some communities, according to the Michigan Municipal League. The average across all Michigan communities is about 11 percent.
The Michigan Municipal League has organized a campaign called Replace, Don’t Erase. It says repeal of the personal property tax without a replacement “would be financially devastating to local governments across the state.”
Replace, Don’t Erase is a coalition of Michigan organizations representing police and fire services, school administrators and school boards, libraries, and the Michigan Association of Counties.
In mid-December, Sen. Dave Hildenbrand, R-Lowell, introduced a bill affecting all three categories of personal property tax paid by business: industrial, commercial and utility company property. His bill would eliminate the tax on property bought after Dec. 31, 2012.
The personal property tax “is one of those things” getting a lot of attention, said Fred Schaible of Hildenbrand’s office. “There’s quite a few senators and the lieutenant governor’s office and others engaged in this discussion right now.”
The utility property component is “a very small amount” of total revenue raised, he added.
“Obviously, the bigger concern is the commercial and industrial — especially the industrial, where people are trying to make an investment in the state and we’re taxing them on that investment,” said Schaible.
Grand Rapids Deputy City Manager Eric R. DeLong said it appears the “current discussion” is toward elimination of the industrial personal property tax, which is about 35 percent of the total levied in Kent County. It would mean a loss of $480,000 to the city’s general fund, and $1.4 million across all Grand Rapids city funds.
DeLong said it appears that elimination of just the industrial personal property tax is more likely than all three categories together. He said elimination of all personal property tax, which would include the tax on commercial business equipment, would be much more significant.
“Elimination of the entire personal property tax would have dramatic impacts, not only on local operations but also on the state’s school aid. Probably the largest impact would be on the state’s school aid fund, so there would be significant barriers to overcome” in getting that passed, said DeLong.
“I think that’s why they’re looking more at the industrial personal property, rather than everything,” he added.
“I think there’s general consensus that the personal property tax is an inefficient tax,” said DeLong. “It’s difficult to collect. It essentially taxes investment, which is kind of the prelude to profit, not the actual profit. So it’s maybe not taxing the appropriate thing.”
He said Grand Rapids city management agrees with the critics that “all things being equal, if we didn’t have the personal property tax, that would be fine.” He added, however, that Michigan cities have taken significant hits in terms of lost state-shared revenue and other things.
“While we agree” that the tax should be eliminated, “we do need to replace the revenue,” said DeLong, noting that the personal property tax serves as “an assured source of revenue. … It’s not variable and not subject to appropriation. So the future fix — and we believe there are a variety of potential fixes — should be one that has those same characteristics, where we replace revenue … in a way that is dependable.”
DeLong noted that the city is working with the Grand Valley Metropolitan Council and the Grand Rapids Area Chamber of Commerce because “we have joint interests that we share in this matter. And we’re working as partners trying to find a solution together.”
Rick Baker, president/CEO of the Grand Rapids chamber, said “both business and government view this as a bad tax. It’s a disincentive for the business community to invest in Michigan.”
While the focus is on industry in particular, he added that it’s “not just manufacturing. I know we, as an organization, have to keep an inventory of all our equipment, and all the things that we use inside the building,” which the chamber is then taxed on.
Andy Johnston, the chamber’s vice president of government affairs, said other states are eliminating or phasing out their personal property tax to be more attractive to industry.
“If we want be a strong manufacturing state going forward, the personal property tax is not a part of that future,” said Johnson. “How does it make sense to tell our manufacturers, ‘When you buy a new piece of equipment, you need to keep your business healthy; we’re going to keep taxing you on that equipment from now until kingdom come.’”
“This is the major impetus behind this,” said Stypula. “All of our neighboring states have, in one fashion or another, either eliminated a personal property tax or they have agreed to phase it out over time, as the governor and Legislature are thinking of doing here. And I know it’s especially true of Indiana and Ohio.”
Wayne Roberts, a partner at the Dykema law firm and chair of the chamber’s taxation/regulation committee, said a replacement for the tax has been a topic of conversation among many groups in government and business.
Roberts has heard reports from the governor’s office that some of the Michigan Business Tax credits — which Snyder wants to eliminate — will expire over the next five to 10 years and won’t be replaced with more credits — “and that will generate additional revenue in the general fund, which will be available to offset the reduction in personal property tax.”
Stypula, however, said, “One thing (Snyder) is not promising local units of government and school districts is that there would be a dollar for dollar replacement of the revenue lost.”
Zawacki said he has heard the personal property tax generates perhaps as much as a billion dollars or more for Michigan. “It’s a big number, but there’s other ways of making it up,” he said.
Zawacki said government is going to have to learn how to cut back on spending. Industrial companies that go through recessions learn how to survive on less, he said, but “the city, state and federal governments haven’t learned how to do that.”
Indiana, said Zawacki, has “done the right things” that make it more attractive to industry to locate there, and is now a major competitor against Michigan.
Root said this is not a “hot” issue for the voters in Michigan unless they own a business. “The average voter is going to say, ‘It doesn’t bother me. I don’t care what they do.’ But the average voter will still have the same expectation for services that diminish” if the tax goes away without a replacement.
“How do you make up that revenue?” said Root. “Only one place: either from the citizens, or from reduction of services. You have two choices.”
Root does not express confidence in what the Legislature will do.
“Legislators have shown a strong interest in making sure they take care of the state budgets before they worry about the local communities,” he said.