By Emily Votruba
Tomorrow, August 5, voters will decide whether to adopt a proposal to eliminate the personal property tax. The strangely worded measure doesn’t actually mention “personal property tax,” but instead says the following:
Approval or disapproval of amendatory act to reduce state use tax and replace with a local community stabilization share to modernize the tax system to help small businesses grow and create jobs. (Read the full ballot language and more about the proposal here and here.)
If you own a business in Michigan, you pay personal property tax (PPT) every year on equipment you use (machinery, vehicles, furniture, computers, refrigerators, cash registers, kitchen appliances). You’re supposed to pay the same rate (set by your local government) every year, based on the price you paid for the item, for the life of your business or until you get rid of the equipment, even as the item decreases in value. In communities with big business and manufacturing bases, the PPT forms a large share of local revenue, used for schools, fire, police, EMT, park maintenance, and other services.
In 2010, Elberta derived 3.32% of its property tax revenue from personal property tax.* That means out of the Village’s $129,933.48 in total property tax revenue, $4,313.79 came from business owners paying tax on their various movable assets, most of which they had already paid sales tax on at the time of purchase. Businesses are in effect taxed twice—more than twice—on material regular consumers are taxed for once.
According to the Tax Foundation, a nonpartisan DC based think tank, seven states have eliminated PPT altogether, four states assess a very small PPT, and other states have enacted exemptions for businesses of certain types or sizes. Michigan itself has already enacted a personal property tax exemption for businesses with less than $80,000 worth of equipment. More on that below.
Some voters may be wary of taking Lansing’s word for it when it promises any local revenue lost from eliminating PPT will be replaced through the use tax, which the proposal also promises not to increase. The Senate Fiscal Agency estimates that state general fund revenues would be cut by $126 million in 2016, the first-year the proposal would begin taking effect, and by $483 million in 2023 when fully phased-in.
What is use tax? Most of us never pay it because we don’t buy goods wholesale. But if you have a state business ID, you can buy goods without paying sales tax, as long as you pay that 6% eventually—whether you pass the expense on to consumers when you sell products, or by declaring that amount to the state and paying it at the end of the year.
This use tax might be an unpredictable source of revenue. Let’s say you purchase 50 pounds of coffee wholesale with a business ID. If you don’t make cappuccinos with it, you’re supposed to pay the state 6% out of pocket on whatever you have left that isn’t spoiled. That’s to keep you from just buying all your personal groceries wholesale. You can see how abuse of the use tax might be hard to detect and enforce.
In Michigan, use tax is also assessed to lodging establishments for their rooms and amenities and in sales or transfers of recreational vehicles to nonfamily members. Wired communication services, Internet sales, and all imports of goods from outside Michigan are also subject to use tax. You can read about it in more detail here.
Use tax revenue, like that from PPT, fluctuates according to consumer activity and whether or not businesses are investing in inventory. The Local Community Stabilization Authority that Prop 14-1 creates would distribute the use tax revenue directly to municipalities and would theoretically ensure that communities receive the same revenue they’re accustomed to, and perhaps more (some argue). Proponents say eliminating the PPT will also save both businesses and local governments the paperwork headache involved in filing and adminstering the tax.
Since tax law is really confusing, and businesses are the ones who’ll (supposedly) be most immediately affected by this proposal if it passes, I asked some Elberta business owners what they think of the measure and how they’re going to vote.
Steve Hubbard, owner of Bayshore Tire & Auto, says he’s been so busy he hasn’t had time to investigate the proposal. “I’ll say any measure that’s going to cut my taxes, I’m probably for. Michigan taxes the crap out of small businesses. We lose so much money just processing that stuff.”
According to the US Small Business Administration, over 98% percent of Michigan businesses are “small”—with fewer than 500 employees. Indeed, the vast majority of Michigan businesses (670,000+) have no employees at all.
Katie Condon, along with her sister Janet Condon Whiting, has owned the Mayfair Tavern since January 2012. They pay personal property tax on kitchen equipment, TVs, their computer system, and any other tangible business assets they acquire. Condon says she’s definitely voting yes on Proposal 14-1. “[Personal property tax] is a dumb tax. It kills small business, and up here in Northern Michigan we’re all small.”
Diane Jenks, owner of A Shear Class Experience Salon & Day Spa, and also a member of the Village council, said in an email on Friday that she was still researching the issue. “I want to know where the replacement dollars are coming from and how and when it will be disbursed back to municipalities. I wonder if there will be any hidden criteria or restrictions on funding replacement of personal property tax dollars.”
Jim Barnes is a new business owner in the Village, with both Elberto’s Taqueria and Eco-Building Products opening here in 2013. He suspects that if the personal property tax is eliminated, that revenue won’t be replaced. He said he hadn’t yet been assessed personal property tax by the Village, but has paid it in Elmwood Township and Traverse City for Northern Delights and Eco-Building Products.
“In the past, our personal property taxes have been a nominal annual fee. The hassle of filling out the forms is more painful than paying the tax,” Barnes wrote in an email. He noted that the Village has “an extraordinarily high real property tax rate”—it’s the highest Village rate in the county at 16.1565%—but says he will probably vote no on eliminating the tax, because he believes “federal, state, and municipal taxes are necessary to maintain infrastructure and provide valuable services to our citizenry.” Barnes says he’s more than willing to keep paying the PPT. “I just hope it isn’t too much when the Village gets around to assessing ours.”
Sheila Lafleur, proprietor of the Lighthouse Café, said Saturday that she hadn’t decided how she’ll vote on the measure and didn’t want to go on the record with her opinion of it. She said she’s had the same kitchen equipment for a long time, it’s still serving her well.
Colleen and Ed Jones acquired the Betsie Bay Marina from Kris Mills in mid-June this year. Colleen is familiar with the PPT from previous business ventures. “The existing tax law is really poorly written. It’s difficult to put reasonable values on your property, and it’s not enforceable. It’s a double tax on business owners.” She plans to vote yes on Tuesday to eliminate PPT, but concedes that the proposal “isn’t ideal—the allocation measure for replacement of revenue is kind of weird.”
Michele Cannaert of the Conundrum Café was undecided on the proposal when we spoke on Friday. She had applied for and received the new exemption, for businesses with less than $80,000 in equipment. “That’ll be $700 less that I’ll owe for next year. I can use that money to increase my inventory, or hire another person.
“I’m looking into whether that exemption will still be in effect if the proposal doesn’t pass,” she said. Cannaert, who is also an educator in the public schools downstate, is concerned about loss of revenue for schools and other services, but thinks the personal property tax is a disproportionate burden on small businesses like hers, not just in terms of money, but time and hassle. She files her taxes quarterly, and must submit a list of equipment values every time.
“It would be great if they could just keep that [small business] exemption in place even if the proposal doesn’t pass,” said Cannaert. “That would cover it. I don’t see why these larger companies need another break. But I do wonder how they’re going to offset that loss with the use tax. The use tax is unpredictable too.” Ψ
*Source: MLive report