Eliminate the Personal Property Tax Without Replacement

By James M. Hohman | Oct. 7, 2011

Michigan’s personal property tax should be eliminated without replacement. It is a burdensome tax that directly discourages one of the things that Michigan needs most: business investment.

The personal property tax requires business owners to put a value to all of its equipment — from paper clips to industrial presses — and pay annual taxes on it. Considering that this equipment helps keep Michigan residents employed, eliminating this tax will encourage business growth.

It also contains some natural complexities. It becomes difficult for businesses to put a value on a number of pieces of their equipment, and likewise difficult for assessors to verify. It becomes especially difficult for businesses with mobile equipment — such as contractors with heavy machinery — to count. One contractor, Joe Dunigan of Dunigan Brothers, testified before the Michigan Legislature earlier this year that personal property taxes could double depending on where his jobs were being done at the end of the year. “It forces us to play a game we shouldn’t be playing,” he remarked in a phone interview.

Thankfully, the tax is not all that large — at least in state government terms. It raises around $1.3 billion annually and secures it to local property tax jurisdictions that are fortunate enough to have decent amount of business investment. Considering that Michigan governments at all levels raise $14 billion from property taxes, eliminating the personal property tax would be about a 10 percent cut in tax revenue.

Property taxes aren’t the only source of income for Michigan’s government schools and localities. Districts also get chunks of guaranteed revenue from state income and business taxes. Cities, villages and townships also get pieces of sales taxes revenue. These two pieces of revenue are doing quite well — year-to-date figures show the taxes higher than last year by 3 to 16 percent. While eliminating the personal property tax will drop local government revenue, they may also receive higher income from other tax sources due to business and employment expansion.

Finally, the state government is already assisting local governments in becoming more efficient in their services. As part of the current state budget, schools and local governments will receive extra money for following practices intended to make them more transparent and less expensive. The newly enacted bill that caps government insurance premiums or requires 20 percent premium sharing will also help to cut expenses in local governments. While any savings will accrue to those governments, the state can let businesses benefit from the moves by eliminating the personal property tax.

Some local governments have higher proportions of their revenue from this tax, and legislators may want to make up for that in the appropriations process if it decides to eliminate the tax. But legislators should really consider the net effects of the state’s fiscal situation when eliminating the personal property tax. It may be ripe for elimination without replacement.