Last week, Michigan State Proposal 14-1: Referendum: Public Act 80 of 2014 was approved by the voters by a very comfortable margin. You can’t tell from the title of the proposal, or the actual language of the proposal, what exactly we were all voting on. Instead, people mostly had to rely on snippets of information here and there, and feel comfortable with the fact that just about everyone who had anything to say about the proposal supported it. Now let’s debunk two of the myths that were going around.
MYTH: Proposal 1 eliminated Michigan’s costly Personal Property Tax (PPT), which was a disincentive for businesses to make investments in equipment.
This was the big rallying cry of all the TV commercials, with heartfelt stories of how Ma & Pa Small Business were still paying PPT on equipment they purchased 50 years ago, and how they would love to buy new equipment but it was just too costly because of the PPT. So Proposal 1 eliminated the PPT, right? Wrong.
Proposal 1 eliminated the PPT only for small businesses with less than $80,000 of equipment value in a jurisdiction (township or city). Each year, every business in Michigan needs to analyze the value of their equipment and, if under $80,000, file an exemption affidavit, or, if over $80,000, pay some amount of tax.
If a business has over $80,000 of equipment value in a jurisdiction, the type and amount of tax will depend on whether the business is engaged in manufacturing or not. If not engaged in manufacturing, then the PPT is alive and well as we have known it over the years. If the business is engaged in manufacturing, then the PPT will begin phasing out in 2016 and will be partially replaced by a new State Essential Services Assessment (SESA). The SESA has much lower millage rates than the PPT, and the value on which those millage rates are applied is calculated differently than the PPT, but it is still basically a PPT.
As you can see, the PPT component of Proposal 1 is complex and affects different businesses in different ways. However, it is definitely not true to say that the PPT has been eliminated.
MYTH: Since the revenue from the PPT is going to be partially replaced by the use tax, the use tax is going to grow either by increasing the tax rate or applying it to previously untaxed purchases like groceries or services.
Although the proposal itself included the language “Reduce the state use tax…” and “Prohibit Authority from increasing taxes…” and “Prohibit total use tax rate from exceeding existing constitutional 6% limitation…”, there were still people out there saying that use taxes would increase as a result of Proposal 1. It seems they were basing this on the idea that a part of the state 6% use tax would now be the “local community stabilization share” and would be turned over to a newly-created Local Community Stabilization Authority (LCSA) for disbursement to the local jurisdictions who are no longer collecting as much PPT.
Critics of the LCSA claim that it will be able to do whatever it wants to do with the use tax with no repercussions because the members of the LCSA will be appointed by the governor, not elected by the voters. Actually, the LCSA is really just implemented to receive a certain amount of money from the state based on the loss of PPT revenue to the local jurisdictions, and then the LCSA divides that amount amongst the local jurisdictions. In order to increase the use tax rate or expand the tax base to groceries, services, etc., the Legislature would need to pass a law and the Governor would have to sign the law into effect. It is not in the hands of the LCSA to do this.
- Except for the small businesses with under $80,000 equipment value in a jurisdiction, everyone will still be paying PPT for 2014 and 2015. The phase-out for manufacturers doesn’t begin until 2016, so don’t go thinking you have a windfall of money available in your budget.
- For manufacturers, if the PPT was stopping you from buying some equipment, you can now rest assured that any equipment bought since January 1, 2013, will be fully exempt from PPT starting in 2016 (although the PPT will be replaced by that much smaller SESA starting then).
- The use tax will not be changing, but keep in mind that the Michigan Department of Treasury has been aggressive on auditing businesses for use tax,, so you do need to be diligent about paying use tax on purchases (primarily from out-of-state) when it is due.