Big news out of Michigan: voters yesterday approved Prop 1, a personal property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cut that will amount to about $500 million per year on net.
While individuals only pay property taxes on their real estate, businesses in many states have to pay an additional tax on all of their property that can be touched and moved—from staplers to desk chairs to manufacturing equipment. We’re critical of the negative incentive these taxes create on acquiring new machinery and improving production processes. While personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es only apply to businesses, this negative incentive hurts everyone in the economy because it makes us less productive.
In Michigan, Prop 1 will increase the personal property tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. to $80,000, will create an exemption for all new property purchased, and will phase-in relief for existing property. The result is a healthy phaseout of the tax over time as businesses replace their old equipment, and an immediate removal of any negative incentives to acquiring new equipment tomorrow. The $80,000 exemption means smaller businesses will not pay this tax at all.
The proposal was approved 69-31, which quite frankly is a more sizable margin than we had expected, and is a good sign for taxpayer understanding of the issue. One of the more frequent problems with reforming personal property taxes is that they are a local revenue source, so localities will fight hard to protect the revenue stream. In Michigan, they skirted this issue by diverting state use tax revenues to localities to keep them whole.
If you’ve followed our work over the years, you know that we’ve done a lot on personal property taxes, from our background paper back in 2012, to our work in Indiana in 2014 (which led to a win), to our frequent blogging on the topic. In Michigan this year, I worked with James Hohman of the Mackinac Center on an op-ed in The Detroit News, and he also has an excellent primer paper on Prop 1. Today, the credit goes to him and his team for a job well done on educating taxpayers. This is serious tax reform.
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