Tax Justice Digest stories about Michigan

Not all property tax cuts are created equal.  Though the intent is to shield homeowners from property tax hikes in times of strong growth in housing prices, it is the unintended consequences of caps on increases in a home’s taxable value that have gained these measures attention in recent months.

By effectively limiting the amount by which one’s tax bill can increase, these provisions primarily benefit those long-term residents whose taxable home values have been suppressed for the most years.  Since this creates huge inequities in tax bills between neighbors who have lived in their homes for different amounts of time, Florida voters in January passed a “portability” measure that allows long-time homeowners to take their tax savings with them to a new home upon changing residences.  This obviously does nothing to assist first-time homebuyers, or correct a host of other potential problems that states with such limits have been experiencing.

In Michigan, where housing prices have actually been on the decline, homeowners are continuing to see increases in their property taxes as previously suppressed “taxable values” are using the housing slump to catch up with actual “market values”.  This development, in addition to baffling and infuriating homeowners, provides an excellent illustration of exactly how convoluted these tax limits make the property tax system.  In their poorly conceived attempt to keep property tax bills from getting “out of control”, state legislators have created a system where the property tax barely resembles a tax on the actual value of property at all.  Only under one of these ridiculous assessment-capped regimes could decreases in a home’s market value lead to increases in a home’s taxable value.

Aside from destroying the common sense connection between the actual value of one’s property and the tax one pays, such limits also constrain local revenues without regard to the rising costs faced by local governments.  South Dakota county leaders, facing increasingly grim budgetary realities created by a 3% cap on increases in taxable value, have had to resort to petition drives to raise needed funds.  After a recent failed attempt to try to get an alcohol tax increase on the ballot to make up for revenue shortfalls, one county commissioner remarked that “we need to find a source of revenue…We’ve opted out of the property tax limitations five times.  I don’t think that was ever what the Legislature intended to happen”.  Given that local budgets primarily consist of law enforcement and education expenses, South Dakota residents should feel very fortunate that their state allows county governments to opt out of these overly restrictive limits.

Conservative commentators frequently depict Hollywood as ridden with leftists, but the reality is that, when it comes to tax policy, the movie industry is no different from any other.  Take recent legislative activity in Michigan and Georgia, for example.  Michigan Governor Jennifer Granholm is on the verge of signing a bill that would, among other things, provide a refundable tax credit equal to 42 percent – 42 percent! – of a film production’s costs. The Georgia Senate has adopted a measure – also expected to be signed into law – that will more than double that state’s current film production credit.

Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments.  According to the report, Massachusetts will lose upwards of $140 million between 2006 and 2008 due to its film tax credit, but may receive only about $20 million in new revenue from the economic activity associated with the credit.  What’s more, as the report notes, “any estimate of the net economic and tax revenue impact of tax incentives needs to take into account the reduction in state government spending” associated with such credits.  In such tight budgetary times, that “reduction in government spending” is sure to occur if policymakers keep trying to lure the latest blockbuster to their state.

Despite all this, however, some legislators in Michigan want to delay the introduction of that state's EITC.  Last year, the state passed an EITC for the first time.  Now, proponents of delaying the EITC argue that, given the state's current business and fiscal problems, the government simply can't afford the tax break.  Of course, many of these senators are the same ones who have been advocating against any new business taxes in the state to replace revenue lost with the repeal of the Single Business Tax.  It's true that the state is not in good fiscal condition, but during economic downturns anti-poverty measures become more important, not less.  Michigan voters should urge their lawmakers to keep their promise to the working poor.  For more information on state EITCs, try this helpful website.  For more information on how EITCs work, read this ITEP policy brief.

An extensive study of the Michigan Economic Growth Authority's (MEGA) business tax incentives that were distributed between 1996 and 2004 found that incentive programs frequently don't result in the job creation they promise. As the study explains, "since 1996, MEGA has put together 230 incentive agreements. Under these agreements, 127 projects should have produced 35,821 direct jobs by 2005. In fact, these deals have produced about 13,541 jobs, or 38 percent of original expectations. This represents roughly 0.3 percent of Michigan's total work force."

Gross Receipts Tax Is Not a Cure-All for the States

Over the past few years, both Texas and Ohio have enacted major changes to their tax systems, choosing to replace existing business taxes with taxes based on companies' total receipts. This takes the form of a "margins" tax in Texas and the "commercial activity" tax in Ohio. Two other states, Illinois and Michigan, are also now considering whether to follow suit by implementing taxes based, at least in part, on gross receipts.

IL Gov Won't Raise Taxes on People, Just Taxes That Are Passed onto People

Despite Illinois Governor Rod Blagojevich coming before the Illinois House in a rare all-day hearing to promote his plan for implementing a gross receipts tax (GRT) his proposal was unanimously defeated by the Illinois House in a 107-0 vote.  The Governor's proposal barely passed the Senate Executive Committee.  Analyses by the Center on Budget and Policy Priorities and the Institute on Taxation and Economic Policy suggest that gross receipts taxes are generally passed on by businesses to consumers. The Governor, however, said in his address to the House, "I will not raise taxes on people. I won't do it today. I won't do it tomorrow. I won't do it next week, next month, next year." Ironically, the Governor also said that he would oppose any income or sales tax hike because "It's regressive, and people already are paying to much" but many experts think that the GRT is regressive and hits low- and middle-income people hardest.

Eliminating Revenue Source + No Plan to Replace Revenue = Government Shutdown 

Since voting last year to repeal the state's Single Business Tax (SBT), which is set to expire on December 31, Michigan lawmakers have been in almost continuous debate regarding ways to replace this vital revenue source.  Fearing a government shutdown, the Michigan House and Senate have passed very different tax proposals. The Senate-approved plan would not completely replace the revenue lost from the SBT, while the Governor-supported House plan will raise the same amount of revenue as the current SBT, but would allow for large tax credits for Michigan-based businesses. The House and Senate proposals both have a business income tax component, but the Senate plan relies more heavily on a gross receipts tax element.  In the coming weeks, compromise is needed before Governor Granholm has the opportunity to sign this important yet contentious legislation.

Ignore Those Lobbyists Boring Holes into the Gross Receipts Tax 

Part of the allure of gross receipts taxes - to hear proponents like Governor Blagojevich tell it, anyway - is that they don't have many of the same loopholes as corporate income taxes and will expand the base of economic activity and economic actors subject to taxation.  The reality may prove quite different, however.  Gross receipts type taxes have scarcely settled onto the pages of law books in Texas and Ohio, yet businesses in both states have already begun clamoring for - and will soon start receiving - concessions and special treatment.  In Texas, the House of Representatives last week approved a bill that would double the exemption for small businesses under the margins tax, would lower the taxes paid by multistate financial services companies under the tax, and would attempt to prevent Sprint Nextel from passing the tax along to its customers. 

There are several proposals in states across the country that would expand state sales tax bases to include services. These efforts aim to improve both states' financial stability and the fairness of their tax codes. It's probably not fair, for example, that in some states people who do their own laundry pay sales taxes when they buy a washer or dryer but people who have their clothes laundered by someone else pay no sales taxes at all.

One component of an overall tax proposal in Maine would expand the sales tax base to include a variety of personal and real property services. In Maryland, a state house committee on Wednesday debated House Bill 448, which would expand the sales tax base to include luxury services like interior decorating and other personal services. In Michigan, Governor Jennifer Granholm has also proposed a measure to expand the sales tax base. The political ramifications of taking on previously untaxed businesses may make some policymakers wary. Nonetheless, as states shift from manufacturing economies to service economies, it's essential that tax structures change too. For more on expanding the tax tax base, check out ITEP's policy brief.