(Edited: July 31, 2014, 3:30 p.m. to include Ernst & Young graphic map)
A week from today, Michigan voters will head to the polls to perform their democratic duty by selecting party candidates for the November general election. They will additionally face a ballot question that requires, at the very least, the rosetta stone to decipher.
Proposal 14-1, the brain child of the Michigan legislature, reads like this:
By golly, that sounds positively delightful — a “yes” vote will modernize the tax system and create new jobs! If you’re thinking that sure sounds like more trickle-down GOP-speak, you may be right.
There’s no organized opposition to the proposal, and Democratic State Senator Gretchen Whitmer recently wrote a Detroit News op-ed in support of the measure. She qualified her come-lately endorsement of prop 1 explaining that she initially had concerns, which have since been put to rest:
Unfortunately, I didn’t have the assurances I needed to answer those questions as the legislation was hurried through without the opportunity for any real debate, leading me to be one of only two senators to vote against it at the time.
Since then, however, the analyses done by local government officials and fiscal agencies have answered my questions and addressed my concerns. Now that I have those assurances, I’m confident Proposal 1 is right for Michigan.
Let’s take a closer look at what we are being asked to swallow — time to un-encrypt the murky language and parse its potential impact.
Although the proposal doesn’t spell it out, the measure is about eliminating personal property taxes on businesses — instead the ballot language just alludes to “modernizing” business taxes. Lawmakers are asking voters to approve the phase-in of a specific part of legislation they passed a couple of years ago as part of a package of bills, known as Public Act 80, designed to give tax breaks to Michigan’s businesses.
Why would this legislature, renowned for thumbing their nose at the electorate, opt to seek such approval? It’s required by Michigan’s Constitution. Article IX, Section 31, requires voter approval for certain types of changes to the tax code. Because PA-80 is composed of a series of pieces of legislation that are tie-barred to each other, if prop 14-1 goes down, so goes the entire package of tax relief measures for business.
Before we get into the nuts-and-bolts of the ballot measure, let’s first be clear that the primary beneficiaries of this are large corporate entities, not the mom and pop businesses the language implies. GOP lawmakers never grow tired of their rhetoric on tax cuts for “job creators” — although Michigan has yet to see evidence of a correlation between making the rich, richer and growing its economy. Yet, there’s plenty of hard data to refute the Republican mantra.
Owen Zidar, Assistant Professor of Economics at the University of Chicago Booth School of Business, and Faculty Research Fellow at the National Bureau of Economic Research, found the only kind of tax cuts that generate economic growth are quite different from what Republicans would have us believe:
The empirical relationship between tax cuts for the top 10% percent and job creation is negligible in magnitude, statistically insignificant, and much weaker than that of equivalently sized tax cuts for the bottom 90%.
Another Republican myth is that Michigan’s business taxes are among the worst in the nation. In fact, a 2012 state-by-state comparison compiled by Ernst & Young, in collaboration with the Council on State Taxation (COST), found that Michigan business taxes, as a percentage of state revenue, are the third lowest in the nation. The national average is 45.2 percent, and Michigan businesses pony-up a mere 35.8 percent.
Source: Ernst & Young report
Additionally, Michigan is notorious for cutting sweet multi-million dollar tax give-aways to attract and maintain business. In their report, Megadeals: The Largest Economic Development Subsidy Packages Ever Awarded by State and Local Governments in the United States, Good Jobs First found that Michigan had made fully 29 outrageously over-the-top corporate tax give-aways — making the state the national leader, with New York coming in second at 23. Michigan forfeited a whopping $7,101,236,000 (yes, billion) to mostly large fortune 500 type companies in return for little, if anything at all. These bonuses were untethered to any real and measurable job growth — they were nothing more than a trickle-down wish and a prayer.
Understanding this ballot proposal requires knowledge of what the personal property tax is, and who pays it. The PPT is a tax on business equipment collected by local units of government as a substantial portion of their operating budget — estimated to be about $590 million annually. Lawmakers want to repeal the PPT and replace it with a more reliable revenue stream for local governments from the 6 percent State Use Tax — not to be confused with Michigan’s sales tax. The state describes the use tax this way:
The use tax is a companion tax to the sales tax. Use tax of 6% must be paid on the total price (including shipping and handling charges) of all taxable items brought into Michigan or purchases by mail from out-of-state retailers. Credit is given for tax paid to another state. Use tax is also applied to certain services such as telecommunications and hotel/motel accommodations.
Use tax revenues are more than double those collected from the PPT. One-third of the use tax goes directly to the School Aid Fund, with the remainder sent to the state’s general fund. The plan is to re-allocate a portion of those general fund revenues back to local units of government, and possibly short-change other state budget priorities, say roads, as an example. Yes, it is robbing Peter to pay Paul.
The League of Women Voters provides a clear explanation of what the referendum intends to accomplish and what its fiscal impact is expected to be:
Another salient question is whether lawmakers can be trusted to fully fund local units of government under this tax reform. The possibility for monkey business remains — we need look no further than education funding in Michigan. GOP leaders insist that K-12 spending is up, but real dollars flowing into the classroom are down, especially after being adjusted for inflation.
Local units of government are struggling already and, in spite of the Michigan Township Association’s support of this ballot measure, a Nov. 2012 Michigan Public Policy Survey found that local leaders are wary of the plan:
This proposal provides no constitutional cover for municipalities. With most of them already living on the edge, even a small drop in local government revenues would result in either a decrease in services or an increase in debt, or both — leading to the kind of fiscal death-spiral Michigan’s cities are known for.
Another anomaly about the referendum language is who wrote it. Lawmakers designed this camel, which goes a long way in explaining its cryptic nature. Typically, ballot language would be crafted by the office of the Secretary of State.
Craig Thiel, of the Citizens Research Council points out a potential impropriety with the language:
Article XII, Section 2 of the Constitution requires that questions pertaining to proposed constitutional amendments [even though this is not one] be described in not more than 100 words and “consist of a true and impartial statement of the purpose of the amendment.” Further, Section 485 of the Michigan Election Law states, “The question shall be clearly written using words that have a common everyday meaning to the general public. The language used shall not create prejudice for or against the issue or proposal.”
…[O]ne phrase in the language could be interpreted to advocate for passage of the proposal, “. . . modernizing the tax system to help small business grow and create jobs in Michigan.” Further, some people have pointed out that this phrase is not entirely clear…. It is not clear the phrase comports with the “common everyday meaning” requirement of state law.
And to top it off, there is a gross error in the ballot question itself. The final point of the measure says a “yes” vote would “Prohibit total use tax rate from exceeding existing constitutional 6% limitation”. The state use tax is not locked by the constitution. Although the use tax does bear some constitutional caveats, it is ultimately governed by Public Act 94 of 1937, which allows lawmakers to raise the rate without bumping into constitutional limitations.
Voters will certainly find the ballot question baffling — and its fate will likely be decided along party lines due to the vague, yet loaded GOP language.
Amy Kerr Hardin
Read the comprehensive CRC analysis of Prop14-1.