'Shift-and-Shaft' Tax Proposal Ekes out Win in Michigan

'Shift-and-Shaft' Tax Proposal Ekes out Win in Michigan
November 1, 2004

Michigan real estate owners will have to pay part of their county property taxes five months sooner next year, a move that amounts to a tax increase, according to an analysis by the Mackinac Center for Public Policy.

The proposal sailed through the State Senate by a two-to-one margin before publicity raised a firestorm of opposition, prompting some members of the State House to back away. Gov. Jennifer Granholm (D) strongly argued for the accelerated property tax payments, and on September 22 the measure squeaked through the House by one vote.

The accelerated property tax payments plan was part of a budget agreement brokered by Granholm and Republican House Speaker Rick Johnson.

Though the agreement had the backing of the Democrat governor and Republican House Speaker, it barely achieved the minimum 55 votes for passage in the House.

Governor Threatened to Cut Essential Services

Granholm had argued a defeat would have forced the state to cut back on support for local police and fire services, fire protection, and public works. That threat prompted local government officials to lobby hard for the tax shift.

"County and municipal officials from across the state thronged the Capitol on Wednesday to argue for the tax shift, fearing the alternative would be further cuts in the basic services they offer," according to an account of the day's vote by Mark Hornbeck of the Detroit News.

For the owner of a $100,000 house, about $79 in county tax collections will be moved forward next year, $158 the year after, and $238 starting in 2007, according to state estimates.

Granholm and Johnson insisted moving the tax collection date up several months did not constitute a tax increase. However, an analysis by one of the authors of this article (McHugh), conducted for the Mackinac Center for Public Policy, calculated the change as amounting to a $183 million property tax increase. (The effect on individual taxpayers is explained below.)

Opposition Was Strong

Hundreds of Michigan residents agreed with that assessment and called the governor's office and area legislators to express their opposition.

Steve Racinski, a retired shop worker from Dearborn Heights, told the Detroit News, "I'm on Social Security and last time they collected taxes early for schools, I had to go into my savings account to pay it."

As in most states, Michigan legislators approved big increases in spending in the 1990s, when state coffers were filled with revenues from the dot-com bubble. Since the burst of the bubble, those states have been scrambling to avoid spending cuts.

Lawmakers who opposed the tax shift said the state should have done more to control spending. They also argued the shift really is a tax hike, as the net worth of the average taxpayer will decline in order to make the early tax payments.

Taxpayers Poorer Under New System

Under the old system, taxpayers paid county property taxes in December. Under the new system, which will be phased in over a 31-month period ending in July 2007, they will pay in July. The change is permanent.

McHugh's analysis for the Mackinac Center found that if a person paid $100 a year in county property taxes under the old system, between January 2005 and July 2007 the person would have paid $200 in property tax. The person also would have accrued another seven months' tax liability of $58, which would have accumulated from December 2006 through June 2007, but would not have been payable until the next December. Thus, an informal "personal balance sheet" at that moment would show the person's wealth down by $258--$200 in cash already paid out, and a $58 accrued liability.

Under the new law, the person will have paid out $300 between July 2005 and July 2007. Although the person will not have accrued the $58 "accounts payable" liability that would exist under the old system, the personal balance sheet will still show wealth down by $300--$300 in cash already paid, and $0 in accrued liability.

Thus, the homeowner will be $42 poorer under the new system, the difference between the $300 decrease in wealth under the new system and the $258 decrease under the old system. The government will be $42 richer. The $42 increase in payments represents a one-time 16.3 percent tax hike over the 31 month phase-in period.

After July 2007, the taxpayer will be back to paying the old rate of $100 per year. When December 2007 rolls around, residents won't get a new tax bill but will have accrued another five months of "accounts payable" liability, or $42. At that point they will still be out the $300 in cash payments, and also will have added a new liability. And so it goes. Taxpayers never do recoup that $42.

It will be as if they have paid for 36 months of service but received only 31 months' worth.

This will diminish the net worth of average homeowners by $50 to $1,000, depending on the taxable value of their house. Most people won't feel the loss much, as they don't use double-entry accounting, but businesses do and will notice the loss.

A company with substantial plant and equipment assets might pay $100,000 in county tax, and it will suffer a loss of $42,000. This is not an "accounting fiction," and any company that fails to report the decline in book value to shareholders will be guilty of Enron-like accounting.

Loss Will Be Measurable

In addition to the balance sheet effects, for many taxpayers there is also the opportunity cost of handing over their cash five months earlier. During that time they lose the chance to earn interest on their money. At today's historically low interest rates, this doesn't amount to much, but when rates go back up the opportunity costs will also increase.

As a result, taxpayers will involuntarily lose wealth, and the government will gain it. The law enables the state's political establishment to postpone cuts in spending while taking more from homeowners, prompting the Mackinac Center to characterize the law as a tax increase.


Jack McHugh (mchugh@acd.net) is a legislative analyst for the Mackinac Center for Public Policy. Steve Stanek (stanek@heartland.org) is managing editor of Budget & Tax News.


For more information ...

Jack McHugh's analysis of the tax shift, "County Tax Shift: It Quacks, It Waddles; It's a Duck," is available on the Mackinac Center for Public Policy Web site at http://www.mackinac.org/article.asp?ID=6818