Analysis: Local Governments Wrong to Call Foul On Property Tax Reform

Local governments are crying poverty over a proposal that would make the state more attractive for businesses — a plan to phase out the state’s tax on business equipment.

They’re also raising the alarm that they’ll have to raise taxes on local property owners to make up for lost revenue if the bill passes. School districts, counties, cities and townships should be applauding the state’s approach instead of fighting it.

Local governments complain that the revenue from the tax will not be replaced, meaning less revenue for strained their budgets. But the specific proposal actually replaces property tax revenue for local governments by expiring certain tax credit programs. It also mandates adjusted state assistance to compensate for governments that have a high proportion of their revenues from the tax on business equipment.

Further concern about lost revenue is mitigated by a phase-out of the tax instead of instant elimination.

The state estimates that businesses will only have their taxes lowered by $80 million in the first three years of the bill — far less than the increases in state transfers to local governments and schools expected in this year’s budget.

Because of the long phase-out of the tax, the revenue changes from removing this tax will be dwarfed by macroeconomic changes. The state’s economy has been improving over the past year and will be expected to continue to do so.

As to the threat of local units raising overall property taxes if the bill passes, local government boards are already making good on that threat without the bill even passing. For instance, schools are asking to increase local property taxes by $540 million this year alone.

While nearly every government has made some moves to lower expenses in the past decade, most have failed to make substantial reforms to the ever-increasing costs of the compensation packages offered to government employees. Participating in 80-20 reforms, benchmarking retirement packages, and paying attention to paid leave and salary schedules are all worth exploring before raising taxes.

All told, bringing benefits in balance would save governments $5.7 billion — far greater than the fiscal impact of personal property tax elimination.