On Aug. 5, most voters will be focused on the primary elections for candidates. But there is another important issue on the ballot that day.

Voters will be asked to approve or reject legislation reforming Michigan's personal property tax. This is a tax businesses pay annually on the value of their equipment. A "yes" vote would eliminate this cost for small businesses and phase it out for manufacturing companies.

In Michigan, that means junkyards are paying taxes on the value of their dogs, hotels on their drapery, hair salons on their leftover shampoo, and bars on the worth of their pool cues. The tax forces these businesses to calculate the value of these items and more, figure out the depreciation, and send local municipalities $1.286 billion, according to a 2011 report.

This is separate from the state sales tax, where a fee is levied just once. The personal property tax also is different than the property taxes levied on land and buildings. The personal property tax deals with the value of all other business property, such as machinery, equipment and furniture.

Most of the money resulting from the current tax goes to municipalities and school districts. If the vote is approved, these governments will be compensated for lost revenue by essentially earmarking a portion of the Use tax. The state's 6 percent Use tax is levied on "taxable items brought into Michigan or purchases by mail from out-of-state retailers," according to the Michigan Department of Treasury.

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, says the personal property tax is an inefficient method of taxation that costs Michigan jobs. He just released a policy brief on the issue.

"There's a lot of skepticism from people over the complex way that local government revenue will be redistributed. Yet the state found a way to hold local governments largely harmless while cutting $500 million from an economically inefficient tax," Hohman said.

The ballot proposal would change the state tax system in three main ways. Businesses that own less than $80,000 in equipment will no longer have to pay taxes on those goods; manufacturers will no longer pay personal property taxes on their new equipment; and taxes on older manufacturing equipment will be phased out. This would result in an overall tax cut of about $600 million when fully phased in. Exempted manufacturing property will still be subject to a new alternative tax, but this will be levied at a lower rate and only raise $117.5 million when fully implemented, according to Hohman's analysis.

The proposal is required by the state constitution to hold a public vote because it sets up a "local" Use tax. The local government that levies this tax would encompass the entire state and the money it charges in its tax would commensurately lower the state Use tax.

"This package is a strategic reduction in a burdensome tax," Hohman said. "Voters have the chance to improve the state's business climate."

Download the full study here.

On Aug. 5 Michigan voters will be asked to approve or reject Proposal 1, which would modify the state’s personal property tax. The legislation that would go into effect if Proposal 1 were approved by voters creates three new exemptions for certain businesses that are currently subject to the personal property tax; it does not eliminate the personal property tax. Commercial and industrial businesses with less than $80,000 of personal property will be exempt, and, eventually, all manufacturing personal property will be exempt. These exemptions amount to an estimated $600 million tax cut when fully implemented.

The package of bills includes a mechanism for reimbursing local government units for the revenue lost from these new exemptions. The state would set aside a portion of the statewide Use tax revenue, and use this revenue to reimburse local governments. It is estimated that local governments will be reimbursed for the entirety of the revenue lost due to the personal property tax cuts.

The state would also levy a new, but relatively small, tax on manufacturing personal property that qualifies for one of the exemptions described above, except the small parcel exemption. The state estimates this to raise $117.5 million, making the overall net tax cut of the legislation package worth about $500 million.