Tax Cut Plan Avoids Mistakes of the Past

Michiganians will vote June 2 on a constitutional amendment that would reduce Michigan's tax burden, raise the state sales tax rate, and create a per-pupil guarantee for public school students across the state.

The proposal would provide a large net tax cut in the current year, less tax relief in succeeding years, and a limitation on future property tax increases. Though Michigan voters have rejected several school finance proposals over the past decade, this plan is more soundly designed and avoids major flaws of past efforts. Specifically, it would:

• Reduce school operating property taxes and limit them to no more than 27 mills. Currently, the average school millage rate is about 35, and has been heading up in recent years. Most school districts would initially levy only 18 mills, which would not require voter approval. The reduction in school millage would reduce property taxes by about $2 billion a year.
  

• Limit the total operating property taxes of all units of government, other than cities, villages, and charter authorities, to 40 mills. Currently, these units are limited to 50 mills in total, and the reduction to 40 mills prevents other units of local government from raising their millage rates to offset the school tax reduction.
  

• Limit the annual percentage increase in the assessed value of each parcel of property to the inflation rate or 5 percent, whichever is less, until the parcel is sold.
  

• Increase the state sales tax rate to 6 percent, starting in July of this year. This will raise an additional $1.8 billion in 1994, but only half that in the current year. Because the sales tax increase only affects half of 1993 and the property tax cut affects the entire year, taxpayers will save about $1 billion in 1993. Net savings after that grow from about $250 million in 1994 to $500 million in 1996.
  

• Dedicate the additional sales tax revenue, and net state lottery proceeds, to the school aid fund.
  

• Establish a minimum state and local per-pupil school funding guarantee, beginning at $4,800 and adjusted annually for changes in state revenue. High-spending school districts would be guaranteed at least a 3 percent increase in funding per pupil in the first year.

This proposal is soundly designed to provide immediate tax reduction, true tax limitation for the future, and a school funding guarantee that protects every school district against calamitous reductions in funding. Past proposals that faced the voters failed because they lacked one or more of these protections.

For instance, the two proposals on the 1989 ballot that were defeated overwhelmingly were both net tax increases. The current plan is a net tax cut.

Proposals in both 1989 and 1992, although billed as property tax limitation, would have allowed higher property taxes. This one follows up on definite tax reduction with strong tax limitation.

The voucher plan proposal in 1976 would have eliminated school property taxes, but did not specify how the new educational voucher would be financed. This plan creates a per-pupil guarantee for public schools and constitutionally dedicates sales tax revenue and lottery proceeds to fund it.

Proposal C ("Cut and Cap") in 1992 would have cut taxes by over a half-billion dollars the first year, growing to $2 billion within a few years. Many school administrators and public employee union officials felt this was too much of a tax cut. The current plan, while about a billion-dollar tax cut in 1993, is a modest tax cut of around $250 million in 1994.

The proposal does attempt to make one change voters rejected in the past: it limits annual assessment increases on property. Limiting annual assessment increases on individual parcels would provide predictability to homeowners and avoids the backlogged and clearly unfair assessing appeals process.

The downside, however, is that it creates disparities in effective tax rates. Owners of similar houses on the same street could end up paying significantly different tax bills, depending on how long they have owned the property. Of course, those tax bills would be less than either would pay under current law.

The June 2 tax and school finance reform proposal would reduce and limit property taxes across the state. Even with a 2 percent increase in the state sales tax rate, it provides a net tax cut, now and in coming years. While taxpayers may wish to consider whether a cap on the annual assessment increases of individual parcels is worth the resulting non-uniformity in effective tax rates, the proposal would provide tax savings for Michigan homeowners and a boost for the Michigan economy.