Tax Attic

Jerry Coon

Lame duck session

As an income tax professional, I have seen both the federal Congress and the Michigan Legislature make last minute changes to the tax system. In fact they have gotten very adept at making this type of change. Lame duck changes come after the November election and before those elected take their newly-won positions in January. These late changes give the tax professional community heart burn but we tend to just roll with the changes. The software programmers, however, are the ones who really pull their hair out. They have to create the programs that allow tax professionals to file tax returns and simultaneously allow the Internal Revenue Service to process those returns. It takes them a certain amount of time to make sure the software is working properly. The late changes made during the lame duck session really put the programmers behind the eight ball. At the federal level, we are looking at changes to the Alternative Minimum Tax and any last minute changes Congress can make to the Bush Tax Cuts. There will be only a few that affect 2012. Most of the changes this current Congress is going to make will effect 2013 and years following.

At the Michigan level, the Legislature couldn’t come up with any pressing tax changes so they are going for bigger fish in the lake such as proposing to eliminate the Personal Property Tax (PPT). The PPT is a yearly tax on the fair market residual value of the assets that a business uses in its business environment. For example, Action Tax Service is taxed on the computer systems, office equipment, and the furniture it has in its office. As a businessman, I am in favor of abolishing the PPT. As a resident of the City of Rockford who lives in the Rockford Public Schools district, and a member of the Rockford City Council, I have an extremely large problem if the tax is abolished without a plan to replace the funds. For the City of Rockford, PPT in the amount of approximately $300,000 is used to finance our combined police and fire departments, fund the library and pay general city costs. The Rockford Public Schools (RPS) also is a large recipient of the PPT. Revenue of approximately $1,000,000 of PPT is predominantly used to finance debt and pay for various local programs including autism programming. Eliminating the PPT and the accompanying funds paid to the City of Rockford and the Rockford Public Schools would be disastrous. I have read the House Bills that propose to close out the PPT, Lieutenant Governor Calley’s commentary on the topic, and the Michigan Municipal League’s analysis of the subject and I come to the same conclusion as everyone else: eliminating the PPT is a very complicated bit of business. Currently, it appears that up to 80% of current PPT tax may continue to be reimbursed in some manner from some funding source. Unfortunately, that leaves 20% that will not be reimbursed. Rockford can’t afford to lose $60,000. RPS can’t afford to lose $200,000 in revenue. Bluntly put, it’s shocking that our elected officials are even proposing cuts of this magnitude. In my opinion, there are at least three alternatives to elimination of the PPT. Let’s look at these three.

First, allow the changes made to the Michigan tax system last year work their way through the system before changing the PPT. The Michigan Business Tax (MBT) was replaced by a Corporate Income Tax. The individual income tax system was re-worked by eliminating a large portion of the homestead property tax credits; the pension subtraction was severely restricted for taxpayers born after 1952; a majority of the tax credits were eliminated; and the earned income credit percentage was dramatically reduced. The blunt fact is that over 1 Billion Dollars of income tax burden was shifted from business entities to individual taxpayers. The tax returns to be filed in 2013 for the tax year 2012 will reflect all of those changes. As opposed to making a last second, on the fly, lame duck session over-haul, it might be appropriate to see how the revenue from those returns shakes out. Perhaps there will be enough additional revenue to fund the 20% of PPT that is unfunded. Option 1 would be to not eliminate the PPT until a full and clear picture of this year’s tax changes is known. We have been paying the PPT for as long as I have been in business. One more year of paying to let things shake out from last year’s changes makes sense.

The second alternative is to eliminate the PPT but replace 100% of the funding by increasing the individual income tax. The legislature was very creative in eliminating the MBT by cutting credits and deductions. The net result is still that businesses pay one billion dollars less tax and individuals pay one billion dollars more tax. Why bother with the sleight of hand this time around? Option 2 is to enact a straight-out increase of the individual income tax rate in conjunction with the simultaneous elimination of the PPT. Of course, I am kidding because nothing of this sort is going to happen so we are on to alternative number three.

The third alternative is to go forward with the Legislature’s present plan. As I noted earlier, that plan is to replace approximately 80% of the revenue that Rockford collects. The exact formula for that replacement is not in place as yet. If this passes as it stands, Rockford could continue to receive $240,000 but would lose approximately $60,000 in revenue while RPS could continue to receive $800,000 but would be in danger of losing up to $200,000. The replacement dollars would come from re-allocating approximately $300,000,000 of use tax to a replacement fund. A Michigan Metropolitan Areas Metropolitan Authority would be created with its sole mission being to manage the allocated use tax and divvy it out to the municipalities and schools. Sounds like another bureaucracy in the making with more expense at the Michigan level. That doesn’t make sense to me. The fly in the ointment is that the Legislature can create the Authority but it takes a vote of the people to allow the use tax to be diverted from the general funds to the Authority. The schools might be properly nervous that the PPT will be eliminated but then the citizens of Michigan will vote down the re-allocation of use tax. What a mess that would create. Option 3 then is to divert use tax and create an independent bureaucracy to administer that tax.

There are a myriad of loose ends should the Legislature move forward during this lame duck session and pass the bills in question to eliminate the PPT. Doing this in a rush is not necessary and could create financial difficulties for even very well-run organizations such as the City of Rockford and the Rockford Public Schools. I can only imagine how this will affect municipalities and school districts that are in trouble right now. I believe the text goes like this: “OMG”. This is Jerry Coon signing off.

 

 

 

 

Jerry Coon is an Enrolled Agent and a

Registered Tax Return Preparer.

He owns Action Tax Service on

Northland Dr in Rockford.

Contact Jerry through his website:

www.actiontaxservice.com.

 

 

 

 

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