Lessons from Michigan’s Business Property Tax Reform
Last week, the Indiana House of Representatives passed HB1002, a sweeping package of tax cuts with a final value of more than $1.3 billion a year. The plan faces an uncertain path in the Senate, where tax leaders are skeptical of tax policy making during a non-budget drafting session.
The business community and economic developers are watching closely, as HB1002 includes sought tax relief on capital investments: More than 15% of Indiana’s local property tax recoveries come from businesses’ personal property, primarily industrial equipment . The Personal Business Property Tax (PPT) is based on the acquisition costs corrected for depreciation, but only up to a “floor” set at 30% of the original value.
For manufacturers and other business interests, TPP is already a form of double taxation (after paying sales taxes on new personal property) and the 30% floor keeps tax bills artificially high as equipment ages towards obsolescence. But for local governments, losing the floor reduces revenue capacity that barely keeps up with costs.
As lawmakers debate the issue, Michigan is set to complete a decade-long process to overhaul and replace its PPT system by 2023. Our neighbors to the north face similar challenges in balancing the manufacturing competitiveness and local budget priorities.
Help for small businesses:
The burden of TPP and the cost of compliance (equipment that self-assesses year after year) is clearly more onerous for small businesses. Michigan began with a full exemption for taxpayers with total personal property valued at less than $80,000 for the 2014 tax year.
Indiana reached the same point in several stages: the General Assembly set a TPP threshold for assessments below $20,000 in 2016, raised it to $40,000 in 2019 and $80,000 a year. last (starting with taxes to be paid in 2023). This excludes more than 150,000 PPT declarations filed mainly by small manufacturers and farms.
Replacement of local recipes:
Indiana continued this de minimis floor without replacing local government revenues, beyond the possibility of increasing local tax rates.
In contrast, Michigan built local support into TPP reforms from the start. Half of the proceeds of an existing statewide use tax have been redirected to local distributions and a new replacement TPP (Essential Services Assessment) tax has been levied on large businesses to fill losses at the state level, support local revenue sharing and economic development.
HB1002 protects local government from the impact of lowering the floor of current equipment: companies claim the difference between 30% and actual depreciation on existing PPT assessments as a tax credit from the state, so local tax bills are not affected by the adjustment.
But the bill is silent on losses from lowering the floor for new equipment, which would begin to affect tax collections for cities, counties and school corporations in a few years.
Gradual introduction of exemptions:
Michigan also treated new and existing personal property differently. The state first exempted older (pre-2005) and newly purchased (2013 and later) equipment owned by large companies, starting in 2016. Assets acquired more recently (2006-2012) were added each year taxation until 2023.
HB1002 creates a similar track to lower the floor by 30%, gradually impacting local budgets as personal property acquired in 2022 ages beyond the floor. The state tax credit for existing personal property also ends after 2035; once the current property is completely decommissioned, the depreciation floor is effectively eliminated.
Looking at the big picture:
The Indiana (HB1002) and Michigan PPT plans focus on small business exemptions, tax simplification and progressive reduction in the cost of investing. What did Michigan gain by getting ahead of these reforms? Indiana actually created more manufacturing jobs from 2012 to 2020 (retaining our top spot in manufacturing employment per capita) and surpassed Michigan in manufacturing GDP. Clearly, we are already capitalizing on a strong business climate.
That doesn’t mean TPP relief wouldn’t be a boon for manufacturing in Indiana, or that the 30% floor shouldn’t be scrutinized as an anti-investment blind spot in our tax code. But that’s only part of a bigger picture: The Council on State Taxation (COST) estimates that businesses pay 44 cents for every dollar in state and local taxes collected across the country. Indiana and Michigan both offer a more business-friendly ratio (39 and 35 cents, respectively). Should we aim lower?
Taxation of compromises:
Finally, HB1002 offers no equivalent to Michigan local tax redistribution, only an expiring credit covering PPT relief for existing equipment. There is also no assessment of essential services or an alternative to replace state and local revenues: the state government sees an impact on general funds (offset tax credits) approaching $400 million per year over the next decade, and local revenues are affected in the 2030s, potentially by $200 million per year after 2035.
Another lesson from Michigan: Even though the state has a constitutional obligation to share revenue, local governments have cried foul over changing formulas they say hijack their budgets. After more than a decade under Indiana’s property tax caps, it’s also no wonder that county, municipal and school officials are also wary of any attempt to further limit their tax base.
With a surplus growing toward $5 billion this year, Indiana can absorb TPP cuts in the near term. Acting now could even spur economic development and increase future incomes. But the HB1002 debate should recognize the state fiscal commitments that are also part of a growth-friendly business climate – education, workforce development, infrastructure – and include stronger safeguards for local public services and quality of life investments that attract people, employers and investment to communities across the state.