Budgets and taxes go into overtime

More than six months into the year and the Capitol’s song remains the same: economy, jobs, budget deficits, and tax restructuring. For some time now, MAR’s participation in The Price of Government (POG) project has been highlighted in this column and other MAR publications. Since ours is an industry with little dependence on state appropriations, our efforts had always been directed toward staying out of debates over the funding of state programs. Now, we have helped legislators manage their $40 billion in resources to fund programs without raising additional tax revenue.

The initial results of this POG project have borne fruit as the House and Senate completed the first step in passing their own appropriations bills. On June 9th, Republicans in the House of
Representatives passed HB 4831, a massive 700-page bill that provided funding for the majority of state government, except for the K-12 education budget, which passed separately.

This was a radical departure from the traditional method of passing multiple appropriations bills based on state departments. Speaker of the House Craig DeRoche (RNovi) best characterized the actions taken by the House, saying, “This budget is a bold step toward getting Michigan government to live within its means again.” A bold step, indeed, considering the pressures from a majority of interest groups, (including that education lobby) looking for
additional revenue. The parties gravitated to their opposite poles; every Democrat voted to oppose HB 4831, and every Republican voted for it.

Just as was outlined in POG, House leadership crafted a budget plan focused more on results for their $39.7 billion in tax expenditures, and refrained from discussing the budget in terms of “line item” program cuts. Those results were impressive.

While the House focused on funding priorities and maximizing “outcomes,” the Senate’s version focused more on “cuts,” passing the traditional 17 appropriations bills. While the Senate’s more complex reception to POG was cause for some concern, meetings with MAR members in the Senate districts and communications with GOP Senators quickly solidified our understanding of the Senate majority’s intent. As a body, their will to make the tough decisions remained
undaunted.

Consequently even though the House and Senate took different approaches in crafting their own versions of the budget, tax increases were left out of the equation. That is good news for the real estate industry — and our economy. The two chambers now head into conference committee this
summer to iron out the differences between their respective budgets while looking to broker a deal with Governor Granholm.

Tax Restructuring Plan Still Looming

While the budget process is now moving along, there is a high level of uncertainty about what will transpire in regard to Michigan’s tax structure, or more specifically the Single Business Tax (SBT). Governor Granholm’s plan to reduce the SBT rate from 1.9 to 1.2 percent, base the tax solely on profits, and target the insurance and finance industries with tax hikes in order to achieve “revenue neutrality” has raised some red flags.

The House Tax and Senate Finance Committees have held a series of joint hearings to take testimony on this issue, and the predicted results are twofold: First, the governor’s plan will not be passed as currently written; and second, the only agreement among all business groups who testified is that something must be done to correct Michigan’s anti-competitive and punitive tax code.

Reviewing those results, majority party legislators are coming up with their own ideas. In the Senate, Finance Committee chair Nancy Cassis (R-Novi) has sponsored SB 633 and SB 634, which would gradually eliminate the SBT by a 0.1 percentage point each year. Under this plan, the SBT would be completely eliminated in 2025 and would be based 100 percent on sales, which was one change requested by several business sectors, including manufacturing. This is a
significant difference from the governor’s plan where the SBT would remain in existence with a one time cut to a rate of 1.2 percent. Note that if nothing were done to current law, the SBT would be eliminated by 2009. Legislators are concerned, however, that the current timetable is a “budget buster” due to the nearly $1.5 billion loss in revenue that would result from such a comparatively short time span.

As another alternative, members in the House unveiled their own plans to address the tax-restructuring dilemma. On June 30th, House Republicans announced the following
parts of their plan:

• 25 percent personal property tax reduction for manufacturing
• 10 percent personal property tax reduction for traditional commercial businesses
• Incremental drop in the SBT rate from 1.9 to 1.7 percent based on SBT revenue triggers
• Phase out the healthcare add-back within the SBT over a four-year period
• Change the current sunset of the SBT from 2009 to 2019
• Base the SBT 100 percent on profits
• Close $100 million in tax loopholes or expenditures
• Securitization: This is a complicated plan, but the nuts and bolts of it allow the state to capture $3 billion in tobacco settlement dollars immediately to fund a jobs program, the Merit Scholarship, and place dollars in the Medicaid Trust Fund. This comes as a response to the governor’s $2 billion bonding proposal.

The overall plan proposed by House Republicans results in nearly $1.6 billion in tax law changes. The plan is not revenue- neutral and would result in an additional $250 million hole in next year’s budget.

MAR has not taken a formal position on this new tax plan, but we remain skeptical of the $100 million in tax loophole closings and what that may mean for the property tax treatment of commercial rental properties. Rest assured that the MAR Public Policy Committee will diligently and thoroughly analyze any and all tax-restructuring plans that would have an impact on REALTORS® and Michigan’s economy.

Allergens Legislation Moves

MAR-supported Senate Bill 370, introduced by Senator Cameron Brown (R-Sturgis), was unanimously adopted by the Senate and moved to the House Committee on Regulatory Reform. SB 370 amends the Seller Disclosure form to include language recommending testing for potentially high levels of allergens, including mold, mildew, and bacteria. Getting this legislation through the Senate was no easy task, as several Senators offered amendments attempting
to expand the requirements on sellers.

MAR successfully fought off amendments that required sellers to specify an estimate of financial liability from any “uncapping” of property taxes upon sale. Additionally, we defeated an amendment calling for lengthy disclosures on oil and gas rights, allowing their owners access to the property. We defeated another that forced sellers to opine as to whether the property is under the regulation of the state because of wetlands, floodplains, dunes, etc. The MAR Public Policy Committee will be discussing the merits of those ideas and weighing them against the necessary length and possible confusion they might precipitate.