by Robert Kleine, Vice President and Senior Economist, & Alec Rodney, Economist
Over the next few weeks we will issue a series of reports on various aspects of the school finance legislation. This report, the first in the series, will examine the effect of the two proposals on Michigan taxpayers at different income levels and in different circumstances.
In late December the legislature completed work on school finance reform with some of the most important legislation in Michigan history. This may not be the revolution that some expected or hoped for, but the package includes more than 20 public acts that will affect everyone and nearly every institution in Michigan: school districts, taxpayers, businesses, state departments and programs, and the economy.
On March 15 the public will decide between a statutory proposal that will raise the income tax to 6 percent or a ballot proposal that will increase the sales tax to 6 percent (and reduce the income tax to 4.4 percent). Both proposals provide the same fiscal support to the schools, but each has a considerably different effect on taxpayers.
The statutory plan’s reliance on the income tax and the ballot plan’s reliance on the sales tax are not the only major differences between the two options. Passage of the ballot proposal would cut the homestead property levy from 12 to 6 mills and reduce the single business tax (SBT) rate from 2.75 percent to 2.35 percent. Other differences are highlighted in Exhibit 1. Under both proposals, an additional 3-mill intermediate school district (ISD) tax will be levied on all property. Local districts can also approve, by referendum, an enhancement of up to 3 mills. Only the ballot plan includes an annual assessment limit: the lower of 5 percent or the change in the consumer price index.
Exhibit 2 presents a comparison of how the two alternatives change tax burdens, relative to the current system, for families in various income groups. The exhibit contains the same information for each taxpayer group, except for current property tax rates. In differentiating between tax rates, low-, average-, and high-millage districts are classified, respectively, by the following school/total millage ratios: 28/50, 37/58, and 43/70.
According to our analysis most higher income nonsenior homeowners will benefit from the ballot proposal, and renters, seniors, and low-income homeowners will benefit from the statutory plan.1 Concentrating on higher income homeowners, relative to the current tax system, families in high- and average-millage districts benefit under both plans, while families in low-millage districts pay more under the statutory plan and less under the ballot plan. The ballot option offers greater tax savings than the statutory option to all families with incomes exceeding $30,0002; however, those with the highest incomes will see significant savings, while those in the middle will see modest savings.
For example, a family with a $50,000 income will save about $200 more under the ballot plan than under the statutory plan if they live in an average-millage district and just under $100 more if they live in a high-millage district. For a family with $200,000 in income, savings will be about $1,600 in either district.
Families who rent will see their tax burdens decline under the statutory plan, while the ballot plan will raise their taxes slightly. High-income couples (two-person household with income greater than $30,000) who rent will benefit from the ballot plan because it increases their sales tax burden significantly less than the statutory plan increases their income tax burden.
In general, senior citizens do not benefit from property tax reform because their homestead credit falls dollar-for-dollar with their property tax bill. Since social security income is not taxable, an increase in the income tax has little or no effect on most seniors; however, an increase in the sales tax negatively affects all seniors. Even seniors with somewhat higher taxable incomes will be hurt more by the sales tax increase than the income tax hike. Seniors in high-millage districts benefit under either proposal because they are currently limited by the $1,200 cap on the homestead credit.
Exhibit 2 (available in Acrobat® format only)