Tax reform levels playing field for schools, businesses

Michigan State Roundup

Published July 1, 1994  | July 1994 issue

Students and taxpayers in the Upper Peninsula (U.P.) of Michigan are expected to benefit from a measure passed in March to reform school funding practices and to revamp the overall tax structure of the state.

Under the measure: school funding comes from the state tax pool rather than local property taxes; local business and property taxes take a huge cut; and sales and cigarette taxes jump 50 percent.

While all this means $1.8 billion sliced off the tax burden for Michigan residents, the real beneficiaries could be the school kids, according to state officials. One of the reasons for switching the responsibility for school funding from the community level to the state is to reduce the educational disparity between wealthy districts and poor districts. "This will increase the quality of education for students," says Brian Swift, Gov. Engler's assistant in the UP

The minimum expenditure per student in grades K-12 will now be $4,200, up from $3,000. Rural and some urban districts are expected to be the major beneficiaries. "The Upper Peninsula districts will fare very well," says John Truscott, the governor's press secretary. "They tend to be property- poor and do not have as much industry" to tax as the rest of the state, Truscott adds. Districts that spent more per student in the past can levy additional millage to prevent gouges in current programs.

Because of the switch to state financing for schools, local residential property taxes will plummet an average 82 percent across the state, while businesses will see a drop of 30 percent. For homeowners, this means both a reduction and predictable, low property taxes as the statewide 6-mill levy is capped, with an assessed increase limited to the lesser of 5 percent or the rate of inflation.

Already the state is seeing a housing boom, particularly near the borders of Ohio and Illinois, as residents can now afford higher mortgages with lower taxes, according to Truscott.

Michigan's tax balancing act also includes a jump in the sales tax from 4 percent to 6 percent, with the additional revenue earmarked for school financing as one of the ways to make up for the local cuts. School funding, which historically claimed more than half the revenue from sales taxes will now take two-thirds. Truscott points out that this source of revenue is not as volatile as it may seem, and in fact has only fallen once in 20 years.

While it's too soon to tell, the new tax structure is also expected to encourage Michigan's business competitiveness with other states. But just how long Michigan remains unique is unclear—many of those other states have contacted the governor's office and expressed interest in the state's tax restructure program.

Nettie Pignatello