More Revenue Woes May Be Ahead

September 15, 2006
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GRAND RAPIDS — Now that the Board of State Canvassers has likely stopped the Stop Over Spending proposal from reaching the November ballot, local public officials may have one less revenue threat with which to be concerned.

But there still is plenty for mayors, county chairmen and township supervisors to be worried about, starting with another proposal that will be on the Nov. 7 ballot. This one would require revenue to the entire state public school system, from kindergartens to universities, to automatically receive inflation increases every year.

The Senate Fiscal Agency reported the measure would cost the state $565 million in the first year should voters approve the K-16 proposal and that would likely mean less state revenue to revenue-sharing-strapped municipalities.

In addition, the polls are making local officials very nervous, as results show roughly two-thirds of those surveyed favor the proposal.

"Everybody wants to support education, but this causes us problems," said Don Stypula, executive director of the Grand Valley Metro Council, which has 32 governmental units as members.

Grand Rapids 1st Ward Commissioner Roy Schmidt pointed out last week that the city has lost $30 million in revenue-sharing payments from the state over the past seven years, and has cut $50 million from the general-fund budget and laid off 200 workers. Not having a replacement levy in place for the $1.9 billion Single Business Tax that state lawmakers ended two years early has also raised some red flags.

"I don't think people have a clue. With this [K-16] and the SBT, we may have to roll up the sidewalks in Wyoming," said Mayor Carol Sheets.

But there may be more taxing news on the way for those who manage municipalities, as a push may be coming from business groups to eliminate the state personal property tax. Stypula said the Grand Rapids Area Chamber of Commerce is one group that wants the levy wiped off the books and replaced with something else.

"They're not clear on how to do that, though," said Stypula, who is on the chamber committee looking at tax reform.

But Stypula said it was clear that the chamber felt the personal property tax has been more of a deterrent to business growth than the SBT was. He said the consensus among chamber members was the SBT at least provided business owners with a certainty of what their tax bills would be, while the personal property tax didn't.

Stypula also said the chamber wants local units held harmless if the personal property tax is eliminated, and the mood in Lansing might be right to snuff out the tax.

"I think, from the chamber's perspective, they see an opportunity. And they're right. There is an opportunity," said Stypula.

But it's not just the state that local officials are fretting over. Through a new accounting rule Congress approved for the public sector last spring, the Internal Revenue Service also has them dazed and confused.

The code amendment included a provision requiring any local government that buys $100 million or more of goods and services in a given year to add a 3 percent surcharge to the total it spent. The purchases can range from office products like paper clips, ink pens and legal pads to contracts with lawyers and consultants, and that surcharge goes directly to the IRS.

"The way it was characterized to me from the head of the National Association of Counties legislative director is, basically, the IRS has fallen $8 billion behind in its tax collections on business," said Ottawa County Administrator Al Vanderberg.

"So, instead of using another method [to capture those funds], they've chosen an easy way by forcing cities and counties to do their work for them and charge this 3 percent. It's really causing a stir among the larger units because it forces them to automatically redesign computer systems, add that amount in, then separate it out, and move it on to the federal government," he said.

Vanderberg added that redesigning a computer system may be the easy part. Keeping track of the paper clips, legal pads and ink pens purchased is another matter.

"It's going to create an accounting nightmare for a local government. It's a burden placed on local governments by the federal government — another unfunded mandate. There is no offer to give us any money to pay for our administrative cost to collect this money," he said.

The code revision, which snuck through Congress because it was buried in a large bill, goes into effect next year. But details on how local units are to charge and collect the tax in all situations aren't clear yet.

For instance, what if a local government doesn't plan to spend $100 million on goods and services in its budget next year, but an unforeseen incident forces it to exceed that number. Does it have to re-bill the surcharge to every purchase it made before then? Vanderberg said he wasn't sure.

What the tax might do, though, is keep some units from spending that much money with the private sector to avoid the tax-collecting expense and headache. It also might cause sellers to raise their prices to governments to cover any potential IRS-mandated taxes on their sales, which would end up costing local taxpayers more.

"We have a number of concerns with this," said Vanderberg.

The Grand Rapids City Commission passed a resolution last week that opposed the K-16 funding measure. Second Ward Commissioner Rick Tormala said he wasn't surprised that so many groups have tried to get proposals on the ballot, given how "incompetent" lawmakers have been. He didn't blame the groups, as they had to do what they did because the state has a "do-nothing" legislature.

First Ward Commissioner James Jendrasiak said lawmakers have lacked insight and have been more self-serving than anything else.

"The K-16 proposal, I think, is an attempt by educators to correct Proposal A and the Headlee rollback," said Jendrasiak of changes made to the state's property tax a decade ago.

The canvassers' action led commissioners to delete a resolution from their agenda last week that opposed the SOS proposal. But the SOS matter is headed to the state Court of Appeals. If it loses there, supporters could make a second appeal to the Michigan Supreme Court.

"As of now," said Mayor George Heartwell, "SOS is not on the ballot."    

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