Original Story: detroitnews.com
Lansing — The $1.2 billion road-funding plan endorsed by Gov. Rick Snyder may leave a $102 million pothole in the pockets of as many as 1.2 million Michigan taxpayers who deduct vehicle registration fees on their federal income taxes.
Economist Patrick Anderson's East Lansing-based firm says the "far reaching and complicated" road funding package lawmakers slapped together on the last day of December's lame-duck session will likely cause federal income tax bills to rise.
That's because lawmakers changed the tax on vehicle registrations from an ad valorem property tax to a "straightforward excise tax," the Anderson Economic Group said in a report published Wednesday.
But the federal tax code only allows taxpayers to deduct vehicle registration taxes if it was property tax, meaning taxable income of Michiganians will likely rise if voters approve the road funding package in May, Anderson said.
The economist said the change in law could result in $410 million in fewer deductions for up to 1.2 million Michigan taxpayers, increasing federal income tax bills in the state by $102 million annually. The change will likely hit two-income families the hardest, he said.
"If you drive your car home and park it in your garage, this almost certainly affects you," Anderson told The Detroit News on Wednesday. "If you own two cars in your household, this probably affects you. The property tax deduction is more popular than the mortgage interest deduction."
More than half of all families with a household income between $50,000 and $100,000 claimed property tax deductions in 2012, according to Anderson's analysis of Internal Revenue Service data.
About 90 percent of households earning $100,000 or more annually deducted property taxes on their federal returns in 2012, he said.
The exact number of Michigan taxpayers who could be affected by the change cannot be determined because IRS data does not differentiate between taxpayers deducting property taxes paid on vehicles from property taxes paid on their homes, Anderson said.
A package of bills designed to generate $1.2 billion more annually for roads by 2017 hinges on voters approving an increase in the sales tax from 6 percent to 7 percent on May 5.
Passage of Proposal 1 will trigger a series of new laws to go into effect, including House Bill 4630, which eliminated the depreciation schedule for new vehicles and changed the registration fee to an excise tax.
An IRS spokesman said Wednesday the agency doesn't comment on pending state-level tax legislation.
Anderson, a conservative economist, said the "crowning insult" to taxpayers is the money isn't going to fix the state's roads, but to help fill the U.S. Treasury. He said lawmakers should consider "fixing" the impending law before the May vote.
"Certainly this is something that many of them, if not all of them, didn't know about when they voted for it," Anderson said. "And a lot of their constituents are going to be unhappy about it.
Rep. Mike McCready, sponsor of the vehicle registration fee bill, said legislative leaders were aware of the impact on federal deductions, but chose to eliminate the depreciation discounts for new vehicles instead of increasing the tax rate on all vehicles.
"We felt this would be the least painful (option)," said McCready, R-Bloomfield Hills.
Under the current tax rate, the owner of a $30,000 new vehicle being titled and registered for the first time pays $161 at the Secretary of State's office.
The current law allows the value of the vehicle to depreciate 10 percent annually for the first three years, lowering the so-called annual "birthday tax."
McCready's bill gets rid of the depreciation discount for new vehicles purchased after Jan. 1, 2016, locking in tax rates for the life of the vehicle.
As more new vehicles are sold, the Senate Fiscal Agency estimates the change could generate an extra $150 million annually by 2026 in vehicle registration fees, which rival fuel taxes as a source of road repair funding.
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