CHICAGO -- In a dramatic to force property tax reform in Michigan, the state Legislature voted to eliminate the ability of school districts to levy operating property taxes, effective next July.

The action wipes out approximately $6 billion of school operating property tax revenues for school districts in the state beginning July 1. the start of the districts' fiscal year 1995.

The legislation was passed by the state Senate Tuesday night and by the House yesterday.

Gov. John Engler will sign the bill into law, according to John Truscott, his spokesman.

"This is a historic opportunity for us," Truscott said. "The bottom line is that this plan makes Michigan extremely competitive and it allows us to totally rewrite school financing."

The school districts' operating millages would be eliminated on July 1, 1994, according to state officials.

State Budget Director Patti Woodworth said the Legislature and the Engler administration will now come up with a new plan to fund schools. However, she said, there is nothing in the legislation that says the state must fully reimburse schools for the lost revenues. She said everything except an income tax increase is on the table as far as Engler is concerned.

"Our hope is to come back and try to address this question in the fall," Woodworth said. "We will decide what we want the public schools to be and how we will pay for it."

Andi Brancato, spokeswoman for House co-speaker Curtis Hertel, D-Detroit, said Hertel opposed the measure because it does not contain replacement revenues for schools.

"We have a state budget that's $7 billion," Brancato said. "Where are we going to come up with $6 billion?"

Woodworth said that the legislation does not eliminate the school district's debt service levy.

However, Scott Schrager, senior committee analyst for the House Taxation Committee, said the plan could potentially affect any limited tax debt issued by school districts and debt issued by tax increment finance districts that include school districts, which typically account for 60% of the property tax levy.

"To the extent you have got any kind of debt that depends on an operating revenue stream, you've got a potential problem," Schrager said. "I think in the aftermath of this, the Legislature will have to deal with the existing contractual debt out there."

Another potential problem is the so-called Headlee Amendment to the state constitution, which limits the states' revenue raising ability to a percentage of the state's personal income and which requires voter approval of new taxes.

Schrager said that if the Legislature chooses to reimburse schools for the, loss of the operating tax levy, it would only be able to raise $3.8 billion of the $6 billion needed because of the percentage of personal income restriction.

The only options left to the state would be to get voters statewide to approve a sales or other state tax increase or to have the Legislature authorize local taxes that would need local voter approval to be implemented, he said.

Bob Caldwell, first vice president at Stauder Barch & Associates, a Michigan-based financial advisory firm, said be was "stunned" by the Legislature's action. He added that the plan could have "great ramifications for how schools are funded and could have Impact on bonding."

Rating agency officials said they could not comment on the bill until they have time to review ft.

Kim Brennen Root, a spokes-woman for the Michigan Education Association, said the plan has the potential "to devastate schools."

"They don't say where the money will come from," she add. "Schools can't plan or survive on a promise that those revenues will be replaced."

The association represents teachers and other school employees.

Engler and lawmakers have failed in their attempts over the last few years to reform property taxes in the state.

In June, voters defeated a bipartisan plan that would have raised the state sales tax 50%, cut school operating millages from an average of 34.6 mills to a maximum or 18 mills, and used the $1.8 billion a year from the sales tax hike to reimburse schools and equalize state funding of schools. Last November, two other measures to cut property, taxes and limit assessment growth also turned down by voters.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.