LANSING – A change in Michigan’s vehicle registration tax will mean Michigan motorists no longer can deduct the cost of their annual registration from their federal income tax, according to an analysis released Wednesday.

But the Michigan Department of Treasury disputed the analysis, saying it still anticipated vehicle registration taxes would be deductible for federal income tax purposes.

The assessment from the East Lansing-based Anderson Economic Group, if true, would present a new and challenging obstacle for supporters of the May 5 ballot proposal to increase the sales tax from 6 to 7 percent as part of multifaceted plan to raise $1.2 billion to improve the state’s roads.

Under current law, for the purpose of calculating a vehicle’s registration tax, the value of the vehicle drops 10 percent annually for the first three years the motorist has the vehicle. Then the value freezes. Under HB 4630 , which contains a variety of changes in registration fees, that depreciation will no longer occur.

“The new statute would levy a straightforward excise tax on the list price of the vehicle,” the analysis says. “The levy would be repeated annually without regard to the current value of the vehicle or its age. This clearly is not a deductible ad valorem personal property tax under the Internal Revenue Code.”

Even if correct, the situation might back more political than financial punch. Only about one-third of taxpayers itemize their taxes and so most taxpayers would see no effect from such a change, if the Internal Revenue Service did indeed conclude the tax no longer was deductible.

And for those who do itemize, the hit for someone whose annual registration is $100 would amount to about $25, depending on their tax bracket, in additional taxes owed that they otherwise would have avoided.

But in the context of a ballot proposal, which inevitably hinges on appeals to voters based on emotion, not data, the idea of part of the plan leading to more money going to the federal government will pose a problem for supporters and an opportunity for opponents.

“From a messaging perspective, it’s another log on the fire for the anti- side. I think that this campaign, unless the pro- side has a very solid message, a very tight message, it’s very easy for the anti- side of this to muddy the water,” said T.J. Bucholz of Vanguard Public Affairs. “When you add this potential fiscal challenge to the equation, it’s making it tougher and tougher to get a yes vote out of the electorate in May.”

The analysis estimated the loss of deductible registrations at $410 million and $102 million in additional income taxes paid as result.

The situation was not unknown to legislative analysts, but it never arose as a significant point of discussion. A July analysis from the House Fiscal Agency said it was unclear how the elimination of the depreciation component from the registration tax would affect deductibility for federal income tax purposes.

Rep. Mike McCready (R-Bloomfield Hills), the sponsor of the bill, said he was definitely aware of the ramifications for deductibility on federal income taxes and he expected all legislators were as well. The legislation meant “no pain up front” because vehicle registration fees would not increase yet would raise more than $100 million by ending the depreciation.

“That was we felt a better route to go,” he said.

But there is pushback against the Anderson firm’s analysis.

Terry Stanton, spokesperson for the Department of Treasury, said the Snyder administration is working under the presumption that vehicle registration taxes will remain deductible for federal income taxpayers.

An ad valorem tax is a tax based on the value of property, and IRS guidelines say personal property taxes paid are deductible if charged on personal property, based on value and charged annually. David Zin, senior economist at the Senate Fiscal Agency, said he is not a tax expert, but noted the registration tax would still be based on the value of the vehicle. Those with more expensive vehicles will pay a higher registration tax than those with cheaper ones.

“I think it’s still an ad valorem tax,” he said.

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