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Impact of proposed personal property tax changes
The Michigan Legislature is currently debating a package of eight bills that will virtually repeal Michigan’s personal property tax — a move that has manufacturers rejoicing and municipalities worrying.
The recently introduced legislation comes at the trailing end of Gov. Rick Snyder’s efforts to overhaul and update Michigan’s business tax structure. Snyder and the Legislature began by replacing the much-hated Michigan Business Tax and then revamping tax credits and incentives. Now, they say, it’s time to focus on the personal property tax.
In its current form, the proposed exemptions would be phased in beginning in 2012 for certain commercial personal property and again in 2016 for industrial personal property. Proponents — most notably the Michigan Manufacturers Association — say repealing the personal property tax would encourage companies to invest in new technology and new equipment, spurring job growth and giving added fuel to the nascent recovery of our state’s manufacturing sector.
But many — most notably municipalities with a heavy industrial base — say that the legislation is vague at best when it comes to a replacement revenue structure. As it stands now, beginning in 2016 the Legislature will be required to appropriate funds to make up the shortfall to communities negatively impacted by the loss of personal property taxes. Municipalities and school districts are instead lobbying for a constitutional amendment to guarantee replacement funds.
The proposed legislation offers three major changes to the current personal property tax structure. First, Senate Bills 1065-1067 would extend tax abatements on industrial personal property tax that were in place at the end of 2011. The abatement extensions would apply to personal property, such as manufacturing equipment or machinery, located on a parcel of real property that is used more than 50 percent of the time in industrial processing or in a “direct integrated support” function. This signals to municipalities that whatever they are getting today from particular taxpayers will continue until the tax is otherwise abated.
The second set of changes proposed under Senate Bills 1068-1071 would establish a permanent personal property tax exemption for new eligible manufacturing personal property (beginning Dec. 31, 2015, for personal property purchased after Jan. 1 of this year) and for certain industrial and commercial personal property (beginning Dec. 31, 2012). The bills also propose exempting eligible manufacturing personal property that was subject to taxes for the previous decade, beginning Dec. 31, 2015, and phased in over the following nine years.
This has the effect of “institutionalizing” current PA 198 abatements and making them automatic for eligible industrial and commercial personal property of more than $40,000. Companies will no longer have to apply for PA 198 personal property abatements, which would reduce one of the major local tools that communities can offer to support a project and secure matching incentives from the state.
The final change proposed under Senate Bill 1072 creates the “Personal Property Tax Exemption Reimbursement Act,” which would create a fund to provide assistance to local municipalities in meeting financial obligations that were previously covered by the lost personal property tax revenues. Some estimates put the lost revenue at more than $450 million per year, which makes already-strapped school districts and local units of government tremble. In fact, some municipalities count on 30-60 percent of their budget coming from personal property taxes.
The bill requires Treasury, beginning in 2016, to calculate an estimate of the proposed financial shortfalls caused by the proposed exemptions to personal property. The bill also requires the Legislature to appropriate money annually to a reimbursement fund. Additional gains to offset the loss of revenue are expected through the expiration of various tax credit programs under the former Michigan Business Tax. But municipalities and schools are skeptical of these assurances, lobbying instead for a constitutional guarantee that would not be subject to annual budget negotiations.
Despite applause from manufacturers, the proposed legislative changes already face tough criticism from those impacted by the loss of tax revenues. If the concerns are properly addressed, Michigan may be on its way to a stronger and more attractive environment for business.
Jared Belka is an attorney with Warner Norcross & Judd LLP who concentrates his practice on economic incentives, public-private partnerships and environmental law. He can be reached at firstname.lastname@example.org