Renewable Energy Ren Zones are useful
While the initial groundbreaking Renaissance Zone completed its 15-year journey at the end of last year, a related, nearly tax-free, state-approved effort for advanced energy companies continues.
Created through legislation passed by lawmakers in 2006 — a decade after the first zone’s bills became state law in 1996 — the Renewable Energy Renaissance Zones continue today without an end date in sight. Eight zones, including one in the Upper Peninsula, have been established statewide since July 7, 2006, the date the law took effect.
“It’s for a facility that creates energy, fuels or chemicals directly from the wind, the sun, the trees, grasses, bio-solids, algae, etc.,” said Karla Campbell, manager of state tax incentives for the Michigan Economic Development Corp. “We were looking specifically, at that time, to how we could attract industry here.”
Three RERZs dot the West Michigan landscape. LG Chem in Holland likely has the best known zone in this neck of the woods, but Energetx Composites also has one in nearby Holland Township. Closer to home is the zone for Heat Transfer International LLC in Kentwood.
“The Heat Transfer International (zone) looks like that was designated as having to use cellulosic bio-fuel,” said Campbell, who added there weren’t any other applications being reviewed now. Companies that work with agricultural commodities or with residues from agricultural processes can also be admitted into a zone. There isn’t an RERZ in Grand Rapids.
Campbell said energy companies follow a slightly different qualification program to be designated as a zone than businesses that were admitted to the first one, but the RERZ tax benefits are identical to the original Ren Zone, for all practical purposes: Companies that qualify don’t pay the Michigan Business Tax, the state education tax, personal and real property taxes and local income tax for 12 consecutive years, but will make partial payments in rising increments of 25 percent each year for the last three years of a zone’s 15-year duration.
However, companies still will have to pay for local bond obligations, the school sinking fund and special assessments, along with state sales and use taxes. Applicants must be current on tax bills in order to be considered, just like the first zone.
What is different this time around is that the MBT has been replaced by the Corporate Income Tax this year. Firms that entered into a zone agreement before 2011 ended, when the MBT was still active, were given what the state calls a “certificated credit.”
“So what they have to do if they choose to stay with a Renaissance Zone under the MBT is they have to figure out which has the higher liability — the CIT or the MBT — and take the credit under the MBT against the higher liability,” said Campbell.
The CIT taxes income at 6 percent, which should make the decision simpler. Energy firms that enter the zone this year won’t be exempted from the CIT and can’t start a zone under the old MBT to get that credit. But the other taxes will be exempted.
The application process starts with a community representative, such as a city’s economic development director, or a company official talking about a project in detail with the MEDC. The actual application has to be submitted to the state agency and be approved by either the county or the municipality where the project is located. Applicants have to demonstrate the positive impact their projects will have for the locales and for the state to receive the nearly tax-free status that comes from being in a zone.
When Grand Rapids city commissioners set up the Renaissance Zone that became active in January 1997, they chose six areas in the city that they felt needed to be further developed. A firm couldn’t have its location designated as a zone unless it already was in one of the chosen areas. So a growing company that wanted the lower tax liability had to go to a site approved by commissioners. Some properties were vacant lots.
But that situation has changed with the renewable energy zone. A company’s existing location can be designated if its project meets the requirements. Or a firm with a project can move to another site and have that new property authorized as a zone because an RERZ is assigned for both a project and a parcel, not one or the other.
“For example, a company could expand. Maybe they were doing something different before, and now they want to try this renewable energy market and that could be a possibility. Or they could locate in West Michigan such as LG Chem did,” Campbell said.
“So it has to be project and parcel specific. They have to tell us where they’re going and they have to get a local buy-in from the city, township or village, and then it would go before the Michigan Strategic Fund. But it does have to have a project. And we’re looking at job creation, what type of renewable fuel and the amount of an investment,” she added.
The RERZ legislation, Public Act 270 of 2006, was an adjustment of the original Renaissance Zone law, Public Act 376 of 1996. But under the newer law, a zone designation can be completely or partially revoked if a company fails to begin the operation of a project, ceases operation or fails to begin construction or renovation of a property within a year of getting a designation. In contrast, under the initial zone offering, an owner still received the tax benefits if nothing was done to a property in the zone.
“I would stress that it is project specific and parcel specific,” said Campbell. “And if someone doesn’t commence their operation, then the Michigan Strategic Fund does have the ability to revoke. It’s a little bit more performance based.”